Three Firms Disciplined for Custody and Compliance Violations
Three firms consented to orders alleging violations of the Advisers Act’s custody (206(4)-2) and compliance (206(4)-7) rules. The orders included industry bars and agreements to pay several hundred thousand dollars in fines and disgorgement, appoint a dedicated chief compliance officer, appoint an independent consultant, and notify clients. Two of the cases involved the failure by a fund-of-funds sponsor to deliver audited financial statements to investors even after the SEC staff notified the firms of the failure. The third case involved the failure to conduct a surprise examination of client assets deemed to be in the custody of the adviser because of pre-signed client letters of authorization to move funds. In two of the cases, the principal/CCO was also charged with failure to implement reasonable policies and procedures and conduct annual compliance reviews.
OUR TAKE: The SEC considers violations of the custody and compliance rules as early warnings that bigger problems may exist. As shown by these cases, the SEC will severely punish firms that fail to take action to protect client assets or implement an adequate compliance program.