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On March 4, 2013, the Office of Compliance Inspections and Examinations ("OCIE") of the Securities and Exchange Commission (the "SEC") issued a Risk Alert identifying "significant deficiencies" in compliance with Rule 206(4)-2 (the "Custody Rule") observed by SEC staff during recent examinations of registered investment advisers ("RIAs").  In reviewing the results of several hundred RIA examinations in which significant deficiencies were found, OCIE determined that approximately one-third of them involved failure to comply with the Custody Rule in one or more of the following areas:

• Recognizing situations in which an RIA has custody of client funds or securities;
• Meeting the annual "surprise exam" requirement for RIAs that have custody of client assets;
• Using a "qualified custodian" to hold client assets of which an RIA has custody; and
• Distributing audited financial statements to fund investors, where an RIA advising pooled investment vehicles uses the "audit approach" to compliance with the Custody Rule.

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