RIA Charged for Custody Rule Violations
SEC Releases
Introduction
The SEC charged an RIA on August 1st, 2025, for failing to comply with the independent verification requirements for Firms maintaining custody over client Funds and securities.
This settled charge reveals the importance of ensuring your compliance program is completing the tasks that are required of it. Under the Advisers Act, failing to implement an enumerated set of requirements designed to prevent loss, misuse, or misappropriation of client Funds and securities is considered a violation.
Initial Takeaway: While the Custody Rule often brings misappropriation of assets to light, this charge was more narrowly focused on a procedural Rule violation, specifically, the RIA’s failure to obtain the required annual surprise examination, rather than any actual misuse or diversion of client funds.
It is also important to note that the SEC charges RIAs of all sizes. Taking this recent charge for example, this RIA is a one (1) man shop with approximately $64 Million in Assets Under Management (AUM) operating as a Mid-Sized Advisory Firm.
What Happened?
- Investment Advisers who have custody over client Funds and securities must:
- Ensure that a qualified Custodian maintains the client Funds and securities;
- Notify the client in writing of accounts opened by the Adviser at a qualified custodian on the client’s behalf;
- Have a reasonable basis for believing that the qualified Custodian sends account statements at least quarterly to clients, and
- Ensure that client Funds and securities are verified by actual examination each year by an Independent Public Accountant pursuant to a written agreement at a time chosen by the accountant without prior notice or announcement to the Adviser.
- From at least 2018 to 2024 the President who also served as CCO (Sole Principal) of the Firm served as a Co-Trustee of two trusts that were Firm advisory clients, giving him broad access to the Funds.
- The Sole Principal also had signatory authority on four client accounts where he maintained the ability to instruct the broker as to the delivery of the accounts’ Fund and securities, similar to the Beneficial Owner.
- From 2017 to 2022, the Sole Principal acted as an Authorized Agent with power of attorney over five clients’ accounts giving him the power to place orders, request disbursements, and make gifts to any one or more people including Agent himself or herself.
- During this time, the Firm was required to obtain surprise examinations in accordance with Rule 206(4)-2(a)(4), but no surprise examinations occurred during the relevant period of at least 2018 to 2024.
- The Firm ended up being fined $50,000.
Vigilant’s Conclusion
This enforcement serves as a reminder that even if no illicit actions with client Funds is alleged, failing to implement the required compliance protocols can still result in charges and fines.
It is important that Firms reassess their compliance program for any missing requirements or areas of risk.
Vigilant offers Gap Analysis, Mock SEC Exams, and On-Going Compliance Services that can be tailored to your business needs. Reach out to us today with any questions you may have.