On September 5, 2023, the Securities and Exchange Commission (SEC) announced that it had charged five registered investment advisers (RIAs) with violations of the Investment Advisers Act of 1940, including Rule 206(4)-2, better known as the “Custody Rule”. This rule is in place to ensure the safety of client funds and securities, reducing the risk of misappropriation and fraud. These charges came as part of a “targeted sweep” by the SEC to investigate non-compliance of the Custody Rule within the last year.
These charges are particular for their association with alleged misconduct related to Form ADVs. The Investment Advisers Act requires advisers not only to register with the SEC but also mandates the regular filing of this form. The incomplete or inaccurate filing of Form ADVs by these RIAs represents another plane of industry non-compliance.
Form ADV is an essential document for both advisers and their clients – it offers key information about an adviser’s business, including their financial industry affiliations, disciplinary information, and services offered. Given their centrality in ensuring transparency and investor protection, the SEC views violations of Form ADV regulations with gravity.
What stands notable about this recent sweep is that it is the second round initiated by the SEC, directly aiming at Custody Rule violations within a span of just twelve months. This puts a spotlight not only on the case in question but also begins to raise questions about the observed prominence of Custody Rule violations.
It is yet unclear how these charges will potentially influence future adherence to both the Investment Advisers Act and Form ADV filing regulations. However, it underscores the SEC’s ongoing commitment towards addressing misconduct in this domain and enhancing the safety of client funds and securities.
For legal professionals advising corporations and law firms on compliance, this case is a vivid illustration of the importance of proper and timely compliance with SEC regulations.This recent action by the SEC serves as a reminder of the potential pitfalls of non-compliance and the need to maintain the highest standards of practice.