SEC Issues Guidance On Application Of Custody Rules To Special Purpose Vehicles And Escrows

Introduction

The Division of Investment Management of the Securities and Exchange Commission (the SEC) recently released an IM Guidance Update with respect to the custody rule, Rule 206(4)-2 (the Custody Rule) under the Investment Advisers Act of 1940, as amended. Specifically, the SEC's guidance focused on the application of the Custody Rule with respect to special purpose vehicles utilized for making investments (SPVs) and escrow accounts utilized when selling interests in portfolio companies. This guidance will be of interest to private equity fund managers, and other private fund managers that may periodically utilize SPVs in pursuing their investment programs, provided in each case that the manager is registered as an investment adviser with the SEC.