Advisory Firms Fined for Custody and Auditing Failures on Private Fund Assets

Several investment advisers settled SEC charges for custody violations on the assets of private funds. The SEC charged the firms for failing to comply with audit and reporting procedures that would have afforded an exemption from the applicable custodial requirements.

In separate Orders (see here, here, here, here and here), the SEC found that the investment advisers had failed to do one or more of the following: (i) properly obtain and distribute an audit of various funds which resulted in the funds being ineligible for the exemption from the requirement that they keep their assets with a qualified custodian, (ii) submit annual audited financial statements in a timely manner as required by GAAP and (iii) amend responses to their Form ADVs in a timely manner. The SEC also found that one investment adviser had its audits completed in accordance with the International Standards on Auditing rather than the U.S. generally accepted auditing standards. In addition, the SEC said of the same investment adviser, that its auditor was not registered with the Public Company Accounting Oversight Board.

As a result, the SEC found violations of Advisers Act Sections 206(4) ("Prohibited transactions by investment advisers") and 204(a) ("Reports by investment advisers") and Rules 206(4)-2 ("Custody of Funds or Securities of Clients by Investment Advisers") and 204-1(a) ("Amendments to Form ADV") thereunder.

Each investment adviser agreed to (i) cease and desist from further regulation violations, (ii) a censure and (iii) pay respective civil monetary penalties of $225,000, $75,000, $80,000, $50,000 and $130,000.

The SEC said that the violations had been discovered as part of a targeted sweep focused on the Custody Rule and that these enforcement actions followed nine enforcement actions that the SEC had settled in September 2022. (See, "SEC Sweep Finds Advisers Failed to Comply with Custody Requirement.")