Rule 206(4)‑2 under the Investment Advisers Act of 1940 (Advisers Act), known as the “custody rule,” requires an adviser to implement controls to safeguard client assets over which it has custody, and Advisers Act Rule 204‑1 requires an adviser to periodically file amendments to Form ADV. The custody rule and Form ADV both involve classifying different types of advisory clients. The problem, however, is that SEC staff guidance on the custody rule and Form ADV potentially diverge in the case of a single-investor fund (SIF) client organized as a limited partnership (LP) or limited liability company (LLC) that operates as a means for the adviser to provide individualized investment advice directly to the investor. In a guest article, Simpson Thacher attorney Samuel Francis discusses practical considerations for fund managers when determining whether to treat a SIF client as a pooled investment vehicle (PIV) or a separately managed account
(SMA) under the custody rule and Form ADV. Further, this article asserts that an adviser can treat a SIF client that is organized as an LP or an LLC as a PIV under the custody rule even if that same client is treated as an SMA on Form ADV. For more on Form ADV, see “Unexpected Traps for Filing Other-Than-Annual Amendments Using the Revised Form ADV and How to Avoid Them
” (Jul. 13, 2017); and “A Roadmap of Potential Landmines for Fund Managers to Avoid When Completing the Revised Form ADV
” (May 25, 2017).