SEC Announces Charges against Investment Advisory Firms for Engaging in Undisclosed Principal Transactions and Violating Custody Rule

The SEC has announced charges against two Houston-based investment advisory firms for engineering thousands of principal transactions through their affiliated brokerage firm without informing their clients.

Parallax and its chief compliance officer are also charged with violations of the "custody rule," which requires firms to undergo certain procedures to safeguard and account for client assets. According to the SEC's orders, the CCO was aware that the custody rule required Parallax to either undergo an annual surprise exam to verify the existence of the fund's assets, or obtain fund audits by a PCAOB-registered auditor and deliver the financial statements to investors within 120 days after the fiscal year ended. The SEC alleges that the CCO failed to take any steps to ensure that Parallax complied, even after he and Parallax's owner learned that the fund's auditor was not registered with the PCAOB.

See: SEC Press Release; SEC Order against Parallax; SEC Order against Tri-Star Advisors.
See also: Lofchie's Guide to Hedge Fund Regulation Ownership and Custody Chapter.
Related news: SEC Charges Two Florida-Based Investment Advisers with Preying on Retirees and Violating the Custody Rule (November 20, 2013); SEC Charges Three Firms with Violating Custody Rule (with Lofchie Comment) (October 28, 2013); SEC Charges Hedge Fund Adviser with Breaching Fiduciary Duty by Participating in Conflicted Principal Transaction (September 18, 2013).