Investment advisers discuss compliance considerations while reviewing information on a tablet.

What Investment Advisers Should Ask About the Custody Rule

8/13/2026

Do I have custody? Do I need an audit? Do I need to register with the SEC? Investment advisers should understand the obligations in the Custody Rule.

In under a minute

Rule 206(4)-2 of the Investment Advisers Act of 1940 (the Custody Rule) protects client assets. Once an investment adviser has custody, it generally must use a qualified custodian and, depending on the circumstances, undergo a surprise examination, obtain a private fund audit, or satisfy other verification requirements.
Custody arises more often than firms expect. Serving as general partner of a private fund, deducting advisory fees, or having authority to move client assets all can create custody, even without physical possession of client funds.
The Custody Rule applies only to advisers registered with the Securities and Exchange Commission (SEC), so registration status is the threshold question.
SEC registration turns mainly on regulatory assets under management (RAUM), subject to buffers and exemptions that determine whether a firm registers with the SEC or with the states.
Firms approaching the SEC registration threshold should plan early for the custody, audit, and examination obligations that often follow.

When does the Custody Rule apply?

Custody Rule obligations apply only to SEC-registered advisers with custody of client funds or securities. “Custody” is defined broadly and reaches well beyond physical possession. It includes serving as general partner or managing member of a private fund, deducting advisory fees directly from client accounts, holding authority to access or transfer client assets, and participating in certain arrangements involving related persons. An adviser can have custody solely because of authority granted in fund documents or account agreements without ever touching client funds directly.

An adviser with custody generally must keep client assets with a qualified custodian and satisfy the rule’s notice, account statement, and independent verification requirements, unless an exception applies.

What requirements apply under the Custody Rule?

The specific requirements depend on how custody arises:

Custody arrangement	What applies¹
Custody arrangement that does not qualify for an exception (default rule)	The adviser is subject to an annual surprise examination by an independent public accountant.
Private fund custody arrangement	Instead of an annual surprise examination, the adviser may satisfy the private fund audit provision through annual audited financial statements provided to investors.
Certain affiliated custody arrangements	An internal control report regarding custody controls prepared by an independent accountant may be required.

Crowe observation: Custody issues often surface not because a firm intended to take custody of client assets but because custody results from fund structure, fee arrangements, or authority built into account documentation. Because the analysis is fact specific, a periodic custody review can catch these arrangements before they turn into examination findings.

When is SEC registration required?

Registration status depends on adviser type, available exemptions, and RAUM. RAUM thresholds are established under Section 203A of the Advisers Act and Rule 203A-1.

RAUM level	General registration outcome
Less than $100 million	This level typically is regulated at the state level, subject to certain exceptions.
$100 million to less than $110 million	SEC registration generally is permitted.
$110 million or more	SEC registration typically is required.
Below $90 million (already SEC registered)	SEC-registered advisers generally may remain registered until RAUM falls below $90 million, unless another basis for SEC registration applies.

Exemptions, multistate filings, and specialized adviser categories can complicate the analysis of SEC registration requirements, so the previous table reflects the general rule rather than every scenario.

Registration decision framework

The following diagram outlines the most common path advisers use to determine whether SEC or state registration applies, including how exclusions and exemptions from SEC registration² factor in.

Decision tree for determining whether an adviser generally requires SEC or state registration based on exclusions and exemptions.

Source: Crowe, based on the Investment Advisers Act and the SEC’s implementing rules governing investment adviser registration.

The RAUM thresholds³ apply to advisers who are not otherwise required to register with the SEC or are excluded from doing so. Additional registration provisions and exceptions might apply depending on an adviser’s structure, business activities, and client types.

Exempt reporting advisers

Some advisers qualify as exempt reporting advisers (ERAs) and are exempt from SEC registration. The most common ERAs are private fund advisers relying on Rule 203(m)-1 and venture capital fund advisers relying on Rule 203(l)-1. ERAs still file Form ADV, remain subject to SEC oversight, and might have separate state reporting or registration obligations.

Crowe observation: As private companies remain private longer, advisers increasingly are exploring new fund structures and liquidity strategies, including secondary market transactions and continuation vehicles. As advisers’ business models evolve, periodically reassessing SEC registration status and related compliance obligations can help ensure their compliance framework keeps pace with those changes.

Registration transition considerations

Registration status is not fixed. Growth is the most common trigger (for example, private fund advisers often transition to SEC registration after exceeding the private fund adviser exemption threshold), but changes in business activities or adviser structure also can shift registration status and the compliance obligations that come with it.

Crowe observation: Registration often is treated as a filing exercise, but usually the bigger challenge is preparing for the compliance, custody, and examination obligations that come with it. Firms that plan early tend to manage these requirements more smoothly than firms that treat registration as a one-time filing event.

What are areas of SEC examination focus?

The SEC’s Division of Examinations continues to prioritize fiduciary obligations, compliance program effectiveness, custody practices, valuation methodologies, disclosures, and fee and expense allocations. Advisers should be ready to show effective controls, documentation, and oversight in each of these areas:

SEC examination focus area	Adviser considerations
Registration and RAUM	Support registration eligibility, exemption status, and RAUM calculations.
Custody and disclosures	Evaluate custody status, maintain accurate disclosures, and satisfy applicable audit or examination requirements.
Valuation, fees, and expenses	Apply methodologies consistently and maintain supporting documentation.
Compliance and reporting	Maintain effective policies and oversight processes, accurate books and records, and timely regulatory filings.

What’s next?

Registration status, custody arrangements, and examination obligations are connected. A change in one often changes what’s required in the others. Advisers who evaluate these considerations early are better positioned for surprise examinations, private fund audits, and SEC examinations.

¹ Depending on the applicable Custody Rule provision, the independent public accountant may be required to be registered with, and subject to regular inspection by, the Public Company Accounting Oversight Board (PCAOB).
² Certain advisers may qualify for exclusions from the definition of “investment adviser” or exemptions from SEC registration under the Investment Advisers Act. Advisers relying on Section 203(m) or 203(l) are not required to register with the SEC but are classified as exempt reporting advisers and remain subject to Form ADV reporting and other SEC requirements. Advisers relying on other exclusions or exemptions may not need to register with the SEC but may still have state investment adviser registration or reporting obligations.
³ Advisers with less than $25 million in RAUM are generally regulated by the states and typically may not register with the SEC. Advisers with $25 million to less than $100 million in RAUM (midsized advisers) are generally required to register with the state where they maintain their principal office and place of business and are barred from registering with the SEC instead. However, if that state does not require investment adviser registration or does not examine the advisers it registers, the adviser must register with the SEC because no state regulator is available.

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