SEC Rule 206(4)-2

Deems it fraudulent for investment advisers to have custordy of client funds or securities unless a qualified custodian maintains these in a separate accounts. Also stipulates that the client must be notified fo rthe custodian's details upon account opening or following any changes to this information.

Rule Overview

Jurisdiction: United States

Regulator: SEC

Topic: Custody

Overview

Latest News

The rule also requires the firm to have a reasonable basis for believing that the qualified custodian is sending account statements on at least a quarterly basis to the firm’s clients.

Also requires the independent verification by a public accountant of the existence of client funds and securities.

The independent verification must occur on at least an anual basis at a time “that is chosen by the accountant without prior notice or annoucnement to you and that is irregular from year to year.

Exceptions to this rule include those covering:

Shares of mutual funds
Some privately offered securities
Fee deduction
Limited partnerships subject to annual audit
Registered investment companies
Certain related persons

Latest News

More on IAA 1940 Rule 206(4)-2

SEC fines two RIAS $150,000 over faulty client agreements

SEC fines two RIAS $150,000 over faulty client agreements

Premium

January 26, 2026

Penalties imposed over potentially misleading information on non-waivable legal rights.

Brite Advisors USA breached core safeguards in cross-border asset management

Brite Advisors USA breached core safeguards in cross-border asset management

Premium

June 25, 2025

SEC’s case highlights how undisclosed conflicts and custody rule violations put client assets at risk.

Improving accounting controls beyond your audit

Audit

Improving accounting controls beyond your audit

Quick Read

March 21, 2024

Practical advice for compliance teams when completing essential reviews in adherence with the SEC's Custody Rule.

SEC unveils new private fund reforms - scope and best compliance practice

SEC

SEC unveils new private fund reforms – scope and best compliance practice

September 19, 2023

Reforms bring several significant requirements applicable to private fund managers, including non-US based advisers and exempt reporting advisers.

SEC charges five investment advisers for custody rule violations

SEC charges five investment advisers for custody rule violations

Premium

September 6, 2023

The SEC charges five investment adviser firms for failing to meet requirements related to the safekeeping of client assets.

SEC amends safeguarding rule to enhance customer asset protection

SEC

SEC amends safeguarding rule to enhance customer asset protection

February 17, 2023

Changes address concerns about client asset custody problems in the crypto sector.