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Five Managers Charged with Violating the Audit Exemption of the Custody Rule
Summary:
- On September 5th, 2023, the Securities and Exchange Commission settled an administrative proceeding with five investment managers for various violations of the Custody Rule1.
- The firms agreed to pay civil penalties ranging from $50,000 to $225,000.
- This is the second set of cases that the Commission has brought as part of a targeted Custody Rule sweep.
Allegations and Underlying Conduct:
- Any given firm involved in this round of cases may have violated the rule by engaging in one or more of the following practices:
| Failed to perform an audit | 3 Firms |
| Performed an audit but did not distribute financials in accordance with the Custody Rule | 3 Firms |
| Auditor used IFRS instead of GAAP as auditing standard | 1 Firm |
| Auditor was not registered with PCAOB and/or not subject to inspection | 1 Firm |
| Failed to update Form ADV Part 1, Schedule D, Section 7.B. from “Report Not Yet Received” | 2 Firms |
| Failed to update Form ADV Part 1, Schedule D, Section 7.B to reflect that an audit was no longer being performed. | 1 Firm |
Key Takeaways:
- Focus on Custody: The Commission continues to focus on technical violations of the Custody Rule.
- Certain Violations Easy to Identify: Some custody rule violations can be identified by reviewing Form ADV filings including Schedule D, Section 7.B.23 which identifies whether an auditor report has been received. Ensuring that Form ADVs are completed accurately and updated in a timely way can be key to avoiding scrutiny.
- PCAOB Registration: For auditors that are less well-known, managers should consider checking the PCAOB website to ensure registration and should consider obtaining a representation in their audit engagement letter to ensure that the auditor is subject to regular inspection.
- Continuing Initiative: The SEC has signaled that this is a continuing initiative and more cases are likely.
1 Lloyd George Management (HK) Limited; Apex Financial Advisors, Inc.; Bluestone Capital Management, LLC; Disruptive Technology Advisers LLC; The Eideard Group, LLC.