Compliance
The Custody Rule's 120-Day Clock: Back-Planning Your Year-End Marks From April 30
The custody rule gives a December fund until April 30 to deliver audited statements to its LPs. Here's how to back-plan your Level 3 marks from that date.
By 409.AI Team - 2026-10-05
# The Custody Rule's 120-Day Clock: Back-Planning Your Year-End Marks From April 30
Fund valuation guidance almost always starts at the methodology. Pick an approach, calibrate it, document the unobservable inputs, defend the result. All of that matters, and none of it is what goes wrong at a first audited year-end. What goes wrong is the calendar.
If you're the CFO of a venture or private equity adviser that registered with the SEC this year, the fixed date waiting for you isn't December 31. For a fund with a December fiscal year end, audited financial statements have to be in every limited partner's hands by April 30, 2027. That date doesn't move because a portfolio company was slow sending its cap table. Work backward from it and the valuation process has a deadline. Work forward from the measurement date and you find out in March that you're three weeks short.
Where April 30 comes from
The source is the custody rule, [17 CFR 275.206(4)-2](https://www.law.cornell.edu/cfr/text/17/275.206%284%29-2). It opens by naming who it binds: "If you are an investment adviser registered or required to be registered under section 203 of the Act." That phrase is the whole scope question, and it decides whether the rest of this applies to you.
Having custody of client assets normally means establishing accounts with a qualified custodian, notifying clients, having a reasonable basis for believing the custodian sends quarterly account statements to each investor, and submitting to an annual surprise examination. Those requirements fit a fund general partner awkwardly, so paragraph (b)(4) offers an alternative, usually called the audit provision. As the SEC described it in its own October 2026 proposing release, an adviser relying on it "is not required to comply with the notice and account statement delivery requirements of the rule and shall be deemed to comply with the surprise examination requirement" for a pooled vehicle subject to annual audit.
The conditions are short enough to quote. The fund has to be audited "at least annually" and distribute "its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) within 120 days of the end of its fiscal year," audited "by an independent public accountant that is registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by, the Public Company Accounting Oversight Board." The fund has to be audited again upon liquidation, with those statements distributed promptly after.
Three things in there are easy to skim past and expensive to get wrong.
The clock runs from fiscal year end, not from when your auditor was engaged. December 31 plus 120 days is April 30.
The obligation is distribution, not signature. An opinion dated April 28 that reaches LPs on May 6 has missed the deadline.
And the auditor has to be PCAOB-registered *and* subject to regular inspection, tested at the start of the engagement and at each calendar year end. A regional firm that handles your portfolio companies' audits beautifully may not clear that bar. Confirm it before signing the engagement letter.
Who this actually binds
Plenty of emerging managers read the custody rule and conclude it applies to them when it doesn't.
Rule 206(4)-2 reaches advisers registered or required to be registered under section 203. An exempt reporting adviser isn't. If you rely on the venture capital fund adviser exemption under section 203(l), or the private fund adviser exemption under 203(m), the rule's 120-day deadline isn't your deadline. Your limited partnership agreement is, and most LPAs require audited GAAP financials anyway, often inside 90 or 120 days, with side letters sometimes tightening it further. Read yours before assuming you have slack.
Registration is what flips this on. An adviser that crossed into registration during 2026 meets the rule at its first year end as a registrant, which is precisely the year nobody in the finance function has run the close before.
The part of the close that moves
Everything in the audit has a predictable duration except the marks.
Cash reconciles. Capital accounts roll forward. Management fee and carried interest calculations are arithmetic. What takes unpredictable time is the Level 3 portfolio, because those measurements rest on inputs that aren't observable and judgments a third party will challenge. If one unobservable input is significant to the measurement, [the whole measurement lands in Level 3](https://409.ai/articles/asc-820-level-3-classification-significant-unobservable-input), with the disclosure and the scrutiny that follow.
Your auditor tests those estimates under the standard for auditing accounting estimates, and the testing isn't a review of your spreadsheet's arithmetic. It looks at the method, the assumptions and the data separately, and it looks for management bias across the portfolio as a whole. We've written about [what a first audit actually tests about a valuation](https://409.ai/articles/first-audit-409a-valuation-au-c-540-assumptions), and the same structure applies to a fund's positions.
Two areas reliably generate the questions that consume March.
The first is calibration. If you bought into a round at $12.00 a share and you're carrying it at $12.00 four quarters later, your auditor wants to know what work supports that, not just that nothing has happened. SEC staff have been explicit that [calibration to the entry price is where the evidence has to be](https://409.ai/articles/sec-staff-statement-private-asset-fair-value-calibration-nav), and that an entry price stops being evidence of fair value at some point.
The second is consistency. A $120 million fund with 24 positions usually has three or four marked off a recent priced round, a handful off a secondary or continuation vehicle, and the rest on a method you chose and must apply the same way every quarter. [Your valuation policy decides those answers before the quarter does](https://409.ai/articles/fund-valuation-policy-asc-820-audit-sec-exam), which is why the policy gets written in November and not in March.
A back-plan that fits inside 120 days
Here's the shape of a close calendar for a December 31 fund. The two dated obligations are rules; the rest is planning judgment, so adjust it to your portfolio and auditor.
Early January. Request portfolio company data: latest cap tables, audited or management financials, revenue through December, any financing activity in the quarter. This is the long pole. Portfolio companies have their own year ends and your request isn't their priority, so send it before the holidays and chase the slow ones from week one.
Late January. Draft marks for every position. Not the easy ones first, the contested ones first, because those get rewritten.
