Custody Rule Violations and Inaccurate Form ADV Disclosures

The U.S. Securities and Exchange Commission (SEC) is getting increasingly tough on private fund managers announcing charges against nine advisory firms for violations of the Advisers Act's Custody Rule (Rule 206(4)-2)  and, in some cases, failing to make timely disclosures on Form ADV. 

Many private fund managers are considered to have custody under the Custody Rule because they, or an affiliate, have control over fund assets. To avoid some of the rule's more onerous reporting and notice requirements, most managers take advantage of the "audit exception." This exception allows them to comply with the rule by (i) arranging for an independent public accountant to audit their funds' financial statements and (ii) delivering the statements to investors within 120 days of its fiscal year-end (180 days for fund of funds).   

These advisers failed to comply with the audit exception and were cited for the following violations: 

• Failing to have their private funds audited by an independent public accountant 
• Failing to deliver the audited financial statements to investors promptly 

To add insult to injury, the SEC also cited some firms for not updating their Form ADV to reflect that they received audited financial statements after initially reporting that the reports had not yet been received.  

Key takeaway 

The SEC is cracking down on Custody Rule violations and reviewing the responses to Form ADV questions on custody. Accordingly, private fund managers that respond "Report not yet received" to Form ADV Part 1A, Schedule D, Section 7.B.(1), Question 23(h) should amend this section promptly after the report becomes available.   

How we help

Financial firms must meet various regulatory filings requirements or else face potential monetary penalties and reputational damage. However, the regulatory filings process can be time-consuming and error-prone when done manually in-house. 
 
Our Regulatory Filing services provide a cost-effective, full-service offering designed to help streamline complex reporting requirements, improve data accuracy, and reduce the operational costs related to regulatory filings. 
 
Our experienced team of regulatory filings specialists can help your firm draft, review, and file applicable filings, including Form ADV, on your firm's behalf.

For more information about the Custody Rule or Form ADV disclosures, or to find out how we can help your firm with its filings, please reach out to your ACA consultant or contact us below.

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