Published on Jan 25th, 2026 |

Custody Rule Violations and Compliance Gaps Drive SEC Order

SEC Releases

Introduction

On January 20, 2026, the SEC issued an administrative enforcement order against two RIAs (both wholly owned by the same parent corporation) for Custody Rule Violations and Compliance failures. The RIAs were charged a combined total of $150,000 in civil money penalties ($85,000 for one RIA and $65,000 for the other).

The action highlights the SEC’s continued emphasis on proper Compliance with the Custody Rule, robust Compliance Programs for RIAs, and transparent Advisory Agreements.

Key Takeaways

Key Takeaways

Over a period from at least May 2019 through December 2024, the SEC determined that the two RIAs engaged in conduct that violated multiple provisions of the Advisers Act, including:

  • Custody Rule Violations
    • Although the Advisory Agreements granted the Firms authority over client assets, they failed to satisfy the annual independent verification requirement under the SEC’s Custody Rule. This Rule is designed to ensure that client assets are verified by a qualified Independent Accountant.
  • Compliance Program Deficiencies
    • The Firms did not maintain written policies and procedures reasonably designed to prevent violations of the Advisers Act and applicable SEC rules, including those governing Custody and Advisory Contracts.
  • Misleading Contract Terms
    • The Firms’ Client Advisory Agreements contained language implying that fiduciary duties were limited or that the Firms were afforded liability protections beyond what the law permits. These “hedge clauses” could mislead clients about the Adviser’s obligations.
  • Improper Assignment Provisions
    • Advisory Agreements lacked required restrictions on assignment, allowing the Firms to transfer Client Agreements without proper client consent.

Vigilant's Conclusion

Vigilant’s Conclusion

The SEC’s order against these two Firms serves as a reminder that RIAs must align contractual language and compliance practices with regulatory expectations and fiduciary duties.

Key themes from this enforcement action include:

  • Custody Compliance is Non-Negotiable
    • Where a Firm has authority over Client Funds or Securities, it must meet the Custody Rule’s verification requirements and ensure proper safeguarding of those assets.
  • Policies and Procedures are Fundamental
    • Written compliance frameworks tailored to the Firm’s operations are critical. Regulators expect Advisers to proactively identify and mitigate compliance risks.
  • Contract Clarity Matters
    • Advisory Agreements should use clear, accurate language that reflects an Adviser’s true legal obligations. Any attempt to limit fiduciary duties or create misleading protections can trigger regulatory scrutiny.

For Advisers, this case underscores the importance of routinely reviewing Compliance Programs with up-to-date regulatory standards in mind.

It is important to consider adding Compliance Expertise to help address any weaknesses before an SEC Examination occurs.

Contact Us