Financial firms should see enforcement actions as learning opportunities. The Securities and Exchange Commission (SEC) and other regulatory bodies enforce steep fines and penalties to send a clear message and deter future violations. As a result? They expect firms within the industry to pay attention and adapt their compliance programs accordingly.
With that in mind, we’re continuing our blog series, “what went wrong” in which we cover recent enforcement actions and what your firm can do to avoid the same mistakes.
In our previous enforcement action blog post, we talked about 11 financial firms charged for violating the SEC’s recordkeeping requirements, totaling $289 million in penalties. Today, we’re focusing on charges the SEC filed against five investment advisers for allegedly failing to comply with requirements related to the custody rule and what firms can learn from these charges.
The case: Violations of the SEC’s custody rule
On Sep. 5, 2023, the SEC charged five investment advisers for violating the SEC’s custody rule.
According to the SEC:
- 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 or ensure a qualified custodian maintained client assets.
- Two of the firms failed to promptly file amended Forms ADV to reflect they had received audited financial statements.
- One of the firms did not properly describe the status of its financial statement audits for multiple years when filing its Form ADV.
Without admitting or denying the findings, the five firms agreed to be censured and to cease and desist from violating the respective charged provisions. The firms also agreed to pay civil penalties from $50,000 to $225,000, totaling more than $500,000 in combined penalties.
Since September 2022, this is the second set of cases that that the SEC has brought for violations of the SEC’s custody rule and Form ADV requirements.
What can investment advisers do to avoid violating the SEC’s custody rule?
Co-Chief of the SEC Enforcement Division’s Asset Management Unit Andrew Dean said, “The Custody Rule and the associated Form ADV reporting obligations are core to investor protection. We will continue to ensure that private fund advisers meet their obligations to secure client assets.”
Here are some steps your investment advisers can take:
- Develop a comprehensive compliance program that includes policies and procedures designed to ensure compliance with the SEC’s custody rule and Form ADV requirements.
- Offer regular training and education to employees about the custody rule and reporting obligations outlined in Form ADV.
- Select qualified custodians to maintain client assets as required by the custody rule. Perform due diligence on custodians to ensure they meet regulatory standards.
- Perform regular audits of client assets and ensure that audited financial statements are delivered to clients promptly within the required timeframes.
- Promptly update Form ADV to accurately reflect any changes in custody arrangements, audited financial statements or other material information and ensure that all information is accurate.
- Maintain thorough records of compliance efforts, including custody arrangements, audit reports and Form ADV updates.
- Consider conducting third-party compliance audits or engaging compliance consultants to review and assess the effectiveness of the firm’s compliance program.
- Conduct regular internal audits to identify any potential violations or weaknesses in the firm’s compliance program.
- Engage compliance consultants to provide guidance and advice on compliance matters, ensuring that the firm’s practices align with regulatory requirements.
- Consider automating this part of your firm’s compliance program. RIA in a Box’s MyRIACompliance® solution helps firms automate and streamline the Form ADV creation and filing process, saving time and resources for compliance teams of all sizes.
Complying with COMPLY
Investment advisers should take this recent slew of charges as a wake-up call to revisit their compliance programs. Investment advisers can take several steps, like conducting regular audits of client assets and promptly updating their Form ADV, to avoid violating the SEC’s custody rule. Investment advisers might also find automation helpful in maintaining their compliance programs and avoiding violations.
COMPLY offers tailored services to meet each firm’s specific needs, considering their size, complexity and risk profile. This helps firms assess and mitigate compliance risks effectively. By utilizing COMPLY’s consulting services and solutions, investment advisers can ensure they are prepared for regulatory changes, maintain updated policies and procedures and minimize the risk of violations.