If you manage a pooled investment vehicle and operate on a calendar year, the April 30th deadline to distribute audited financial statements has either just passed or is top of mind. Whether you’ve met your obligations or are still working through them, now is a good time to revisit the Custody Rule, especially given the evolving regulatory landscape heading into 2026.
The Custody Rule: The Basics
The Custody Rule (Rule 206(4)-2 under the Investment Advisers Act of 1940) requires investment advisers to hold client funds and securities with a qualified custodian that sends quarterly statements directly to clients. It also requires advisers to undergo an annual surprise examination by a PCAOB-registered accounting firm.
However, advisers to pooled investment vehicles may take advantage of the audit exemption under Rule 206(4)-2(b)(4) in lieu of these requirements. To qualify, advisers must annually distribute GAAP-audited financial statements, prepared by an independent, PCAOB-registered and inspected accounting firm, within 120 days of their fiscal year end. A final audited statement is also required upon fund liquidation.
Before assuming you qualify for the exemption, ask yourself:
- Do I have custody as defined by the rule?
- Are client assets held with a qualified custodian?
- Can I satisfy the audited financial statement requirements on time?
If you have custody but haven’t distributed audited financials within the 120-day window, you may be in violation of the rule, and you’ll need to ensure compliance with the notice, statement delivery, and surprise examination provisions instead.
Where Things Stand in 2026
The regulatory picture around custody has shifted considerably over the past two years, and advisers should be aware of the current state of play.
In June 2024, the U.S. Fifth Circuit Court of Appeals vacated the SEC’s Private Fund Advisers Rule (88 Fed. Reg. 63026), which would have imposed new quarterly reporting requirements, expense restrictions, and limitations on preferential treatment. The SEC declined to appeal, allowing both the en banc rehearing and Supreme Court petition deadlines to pass without action, effectively ending the litigation. As of early 2026, no replacement rule has been finalized, though the SEC is expected to issue a revised proposal, and the rulemaking process remains ongoing.
A modernization of custody rules, including explicit provisions for crypto assets, is on the horizon, with a Notice of Proposed Rulemaking (NPRM) planned for April 2026. Advisers holding or managing digital assets should begin evaluating their custodial frameworks now, as new requirements around key management, segregation, insurance, and attestation are expected to follow.
The SEC’s 2026 Examination Priorities specifically reference compliance programs related to marketing, valuation, portfolio management, disclosure, and custody. In short, custody remains a top enforcement focus, and deficiencies continue to be identified at a significant rate.
Common Custody Rule Violations to Avoid
According to a Risk Alert from the SEC’s National Exam Program, significant deficiencies were found in approximately one-third of all advisers examined. The most frequent problems include:
Failure to recognize custody: Advisers often don’t realize they have custody when they perform bill-paying services, hold check-writing authority, serve as general partners of pooled vehicles, or access client accounts using the client’s own login credentials.
Surprise examination failures: Form ADV-E not completed within 120 days, or exams conducted at the same time each year (defeating the “surprise” requirement).
Qualified custodian deficiencies: Client assets held in the adviser’s name without proper agency notation, funds commingled with employee assets, or inadequate basis to confirm custodians are sending required quarterly statements.
Audit approach failures: Auditor not independent under Regulation S-X, financials not prepared under GAAP, statements not delivered to investors within 120 days (or 180 days for fund-of-funds), or auditor not registered with the PCAOB.
What to Do If You’ve Missed the Deadline
Missing the April 30th deadline doesn’t mean you’re without options, but it does require prompt action. You’ll need to assess whether you qualify for the audit exemption, determine whether a surprise examination is now required, and work with a qualified accounting firm to get into compliance as quickly as possible.
If you have questions about your Custody Rule obligations or need assistance with a surprise examination, contact Steve Vlasak at svlasak@richeymay.com, Business Development Partner in Richey May’s Alternative Investments Practice.
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