SEC Staff Issues No-Action Relief Under Custody Rule

The SEC staff has issued a no-action letter to Madison Capital Funding LLC, allowing the registered investment adviser to conduct certain loan syndication activities despite its inability to comply with certain requirements of Rule 206(4)-2 under the Investment Advisers Act. This rule, known as the custody rule, requires registered investment advisers to hold client funds or securities in accordance with certain conditions in order to protect client assets from misappropriation.

What the rule requires

The rule provides that client funds and securities must be maintained with an organization, such as a bank or a registered broker-dealer, that meets the definition of "qualified custodian." The funds must be held either in a separate account for each client (under the client's name) or in accounts that contain only the client's funds and securities under the investment adviser's name as agent or trustee. Additionally, the investment adviser must have a reasonable