September 6, 2023

SEC Charges Five Advisory Firms for Custody Rule Violations


SEC Charges Five Advisory Firms for Custody Rule Violations

On September 5, 2023, the SEC announced Custody Rule related charges against five investment advisers, with fines totalling more than $500,000. These charges come on the tailwind of the 2022 charges of nine investment advisers, with fines totalling more than $1 million. According to the order, the firm’s failed to do one or more of the following:

  • Have audits performed
  • Deliver audited financials to investors in a timely manner
  • Ensure a qualified custodian maintains client assets
  • Failure to disclose custody, and amend ADV information accordingly
“The Custody Rule and the associated Form ADV reporting obligations are core to investor protection,” said Andrew Dean, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “We will continue to ensure that private fund advisers meet their obligations to secure client assets.”
AdvisorAssist reminds their clients of their obligations concerning custody. An Advisor may be deemed to have custody when:
  • A Supervised Person of an Advisor is appointed as executor, conservator, or trustee for an estate, conservatorship, or personal trust or have power of attorney for a client unless, the appointment of these roles is through familial obligation or through a personal relationship, and not as a result of employment with an advisor.
  • An Investment Advisor Representative or Supervised Persons maintains client personal login credentials.
  • An Advisor has check writing or discretionary money movement authority to third parties. However, and Advisor may not be subject to the independent, surprise examination requirement of the custody rule, for standing letters of authorization to third parties, provided the standing instructions meet the seven conditions test, per the February 17, 2017 No-Action Letter .
  • If you are an Advisor to a private fund, you are deemed to have custody of the fund's assets. As such, the fund[s] must be audited annually by an independent public accountant registered with the Public Company Accounting Oversight Board (PCAOB), where audited financials must be delivered to investors within 120 days of the fiscal year end (180 days for fund of funds).
Generally, a registered investment advisor who is deemed to have custody of retail client assets will be required to maintain these assets as a "qualified custodian." Further, they must ensure that the Qualified Custodian is delivering statements to the client on an at least quarterly basis.
Should a firm touch upon any of the stated items related to custody, it is imperative that they reach out to their AdvisorAssist consultant for further assistance.


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