Early February. Valuation committee review and sign-off, memo written. Who marks, who reviews and who signs should already be settled.
Mid February. Fieldwork opens and the prepared-by-client package goes over. If your marks aren't final here, you're paying your auditor to wait.
March. Questions, and the revisions they cause. Build real room. A single position moving is rarely a single number.
March 31, 2027. Your Form ADV annual updating amendment is due, "within 90 days of the end of your fiscal year" under [17 CFR 275.204-1](https://www.law.cornell.edu/cfr/text/17/275.204-1). Note what that means: it falls due a month *before* the audit distribution deadline, and Schedule D asks whether the fund's audited financial statements were distributed for the most recently completed fiscal year. With the deadline not yet passed, an adviser that has engaged its auditor and expects to distribute on time can answer yes. An adviser that blows April 30 has a Form ADV problem on top of a custody rule problem.
Mid April. Opinion signed, with a buffer.
April 30, 2027. Statements distributed to every LP.
Count the slack in that calendar and there's about two weeks of it. That's the honest answer to why marks have to be frozen in early February for an April 30 deadline, and why "we'll finalize valuations when the auditor asks" is the plan that fails.
What a late mark actually costs
Suppose that $120 million fund carries a Series B position at $8.0 million, marked off the round it led 14 months ago. In mid-March the auditor concludes a flat mark isn't supported: the company missed plan, comparable multiples have compressed, and calibration points to $6.4 million.
That $1.6 million is 1.3% of the fund. It's also a change to NAV, which flows into the capital account statements, the performance figures in your LP report, and any carried interest calculation that runs off year-end value. The accounting entry takes an afternoon. Re-running the allocation, reissuing the schedules and getting the revised numbers back through review takes much longer, and in late March you don't have much longer.
The same arithmetic is why a position where [a continuation fund priced below your carrying NAV](https://409.ai/articles/continuation-fund-price-below-nav-asc-820-quarter-end-mark) belongs in your December work rather than your March surprises, and why the [lock-up discount decision under ASU 2026-03](https://409.ai/articles/asu-2026-03-final-lock-up-discount-quarter-end-decision-funds) should be settled before fieldwork, not during it. Worth confirming early too: that the statements you're distributing are the right ones. A fund meeting the investment company definition reports under [ASC 946](https://409.ai/articles/asc-946-investment-company-venture-fund-financial-statements), which brings a schedule of investments and, for many funds, a cash flow statement they didn't expect to owe.
The October 1 proposal, and why you still plan against 120 days
On October 1, 2026, the SEC proposed a substantial rewrite of the custody rules (Release Nos. IA-7023 and IC-36353, File No. S7-2026-35). Among much else about crypto custody, it would redesignate the Advisers Act custody rule as rule 223-1 and change the audit provision in several ways that matter to fund finance teams.
It would extend the 120-day deadline to 180 days for a fund of funds and 260 days for a fund of funds of funds, largely codifying a position SEC staff already took by no-action letter in the custody rule FAQs. It would let an adviser satisfy distribution by delivering to an investor's designated independent representative. It would relieve a pooled vehicle formed within the last 90 days of its fiscal year from a first-year audit, provided it distributes financial statements, which may be unaudited, within 90 days and the stub period is covered by the following year's audit. And it sets out the Commission's view that a short delay caused by "reasonably unforeseeable circumstances" generally wouldn't be treated as a violation, provided the statements go out promptly once the problem is resolved.
Read that last one carefully, because it's the one that gets misremembered. It's a stated view about enforcement in narrow circumstances, and it describes a force majeure event or an unexpected technology failure, not an auditor who ran long because your marks were late.
More to the point, this is a proposal. Comments are due 60 days after Federal Register publication, and none of it is law today. If you run a straight venture fund, it wouldn't change your deadline even if it were adopted tomorrow. Plan against 120 days.
Before December 31
You have about twelve weeks, and the work that makes April 30 reachable is almost entirely work you do before the measurement date. Almost none of it is valuation work.
Confirm your auditor is PCAOB-registered and subject to inspection, and get the engagement letter signed with fieldwork dates in it. Put the data request to your portfolio companies in writing now, with a January deadline and a named owner for chasing it. Settle the valuation policy questions you know are coming, position by position, while there's no pressure on the answer: the flat marks, the secondary prints, the one company that raised at a price you don't believe. Write down who signs off and when. Then publish the calendar internally with April 30 at the end and every date behind it derived from that.
A fund that misses the 120-day deadline rarely missed it because it couldn't value a company. It missed because nobody counted backward in October.
If your December 31 marks will need a documented fair value measurement that holds up under audit testing, that file is easier to build now than in February. 409.AI's [ASC 820 portfolio valuation reports](https://409.ai/products/asc-820) are built for it, with a draft back in 24 hours and expert review on every report.
Sources
- [17 CFR 275.206(4)-2](https://www.law.cornell.edu/cfr/text/17/275.206%284%29-2) (custody rule, audit provision at (b)(4))
- [17 CFR 275.204-1](https://www.law.cornell.edu/cfr/text/17/275.204-1) (Form ADV annual updating amendment)
- SEC, *Adviser and Regulated Fund Custody Rules; Crypto Custody Rules*, Release Nos. IA-7023; IC-36353, File No. S7-2026-35 (proposed October 1, 2026): [sec.gov](https://www.sec.gov/rules-regulations/2026/10/s7-2026-35)
- SEC Division of Investment Management, [Custody Rule FAQs](https://www.sec.gov/divisions/investment/custody_faq_030510.htm) (Questions VI.7 and VI.9)