News & Insights

SEC Charges Five Advisory Firms for Custody Rule Violations

What happened?

On September 5, 2023, the SEC charged five investment firms who failed to comply with requirements regarding safekeeping of client assets, and/or to timely update disclosures relating to audits of financial statements for private fund’s they advise. The firms agreed to settle the charges, paying combined penalties of more than $500,000. To read the full SEC press release, click here

According to the press release “the five firms failed to do one or more of the following: have audits performed; deliver audited financials to investors in a timely manner; and/or ensure a qualified custodian maintained client assets.”

Additionally, two of the firms failed to file amended Forms ADV reflecting received audited financial statements. One of the firms had failed to properly describe its financial statement audit status in its Form ADV for multiple years.

Andrew Dean, Co-Chief of the SEC Enforcement Division’s Asset Management Unit said “the Custody Rule and the associated Form ADV reporting obligations are core to investor protection,” and that the Division of Enforcement “will continue to ensure that private fund advisers meet their obligations to secure client assets.”

This is the second set of enforcement in which the SEC brought charges relating to custody rule violations and failures to properly amend Form ADV disclosures of audited financials. In September 2022, the SEC charged nine firms with similar violations.

What does this mean for me?

The Division of Enforcement continues to monitor custody and answers to Question 23(h) of the ADV wherein Private Fund Advisers must accurately update the status of private fund audits. It is easy to let answers on question 23(h) become stale after the deadline for receipt and investor delivery of audited financials has passed.  A stale answer of “report not yet received” is also one of the easiest compliance failures to be caught by the IARD system.

Custody will also continue to be a key focus area because the SEC is pursuing adoption of the Enhanced Safeguarding Rule to redesignate and amend the current Custody Rule. The SEC recently reopened the comment period for the Enhanced Safeguarding Rule to allow for more public comments before a final rule is adopted.

Fairview® provides full-service compliance support for registered investment advisers by creating and implementing comprehensive, sustainable compliance programs, including ongoing testing and evaluations to ensure firms are remaining compliant with SEC regulations. We make sure that internal controls are built into your operations processes, making compliance features inherent to the culture of your firm. Contact us today for additional information about maintaining your compliance program.