Since its initial adoption in 1962, Rule 206(4)-2 of the Investment Advisers Act of 1940, commonly referred to as the “custody rule,” has undergone a number of revisions and has increasingly been the subject of SEC comments. The SEC’s Office of Compliance Inspections and Examinations has issued several risk alerts – in 2013 and, most recently, in February 2017 – identifying custody deficiencies as an area of concern. See “Top Five Compliance Deficiencies in OCIE Risk Alert Include Annual Compliance Reviews, Accurate Regulatory Filings and Custody Issues” (Feb. 23, 2017); and “SEC Risk Alert Reveals Significant Deficiencies in Custody Practices of Hedge Fund Managers and Other Investment Advisers” (Mar. 7, 2013). This latest risk alert prompted the Hedge Fund Law Report to investigate whether the staff commonly identifies deficiencies in custody rule compliance by investment advisers. Our research suggests that, while alternative asset managers of “plain vanilla” private funds tend to comply with the rule with minimal difficulty, weaknesses can and do occur when advisers are presented with nuanced circumstances. In this two-part series, we identify six common traps that can lead to a private fund adviser’s non-compliance with elements of the custody rule. This 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 (AFS) and meeting the deadline for delivering AFS. The second article will discuss circumstances under which private fund advisers may fail to realize that they have custody, the auditor independence requirement and liquidation audits.