The Securities and Exchange Commission has recently made the first significant revision of the custody rule for investment advisers in the 40 years since its adoption. These amendments were intended to clarify the meaning of "custody" to bring certainty to application of Rule 206(4)-2 under the Investment Advisers Act of 1940 and to harmonize the rule with current custodial practices. The amendments are discussed in Investment Advisers Act Release No. 2176, issued September 25, 2003.

Review of the SEC release describing the amendments suggests that the rule may have far-reaching implications, especially for registered managers of hedge funds and other pooled investment vehicles, who are now deemed to have custody of client funds and securities and must rely on exceptions to application of the full rule. The Commission recently announced a proposal that would require virtually all hedge fund managers to register as investment advisers. If it is adopted, as is generally anticipated, all but the smallest of hedge fund managers will have to comply with this rule.