Published on Sep 14th, 2022 |

Brief Introduction

On September 9th, the SEC charged 9 investment advisers that failed to comply with requirements relating to safekeeping client assets and/or to timely update their SEC disclosures to reflect the status of audits of financial statements for the private funds they advised.

4 Common Issues Found

  1. Violation of the Investment Advisers Act’s Custody Rule occurred with a failure for certain Advisers to have audits performed or delivered in a timely manner regarding audited financials to investors in certain private funds.
  2. Failure to file the amended Form ADV in a timely manner to reflect they had received audited financial statements after having initially reported that they had not yet received the audit reports.
  3. Improper description on the status of the financial statement audits when filing the Form ADV.
  4. Failure to fulfill the requirement of updating the response for their Form ADV annual updating amendment for multiple years.

What were the Final Penalties for each Firm?

All of the Advisers agreed to settle the SEC’s charges and pay combined penalties of over $1 million.

SEC’s Comments Toward the Charges

The Director of the SEC’s Enforcement Division, Gurbir S. Grewal, stated that not being compliant with the Custody Rules creates great risks for the security and safety of client assets. For those Private Fund Advisers that fail to meet the obligations to secure client assets, he stated that the SEC will pursue those that do not meet them.

The Chief of the SEC Enforcement Division’s Asset Management Unit, C. Dabney O’Riordan, stated that it is harder for the SEC to identify firms with potential on-going issues regarding the Custody Rule for Registered Private Fund Advisers that fail to fulfill their reporting obligation. For the sake of investor protection, it is crucial for Private Fund Advisers to update their filings with the SEC, as required.

Vigilant’s Final Conclusion and Insights

As the SEC continues to focus on investor protection, they strongly encourage Firms to ensure their compliance with the Custody Rule, related Form ADV reporting, and amending obligations.

Vigilant’s Managing Director, Jerry Scarpati, MBA, CPA,  provided his impression on the SEC Enforcement Action towards violating the Custody Rule, stating, “SEC Registered Investment Advisers should be sure to properly describe the status of their financial statement audits when filing their Form ADV for Funds they are deemed to have custody of. The Adviser should also be sure to update their response to the Form ADV Annual Amendment to reflect that they had received audited financial statements after initially reporting that they had not received them.”

If you are in need of Compliance Support or assistance relating to the Custody Rule, contact us today.

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