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SEC Hits 9 RIAs With Custody, Form ADV Violations

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What You Need to Know

  • Non-compliance with the Custody Rule puts the security of client assets at risk, SEC's enforcement head says.
  • The SEC is considering amending or writing a new custody rule.

The Securities and Exchange Commission on Friday levied actions against registered investment advisors for custody rule and Form ADV violations. Two of the firms violated just the custody rule and one Form ADV, while six of the firms violated both.

According to the SEC, the firms failed to comply with requirements for safekeeping of 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.

The advisors, all of which agreed to settle the SEC’s charges and pay combined penalties of over $1 million, are:

The SEC’s orders found that some of the firms failed to have audits performed or to deliver audited financials to investors in certain private funds in a timely manner, thereby violating the Investment Advisers Act’s Custody Rule; and certain advisors failed to promptly file amended Form ADV to reflect they had received audited financial statements after having initially reported that they had not yet received the audit reports.

In addition, one advisor — QVR — did not properly describe the status of its financial statement audits when filing its Form ADV, nor did it update its response in its Form ADV annual updating amendment for multiple years, as required, the SEC said.

Janus — which as of May had $269 billion in assets under management, including approximately $43 billion managed in pooled investment vehicles — failed to timely distribute annual audited financial statements prepared in accordance with generally accepted accounting principles, or GAAP, to certain investors in a private fund that it advised, according to the SEC.

“Non-compliance with the Custody Rule creates significant risks for the safety and security of client assets,” Gurbir Grewal, director of the SEC’s Enforcement Division, said in a statement. “These actions show that the Commission expects private fund advisers to meet their obligations to secure client assets and will pursue those who fail to do so. These matters also presented a unique circumstance for promptly resolving our investigations with this group of advisers. Counsel should not assume that the Division will recommend similar resolutions going forward.”

The SEC’s Division of Investment Management is considering recommending that the SEC propose amendments this year to existing rules and/or propose new rules under the Investment Advisers Act of 1940 to improve and modernize the regulations around the custody of funds or investments of clients by RIAs.

Jim Lundy, a partner and member of the Securities Enforcement & Litigation Practice at Foley & Lardner LLP, told ThinkAdvisor Friday in an email that the enforcement actions “relate primarily to the audit requirements of the custody rule, and some of the allegations against certain firms indicate fairly straightforward failures to be in compliance with this aspect of the custody rule. Further, enforcement will enforce the laws and rules ‘on the books’ while their policy making colleagues in other divisions are engaged in rule making.”

Friday’s actions, Lundy added, “align with the public statements of SEC leaders regarding increasing scrutiny of compliance with the custody rule and the private fund industry more broadly.”

C. Dabney O’Riordan, chief of the SEC Enforcement Division’s Asset Management Unit, added in the statement that “registered private fund advisers’ failures to fulfill their reporting obligations make it harder for the SEC to identify firms with possible on-going issues regarding the Custody Rule. It is critical for investor protection that private fund advisers update their filings with the SEC as required.”

Firms “are strongly encouraged to ensure their compliance with the Custody Rule and the related Form ADV reporting and amending obligations,” the SEC said.

In particular, private fund advisors registered with the SEC “are reminded that per the instructions to Form ADV, Part 1A, Schedule D, Section 7.B.23.(h), ‘If you check ‘Report Not Yet Received,’ you must promptly file an amendment to your Form ADV to update your response when the report is available,’” the SEC states.

Without admitting or denying the findings, the firms agreed to be censured, to cease and desist from violating their respective charged provisions, and to pay civil penalties collectively totaling more than $1 million.


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