ENFORCEMENT—Commission hits five advisers, plus one recidivist, for custody rule violations - 08 September 2023

The Commission made a similar targeted sweep for custody rule violations nearly one year ago.

Five investment advisers agreed to pay penalties totaling over $500,000 to settle SEC charges of violations of the custody rule. Among other violations, each of the five firms failed to conduct or timely distribute annual audited financial statements to investors in private funds that they advised. Each of the firms agreed to a cease-and-desist order and censure, and will pay civil penalties ranging from $50,000 to $225,000. Separately, the Commission announced settled charges against a recidivist investment adviser and its CEO for violations of the custody rule. The adviser, which was the subject of a 2020 enforcement action, will pay a $200,000 civil penalty, and the CEO will pay $100,000.

Custody rule. The custody rule requires registered investment advisers having custody of client funds to comply with requirements meant to prevent the loss, misuse, or misappropriation of those assets. Among these are requirements concerning the adviser's use of a qualified custodian to maintain the client assets, or, in the alternative, to retain an accountant to audit the fund's financial statements.

The Commission found that the firms violated the custody rule in a number of ways. Each of the firms failed to either maintain client assets with a qualified custodian, have audits performed, or deliver audited financials to investors in a timely manner. Two of the firms also failed to promptly amend certain information about their private fund audits in their Forms ADV.

The firms each agreed to be censured and to cease and desist from the following violations:

  • For violations of the Custody Rule, Lloyd George Management (HK) Limited will pay a $50,000 penalty (Release No. IA-6395).
  • For violations of the Custody Rule and for Failure to Amend, Bluestone Capital Management, LLC will pay a $75,000 penalty (Release No. IA-6398).
  • For violations of the Custody Rule, The Eideard Group, LLC will pay an $80,000 penalty (Release No. IA-6399).
  • For violations of the Custody Rule and for Failure to Amend, Disruptive Technology Advisers LLC will pay a $225,000 penalty (Release No. IA-6400).
  • For violations of the Custody Rule and for Failure to Amend, Apex Financial Advisors, Inc. will pay a $130,000 penalty (Release No. IA-6396).

"The Custody Rule and the associated Form ADV reporting obligations are core to investor protection," said Andrew Dean, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. "We will continue to ensure that private fund advisers meet their obligations to secure client assets." The Commission charged nine advisory firms in a similar targeted sweep in September 2022.

SQN. Separately, an investment adviser settled Commission charges that it and its CEO again violated the custody rule. In September 2020, the Commission found that investment adviser SQN Capital Management violated the custody rule between 2012 through 2019 as to two private funds under its management and also failed to adopt policies and procedures designed to prevent violations. For its violations of Investment Advisers Act Section 206(4) and Rules 206(4)-2 and 206(4)-7, SQN Capital paid a civil penalty of $75,000.

On September 1, 2023, the Commission announced that it had settled charges against SQN (Release No. 33-98272) for recidivist custody rule violations. According to the Commission, despite the 2020 order, SQN and its CEO failed to correct its course and continued to violate the custody and compliance rules. From 2020 through 2022, SQN failed to engage an accounting firm to conduct an audit of the financial statements of the private funds that were the subject of the 2020 order. SQN also failed to obtain an audit of the financial statements of two other public funds from 2019 through 2022. Audits, therefore, were never conducted, and audited financial statements were not distributed to investors. In addition, the two public funds failed to file required quarterly and annual reports from 2019 through the present.

The Commission found that SQN again violated Advisers Act Section 206(4) and Rules 206(4)-2 and 206(4)-7, and aided and abetted the public funds' violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13. SQN's CEO aided and abetted and caused SQN's violations and those of the funds. To settle the charges, SQN and the CEO consented to cease-and-desist orders, censures, and certain undertakings. SQN will pay a $200,000 penalty, and the CEO will pay $100,000.


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