At an open meeting held on December 16, 2009, the Securities and Exchange Commission (SEC) adopted amendments to the custody requirements under the Investment Advisers Act of 1940 (Advisers Act).  These amendments aim to strengthen controls over client assets held by registered investment advisers (RIAs) or their affiliates.  On December 30, 2009, the SEC published the adopting release for these amendments.  These amendments significantly modify the amendments previously proposed in May 2009 in response to about 1,300 comment letters.  For a more detailed analysis of the prior proposal, see “SEC Proposes Stricter Custody Rules for Investment Advisers,” Hedge Fund Law Report, Vol. 2, No. 21 (May 27, 2009).  For an analysis of the impact of the proposed custody rule on hedge fund managers, see “The SEC’s Proposed Custody Rule Changes: An Analysis of the Impact on Hedge Fund Managers,” Hedge Fund Law Report, Vol. 2, No. 21 (May 27, 2009).  Rule 206(4)-2 under the Advisers Act, commonly referred to as the “custody rule,” protects assets managed by RIAs.  The rule requires RIAs to maintain client funds and securities with a “qualified custodian” in accounts that contain only client funds, and to segregate and identify client securities and hold them in a reasonably safe place.  Few RIAs maintain physical custody of client assets, however; the SEC deems many RIAs to have custody because an RIA affiliate – e.g., an affiliated prime broker – maintains the client assets or the RIA retains access to the accounts via fee arrangements, general partner relationships or powers of attorney, among others.  The amendments to Rule 206(4)-2 impose significant additional requirements on RIAs with “custody” of client assets, including an annual surprise examination by an independent public accountant, registered with the Public Company Accounting Oversight Board to verify client assets, as well as a report by the accountant of internal controls relating to the custody of those assets.  With the amendment, the SEC also published an interpretive release providing guidance to auditors regarding the surprise examination and internal controls report requirements.  This article summarizes the amendments and their implications for the investment adviser community generally, and hedge fund managers specifically.