Investment Adviser Settles Charges for Custody Verification Requirement Violations

An investment adviser settled SEC charges for failing to comply with the independent verification requirement for client assets over which the adviser was deemed to have custody.

According to the order, the adviser had custody over the client assets because its CEO, who was considered a "related person," acted as trustee to two accounts it managed. Additionally, the adviser was in possession of usernames and passwords for a number of other accounts of its clients.

This resulted in the adviser maintaining the ability to misuse or misappropriate client assets, including transferring the assets out of their accounts. As such, the adviser should have been subject to surprise examinations and other requirements under Advisers Act Rule 206(4)-2(a)(1)-(5) ("Custody of funds or securities of clients by investment advisers"). However, the adviser failed to obtain those examinations and fulfill the other requirements for the accounts over which it had custody.

As a result, the SEC determined that the adviser violated Sections 206(2) and (4) of the Advisers Act ("Prohibited transactions by investment advisers"), as well as Rule 206(4)-7 thereunder ("Compliance procedures and practices").

To settle the charges, the adviser agreed to (i) cease and desist, (ii) accept a censure, (iii) pay a civil monetary penalty of $90,000 and (iv) require its CCO to complete 30 hours of compliance training.