SEC Rule 206(4)-2 under the Investment Advisers Act requires registered advisers who have custody of client assets to implement safeguards including a surprise examination by an independent accountant or an annual audit of each fund.
Because most private fund GPs have authority to deduct fees and control distributions, they are deemed to have custody. The audit exception allows fund managers to satisfy the rule through annual audited financial statements distributed to investors within 120 days of fiscal year-end.
This article is for informational purposes only and does not constitute legal advice. Consult qualified professionals for guidance specific to your situation.