UNITED STATES
 

SECURITIES AND EXCHANGE COMMISSION
 

WASHINGTON, D.C. 20549
 

DIVISION OF October 12,2010 INVESTMENT MANAGEMENT 

Robert Van Grover, Esq. 

Seward & Kissell LLP 

One Battery Park Plaza 

New York, NY 10004 US 

Re:	 Request for no-action relief under the Investment Advisers Act of 1940
 

Section 206(4) and Rule 206(4)-2
 

In your letter dated October 1, 2010, you asked the staff ofthe Division ofInvestment 

Management (the "staff') to provide guidance regarding compliance by certain investment 

advisers with rule 206(4)-2 (the "Custody Rule") under the Investment Advisers Act of 1940, as 

amended (the "Advisers Act"). 

You represent that many investment advisers to one or more limited partnerships (or 

limited liability companies or other types of pooled investment vehicle ("private funds")) have 

custody of such private funds' assets as defined in the Custody Rule. Further, you represent that 

most of such investment advisers to private funds obtain annual audits ofthe private funds for 

purposes of complying with rule 206(4)-2(b)(4) (the "Annual Audit Provision"). Among other 

conditions, rule 206(4)-2(b)(4)(ii) requires that the annual audit ofthe private fund be conducted 

by "an independent public accountant that is registered with, and subject to regular inspection as 

ofthe commencement ofthe professional engagement period, and as of each calendar year-end, 

by, the Public Company Accounting Oversight Board ("PCAOB") in accordance with its rules." 

Only auditors to public companies are currently subject to regular inspection by the 

PCAOB. However, Title IX ofthe Dodd-Frank Wall Street Reform and Consumer Protection 

Act (the "Dodd-Frank Act"), signed into law on July 21,2010, provides the PCAOB with 

authority to develop rules to establish a regular inspection program for auditors of brokers and 

dealers as well. I You indicate that several of your investment adviser clients that manage private 

funds have engaged auditors that are auditors to brokers or dealers but not to public companies. 

These auditors are registered with the PCAOB but will not be subject to regular inspection until 

the PCAOB rules referenced above are adopted and take effect. As a result, such auditors' audits 

of private funds would not technically comply with the Annual Audit Provision ofthe Custody 

Rule. Furthermore, even after such PCAOB rules are adopted and take effect, such audit firms 

may not be able to represent that they were subject to regular inspection as ofthe commencement 

ofthe professional engagement period, depending upon when the rules became effective and 

when the engagement period commenced. 

You represent that this aspect ofthe Custody Rule may be disruptive to certain advisers 

that would be required to replace such auditors until the auditors become subject to regular 

inspection by the PCAOB, as contemplated by the Act, even ifthe advisers contemplate reSee Dodd-Frank Act Section 982. 
engaging the auditors once subject to PCAOB regular inspection. You also note that this change 

in auditors may result in additional expense to investors. 

Based on the facts and representations in your letter, we would not recommend enforcement 

action to the Commission under Section 206(4) ofthe Advisers Act and rule 206(4)-2 thereunder 

against an investment adviser that engages an auditor that also audits a broker or a dealer to audit 

the financial statements in connection with the Annual Audit Provision, subject to the following 

conditions2

: 

•	 the auditor was engaged to audit the financial statements of one or more ofthe private funds 

for the most recently completed fiscal year; 

•	 the auditor was registered with the PCAOB and engaged to audit the financial statements of a 

broker or a dealer on July 21, 2010 and is registered with the PCAOB and engaged to audit 

the financial statements of a broker or a dealer as ofthe issuance of audited financial 

statements used to satisfy the Annual Audit Provision; and 

•	 the adviser provides written notification to each investor in each private fund prior to the 

distribution ofthe financial statements that the private fund's auditor is not subject to regular 

inspection by the PCAOB. 

This response applies only to financial statements issued prior to the adoption ofrules 

concerning the inspection of auditors of brokers and dealers by the PCAOB or July 21, 2011, 

whichever date is earlier. 

