An overview of custody-related compliance considerations for private fund advisers in 2026, including operational controls, fund administrators, and regulatory oversight.
As private fund structures continue to evolve, custody-related compliance obligations remain a significant area of regulatory focus for registered investment advisers. This is particularly true where advisers manage pooled investment vehicles through complex structures such as Series LLCs, special purpose vehicles, or multi-entity investment platforms. Although custody issues have historically centered around safeguarding investor assets, recent SEC examinations and enforcement activity suggest broader scrutiny around operational controls, financial reporting, and the segregation of fund-level activities.
Under Rule 206(4)-2 of the Investment Advisers Act of 1940 (the “Custody Rule”), an adviser may be deemed to have custody where it holds, directly or indirectly, client funds or securities, or has authority to obtain possession of them. In practice, discretionary authority over private fund assets frequently triggers custody considerations.
Many private fund advisers rely on the “Audit Exception” under the Custody Rule rather than undergoing an annual surprise examination. To satisfy this exception, the fund’s financial statements generally must be audited annually by an independent public accountant registered with the PCAOB and distributed to investors within the prescribed timeframes.
Where a private fund is organized as a Series LLC, additional operational considerations often arise. Although organized under a single umbrella entity, each designated series may operate as a separate pooled investment vehicle with distinct investors, allocations, capital activity, and investment exposures.
In these structures, firms should carefully evaluate whether operational controls appropriately segregate:
Examiners may assess whether the adviser’s operational framework accurately reflects the economic separateness represented in governing documents and investor disclosures.
Independent fund administrators frequently play an important role in supporting custody-related operational controls. This may include:
Use of a third-party administrator, however, does not eliminate the adviser’s supervisory obligations. Advisers remain responsible for overseeing service providers and ensuring that books, records, and financial reporting processes remain reasonably designed and appropriately documented.
Custody-related examinations often extend beyond custody itself and into broader recordkeeping and governance practices. Advisers should ensure documentation exists to support:
Where third-party administrators are utilized, firms should also maintain documentation evidencing oversight and periodic review of those relationships.
Custody issues involving private funds are often operational as much as regulatory. As fund structures become more sophisticated, advisers should ensure that accounting processes, disclosures, and supervisory practices evolve alongside them. In our experience, regulators increasingly focus not only on whether custody requirements technically apply, but also on whether firms can demonstrate disciplined governance around how investor assets, reporting, and operational controls are managed in practice.
📌 2026 Consideration: Private fund custody reviews frequently intersect with broader questions involving operational resiliency, documentation, valuation oversight, and investor transparency. Firms should periodically reassess whether their internal controls and third-party relationships remain aligned with current regulatory expectations. RegComp Financial continues to assist firms in evaluating custody-related compliance frameworks for private funds and investment advisers.
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