The SEC has issued a Risk Alert on compliance with its custody rule for investment. It notes that with respect to advisers to audited pooled investment vehicles, its examinations found some failed to meet requirements to engage an independent accountant and demonstrate that financial statements were distributed to all fund investors.
The SEC examinations found the following deficiencies with respect to pooled investment vehicles that relied on the audit approach:
- The accountant that conducted the financial statement audit was not “independent” under Regulation S-X, as required by the custody rule.
- The audited financial statements were not prepared in accordance with GAAP (e.g., organizational expenses were improperly amortized rather than expensed as incurred, resulting in a qualified audit opinion; financial statements were prepared on a federal income tax basis; the adviser could not substantiate fair valuations and the accountant therefore could not issue an unqualified opinion on the financial statements).
- The adviser failed to demonstrate that the audited financial statements were distributed to all fund investors. Rather, it appeared that in many instances the statements were only made available “upon request.”
- The audited financial statements were not sent to investors within 120 days of the private funds’ fiscal year ends (or 180 days for fund of funds).
- The auditor was not PCAOB-registered and subject to PCAOB inspection.
- A final audit was not performed on liquidated pooled investment vehicles.
- The adviser requested investor approval to waive the annual financial audit of a fund—but did not obtain a surprise examination. The adviser, therefore, failed to either undergo a surprise exam or comply with the audit approach.