Robert E. Plaze 

Associate Director 

Conditions conveyed during a telephone conversation between Bryan J. Morris ofthe staff and 

Robert Van Grover of Seward & Kissell LLP on October 8, 2010. 

2 
SEWARD & KISSEL LLP 

ONE BATTERY PARK PLAZA 

NEW YORK, NEW YORK 10004 

1200 a STR~I:T, N.W. 

TELEPHONE: (212) 574-1200 WASHINGTON, c.c. 20005 

n:c"'PHoN"': (202) 737-8833 FACSIMILE: (212)480-8421 f"ACSIMIC"': (202) 737-5184 

WWW.SEWKIS.COM 

October 1,2010 

Investment Advisers Act/206(4)-2 

Robert E. Plaze, Esq. 

Associate Director 

Office of the Associate Director, Regulatory Policy & Investment Adviser Regulation 

U.S. Securities and Exchange Commission 

Division of Investment Management 

100 F Street, NE 

Washington, DC 20549 

Re: Investment Advisers Act of 1940, as amended, Rule 206(4)-2 

Dear Mr. Plaze: 

We represent many advisers to limited partnerships, limited liability companies and other types of pooled 

vehicles (hereafter "private funds") that are deemed to have custody of such private funds' assets under 

Rule 206(4)-2 (the "Custody Rule") under the Investment Advisers Act of 1940, as amended (the 

"Advisers Act"). Most of such advisers to private funds rely upon obtaining annual audits of the private 

funds that satisfy Rule 206(4)-2(b)(4) (the "Annual Audit Provision") to comply with the requirements of 

the Custody Rule. Among other conditions, the annual audit of the private fund must be conducted by 

"an independent public accountant that is registered with, and subject to regular inspection as of the 

commencement of the professional engagement period, and as of each calendar year-end, by, the Public 

Company Accounting Oversight Board in accordance with its rules." Rule 206(4)-2(b)(4)(ii)(italics 

added). 

Currently, only auditors to public companies are subject to inspection by the Public Company Accounting 

Oversight Board (the "PCAOB"). Title IX of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act (the "Act"), signed into law on July 21, 2010, provides the PCAOB with authority to 

inspect auditors of brokers and dealers as well. Act Section 982. The PCAOB rules concerning 

inspections of broker-dealer auditors are not effective unless the SEC gives its prior approval under 

Sarbanes-Oxley Act Section 107(b), including an opportunity for public notice and comment. Such rules 

will not, in light of the required notice and comment periods, be effective in 2010. 

Several of our clients that manage private funds have engaged auditors that are auditors to brokers or 

dealers but not to public companies. Such firms' audits of private funds would not comply with the 

Annual Audit Provision of the Custody Rule until the PCAOB rules referenced above take effect 

subjecting those auditors to brokers and dealers to inspection. Furthermore, even after such PCAOB rules 

take effect, such audit firms may not be able to represent that they were subject to regular inspection as of 

the commencement of the professional engagement period, depending upon when the rules became 

effective and when the engagement period commenced. Accordingly, this aspect of the Custody Rule 

may be disruptive to certain advisers who would be required to replace such auditors until such auditors 
become subject to regular inspection by the PCAOB, as contemplated by the Act, even if the adviser 

contemplates re-engaging the auditor once subject to PCAOB regular inspection. 

In light of the above, we ask the staff to provide guidance that it would not recommend enforcement 

action against advisers that engage auditors to brokers or dealers that are not currently subject to regular 

inspection by the PCAOB during the period through enactment of PCAOB rules requiring the regular 

inspection of such auditors and further clarification on whether an auditor satisfies the Annual Audit 

Provision if it is registered with and subject to regular inspection by the PCAOB at any time during the 

engagement period. 

Ifyou have any questions please do not hesitate to contact me at (212) 574-1205 or 

vangrover@sewkis.com. We appreciate your attention to this issue. 

Sincerely, 

~.=\ ()/ ~tVaN~ Robert Van Grover, Esq. 

SK 99999 0010 1129451 v3