Nine RIAs charged with Custody Rule failures

The SEC has charged nine Registered Investment Advisers to private funds with violations of the Custody Rule. Combined, the advisers paid out over $1 million in fines, a sharp reminder for firms to review practices and controls against the SEC’s expectations.

Biscayne Americas was charged with breaking federal securities laws by failing to distribute annual audited financial statements to investors. The firm also neglected to update Form ADV despite having accurate information to hand, resulting in a fine of $135,000 and a censure.

In a similar case, Janus Henderson Investors US agreed to pay a $150,000 fine for failing to provide annual audited financial statements to 10% of its private funds’ investors between 2018 and 2020.

The other advisers charged did not perform audits or deliver audited financials to investors in certain private funds in a timely manner.

“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.”

C. Dabney O’Riordan, Chief of the SEC Enforcement Division’s Asset Management Unit.

Meeting the Custody Rule requirements

Under Rule 206(4)-2(b)(4) of the Investment Advisers Act of 1940, also known as the Custody Rule, advisers to private funds may comply with the ‘independent verification’ requirement of the Custody Rule. This is the case if the fund obtains an annual audit of the fund’s financial statement, performed by an independent public accountant, and the adviser distributes this to investors within 120 days of the fund’s fiscal year end.

Private fund advisers are also required to comply with the remainder of the Custody Rule, designed to enhance the safety of client assets, protect against unlawful activities and provide an additional layer of control. This includes the holding of all assets with a qualified custodian or complying with the specified requirements for privately offered securities1. 1 Privately offered securities need not be held by a qualified custodian if they are acquired from the issuer in a transaction not involving any public offering; are uncertificated, and ownership is recorded only the books of the issuer; and are transferable only with the prior consent of the issuer.

While Form ADV is required to be filed within 90 days of an RIA’s fiscal year end, the Custody Rule requires the distribution of the audited financial statements within 120 days of the fund’s fiscal year end (180 days for fund of funds) to each investor of the fund.

A prompt to review

Firms should take this opportunity to assess compliance with the Custody Rule, including:

  • Confirming all private funds were audited and those audited financial statements were sent to the fund’s investors within the required time frames.
  • Reviewing the Form ADV and confirming each pooled investment vehicle in Section 7.N.(1)(23)(g) reflects reality.
  • Reviewing any segregated manager account and confirming whether the adviser has custody.

How we can help

We support firms with compliance challenges relating to the Custody Rule, including with an assessment of whether the firm has custody, the creation of internal records, compliance monitoring and due diligence. Get in touch to discuss any technical questions or resource needs.

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