On August 1, 2013, the SEC’s Division of Investment Management issued IM Guidance Update No. 2013-04 (Guidance). The Guidance provides relief to private fund advisers with respect to the requirement to maintain certain certificated, privately-offered securities with a qualified custodian. Specifically, the Guidance provides the following:
“The Division would not object if an adviser does not maintain private stock certificates with a qualified custodian, provided that (1) the client is a pooled investment vehicle that is subject to a financial statement audit in accordance with paragraph (b)(4) of the custody rule; (2) the private stock certificate can only be used to effect a transfer or to otherwise facilitate a change in beneficial ownership of the security with the prior consent of the issuer or holders of the outstanding securities of the issuer; (3) ownership of the security is recorded on the books of the issuer or its transfer agent in the name of the client; (4) the private stock certificate contains a legend restricting transfer; and (5) the private stock certificate is appropriately safeguarded by the adviser and can be replaced upon loss or destruction.”
Advisers wanting to rely on this relief should revise their compliance manuals and adopt additional policies and procedures related to the safeguarding of private stock certificates that are not maintained with a qualified custodian.