Custody Rule
Rule 206(4)-2 · 17 CFR 275.206(4)-2
Custody of funds or securities of clients by investment advisers
Read the current text at the source ↗Guide: Solo Adviser Compliance from A to Z
Guide: Outside Business Activities for Investment Adviser Representatives
Guide: The Custody Rule Explained: Rule 206(4)-2 for Investment Advisers
Guide: Annual Compliance Review Checklist for Investment Advisers
- Applies to
- SEC-registered investment adviser
- Effective
- March 12, 2010
When this applies
Applies only where the adviser has custody of client funds or securities as (d)(2) defines it, which is broader than holding assets and reaches fee deduction authority, check-writing authority and general partner positions. On 1 October 2026 the Commission proposed redesignating this rule as Rule 223-1 and amending it, including for crypto assets (Release IA-7023). It is a proposal: this rule applies as written until any final rule takes effect.
What the rule says
A description of the source text.
Where an adviser has custody, client assets must be held by a qualified custodian, clients must be notified promptly of the custodian and account details and of any change, the adviser must have a reasonable basis to believe the custodian sends account statements at least quarterly, and the client funds and securities in the adviser's custody are verified by an annual surprise examination by an independent public accountant at a time irregular from year to year and chosen without prior notice, reported on Form ADV-E within 120 days. The examination does not apply where custody arises only from fee deduction, to pooled vehicles that distribute audited financial statements, or where custody arises only from an operationally independent related person. Where the adviser or a related person is the qualified custodian, an annual internal control report from a PCAOB-registered accountant is required. 75 FR 1484 (11 January 2010).
What it requires
Luna's plain-English reading, not the Commission's words.
- 01Work out whether you have custody before anything else. The definition in (d)(2) catches advisers who hold nothing.
- 02The surprise examination is genuinely surprising: the accountant picks the date, it moves year to year, and there is no notice.
- 03Where the adviser or a related person is the qualified custodian, the internal control report is required in addition to the surprise examination, unless the related person is operationally independent, in which case no surprise examination is required.
- 04Material discrepancies go to the Commission within one business day.
What examiners find
Luna's observations, not a Commission publication.
- Inadvertent custody through a standing letter of authorisation or broad fee-deduction authority.
- General partner of a fund treated as not having custody.
- Account statements sent by the adviser without urging clients to compare them against the custodian's.
Topics
Source last checked against the regulator's copy on October 14, 2026. That date is written by an automated check, not by hand.
Luna Compliance is software, not a law firm. This page is not legal advice and reading it creates no attorney-client relationship. Where this page and the regulator's copy differ, the regulator's governs.