SEC Charges 5 Advisory Firms for Custody Rule Violations
The rule violation announcement is the second the regulator has issued in a ‘targeted’ effort, even as it seeks public comment on a proposed broadening of the custody rule.
The Securities and Exchange Commission on Tuesday announced charges against five investment advisories for failing to comply with requirements related to the so-called custody rule, or safekeeping of client assets, as laid out in Rule 206(4)-2 under the Investment Advisers Act of 1940.
The charges come even as the SEC weighs renaming it the safeguarding rule and broadening its footprint to account for what the regulator has described as advancements in the investment space. The regulator re-opened the comment period for that revised definition on August 23.
According to Tuesday’s announcement, the five firms failed to do one or more of the following: have audits performed; deliver audited financials to investors in a timely manner; and ensure a qualified custodian maintained client assets. In addition, two firms were charged for failing to promptly file amended Forms ADV to reflect they had received audited financial statements, and one firm did not properly describe the status of its financial statement audits when filing its Form ADV.
The advisory firms are: Lloyd George Management (HK) Ltd; Bluestone Capital Management LLC; The Eideard Group LLC; Disruptive Technology Advisers LLC; and Apex Financial Advisors Inc.
“The Custody Rule and the associated Form ADV reporting obligations are core to investor protection,” Andrew Dean, co-chief of the SEC Enforcement Division’s asset management unit, said in a statement. “We will continue to ensure that private fund advisers meet their obligations to secure client assets.”
According to Tuesday’s announcement, all five advisory firms agreed to pay civil penalties ranging from $50,000 to $225,000 to settle the charges. The firms neither admitted nor denied the findings but agreed to be censured and to cease and desist from violating the respective provisions, in addition to the penalty fees.
This is the second set of charges the SEC has brought as part of its “targeted sweep concerning violations” of the Custody Rule after charging nine advisory firms in September 2022, the regulator noted.
The SEC re-opened its comment period on the proposed revision to the custody rule, which had initially ended on May 8, after receiving widespread industry pushback and questions, including suggestions that the new rule would unnecessarily widen the umbrella of regulation for many adviser-led asset investments.
In May, the Investment Adviser Association argued that the amended rule would bring under SEC audit and reporting: digital assets, real estate and physical commodities that could “make those other assets difficult to transact in.” The organization described the rule as “a huge sea change” for custodians, advisers and accountants.
Public comments on the proposed rule changes can be submitted, as well as read, on the SEC’s website.