SEC charges advisory firms with custody rule violations

The Securities and Exchange Commission charged several investment advisors with combined penalties of $1 million for not adequately protecting their clients' assets and failing to disclose the status of audits of financial statements for the private funds that sought their advice, which is a violation of the Investment Advisors Act's Custody Rule. 

The firms, which neither denied nor confirmed the findings, include BiscayneAmericas Advisers, Garrison Investment Group, Janus Henderson Investors US, Lend Academy Investments, Polaris Equity Management, QVR, Ridgeview Asset Management Partners, Steward Capital Management and Titan Fund Management. The firms agreed to be censured and to cease and desist from violating their respective charged provisions .

"Non-compliance with the Custody Rule creates significant risks for the safety and security of client assets," said Gurbir Grewal, director of the SEC's enforcement division, in a statement Friday. "These actions show that the Commission expects private fund advisers to meet their obligations to secure client assets and will pursue those who fail to do so. These matters also presented a unique circumstance for promptly resolving our investigations with this group of advisors."

Andrew Harrer/Bloomberg

The custody rule requires that registered investment advisers who have custody of client funds or securities implement an enumerated set of requirements to prevent the loss, misuse, or misappropriation of those assets. Among other responsibilities, an  investment advisor must ensure that their client's funds and securities are examined each year by an independent public accountant. The custody rule also provides investment advisors with an alternative to the independent examination requirement if the client's fund is audited at least once a year, and if reviewed financial statements are distributed to partners within 120 days of the end of the fiscal year. 

According to the SEC, some of the firms' advisors failed to perform audits or timely update their SEC disclosures in certain private funds. For example, Janus failed to deliver audited financials to approximately 10% of its client's investors for three years in a row. Others reported that they didn't receive audited financial statements and failed to amend their Form ADV when they discovered that they made a mistake. Furthermore, one advisor incorrectly filled out its Form ADV and didn't properly describe the status of its financial statement audits, nor did it update its response for Form ADV annual updating amendment for multiple years.

"Registered private fund advisors' failures to fulfill their reporting obligations make it harder for the SEC to identify firms with possible ongoing issues regarding the Custody Rule," said C. Dabney O'Riordan, chief of the SEC enforcement division's asset management unit, in a statement. "It is critical for investor protection that private fund advisers update their filings with the SEC as required."

The firms were not the only ones to be penalized for custody rules and related violations last week, as on Thursday, the SEC charged the New York City-based investment advisory firm Charles Pratt & Co. $100,000 in civil penalties for violating the agency's regulations.