The SEC announced charges against an investment advisory firm and three of its top officials for violating the “custody rule” that requires firms to follow certain procedures when they control or have access to client money or securities.
Advisory firms with custody of private fund assets can comply with the custody rule by distributing audited financial statements to fund investors within 120 days of the end of the fiscal year. This provides investors with regular independent verification of their assets as a safeguard against misuse or theft. The SEC’s Enforcement Division alleges that the investment advisory firm was late in providing investors with audited financial statements of its private funds and that the three officials were responsible for the violation.
The SEC alleges the investment advisory firm was at least 40 days late in distributing audited financial statements to investors in 10 private funds for fiscal year 2010. The next year, audited financial statements for those same funds were delivered anywhere from six months to eight months late. According to the SEC, the same materials for fiscal year 2012 were distributed to investors approximately three months late.