The Securities and Exchange Commission has fined a New York-based RIA $50,000 for failing to arrange for surprise exams of client accounts over which it had custody.
According to the SEC's order, released Friday, from at least 2018 through 2024, "Munakata Associates’ president served as a co-trustee of two trusts that were the firm’s advisory clients; had signatory authority on four of the firm’s clients’ accounts; and acted as an authorized agent with power of attorney on five of the firm’s clients’ accounts."
As a result, the firm had custody of client funds and securities and was required to obtain independent verification of the assets under the agency's custody rule by arranging for surprise exams by an independent accounting firm.
From 2018 through 2024, however, the firm did not do so.
The SEC action "represents a standalone compliance enforcement action — there was no allegation of investor harm, underscoring the SEC’s emphasis on technical compliance even in the absence of misconduct or client loss," Iron Road Partners, a risk consultancy, said in a note.
Amy Lynch, president of FrontLine Compliance, noted that surprise exams involve hiring a firm registered with the Public Company Accounting Oversight Board to verify the assets over which an RIA has custody — serving as an outside audit.
While "these types of violations are not uncommon, this one [involving Munakata] went to enforcement because they never did it. They clearly never understood the rule and didn’t comply."
Munakata Associates has about $64 million in assets under management in 34 accounts, according to its most recent Form ADV.
Credit: Diego-Radzinschi/ALM
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