Rule 206(4)-2, Custody of Funds or Securities of Clients by Investment Advisers

Rule 206(4)-2 under the Investment Advisers Act of 1940 (17 CFR 275.206(4)-2) establishes comprehensive safekeeping requirements for registered investment advisers who have custody of client funds or securities. The rule mandates that such assets be maintained with qualified custodians in separate accounts, with advisers required to notify clients in writing of custodian information and account arrangements. Advisers must also ensure clients receive quarterly account statements from custodians and obtain annual independent verification of client assets by independent public accountants who must file Form ADV-E (17 CFR 279.8) with the Commission within 120 days and report any material discrepancies within one business day. Unless client assets are maintained with an independent public account, the adviser also must obtain an internal control report from an independent public accountant. The SEC needs this information to monitor compliance with client asset protection requirements, detect potential custody violations and fraud, assess the adequacy of adviser internal controls, and ensure proper segregation of client assets from adviser assets, using the collected data for regulatory examinations, enforcement actions, risk assessment, and systemic oversight of adviser custody practices. This regulation imposes third-party disclosure requirements on investment advisers, with information provided to clients (custodian notifications and account statements), independent public accountants (verification arrangements), qualified custodians (account management), and the SEC (Form ADV-E filings and discrepancy reports), while investors and the public benefit from enhanced asset protection, transparency, and regulatory oversight of adviser custody operations that safeguard trillions of dollars in client assets.

The latest form for Rule 206(4)-2, Custody of Funds or Securities of Clients by Investment Advisers expires 2028-09-30 and can be found here.