SEC Settles Charges with Firm That Violated Custody Rule by Failing to Produce Reports
Commentary by Steven Lofchie
An investment advisory firm, its two owners and a former chief compliance officer ("CCO") have agreed to settle charges that the firm violated Advisers Act Rule 206(4)-2 (the "custody rule") by failing to produce audited financial statements after being reprimanded for a violation several years before, and for failing to take remedial measures.
The firm and its co-founders agreed to pay a $1 million penalty and to a year's suspension from raising money from new or existing investors. Its CCO agreed to pay a $60,000 penalty and to a year's suspension from acting as a CCO or appearing or practicing before the SEC as an attorney.
Commentary
Even though the firm was never accused of misusing clients' money, its failure to provide timely accounting was extreme and repeated. Since it is obvious that compliance with the Custody Rule is (and should be) an SEC priority, the fact that the firm's principals did not take any action to correct the initial failures reflects bad judgment.