Private Fund Sponsor Failed to Deliver Financials within 120 Days (Again)
The SEC commenced an enforcement action against a private fund manager and its principals including its Chief Compliance Officer for violation the custody rule (206(4)-2). The SEC charges the firm with repeated failures to deliver to investors the audited financials of private funds it managed within 120 days of the end of their fiscal years. The SEC cited the auditor which indicated that the delays were avoidable because they involved the failure of management to timely deliver valuation information. The SEC criticized the CCO for failing to implement policies and procedures, relying on “simply remind[ing] people of the custody rule deadline without taking any more substantial action.” The SEC censured the firm in 2010 for similar violations. Andrew M. Calamari, Director of the SEC’s New York Regional Office, said “The custody rule is not a technicality. It is a critical investor protection provision designed to help ensure that investor assets are safe.” In connection with the action, the SEC released an Investor Bulletin describing the custody rule’s requirements.
OUR TAKE: This is not a situation where a firm did not, or could not, understand some esoteric technical requirement. The rule requires that fund sponsors deliver audited financials to investors within 120 days. If you are a private fund sponsor and you didn’t know the rule, it’s time to hire a compliance adviser.