Adopted in 1962, Rule 206(4)‑2 of the Investment Advisers Act of 1940 – commonly referred to as the “custody rule” – is intended to provide additional protection against the theft or misappropriation of client assets by investment advisers. Revised in 2009, the custody rule generally requires a private fund adviser to maintain client assets with a qualified custodian. If the adviser is deemed to have custody of client assets itself, it must either undergo an annual surprise exam or distribute an audited financial statement for the fund to all investors within 120 days of the end of the fund’s fiscal year. Although those requirements appear straightforward on their face, compliance with the custody rule continues to pose challenges for fund managers. For example, the SEC has included custody-related issues in its annual examination priorities for several years. In addition, the SEC has issued multiple risk alerts identifying examples of deficiencies in compliance with the custody rule observed by the exam staff. In this two-part series, the Hedge Fund Law Report identifies six common traps that can lead to a private fund adviser’s non-compliance with elements of the custody rule. The first article identifies options for private fund managers to comply with the rule; discusses the frequency with which custody is reviewed during SEC examinations; and identifies common weaknesses in the areas of inadvertent custody, preparing audited financial statements and meeting the delivery deadline for those statements. The second article discusses circumstances under which private fund advisers may fail to realize that they have custody, the auditor independence requirement and liquidation audits. See “A Refresher on Custody and What to Expect on Surprise Custody Exams” (Feb. 18, 2021); as well as our two-part discussion of the custody rule with Proskauer partner Robert Plaze: “History and Possible Amendments” (Dec. 19, 2019); and “Compliance Challenges, Common Issues and Tips” (Jan. 16, 2020).