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Custody Crackdown – LexBlog


Earlier this year, the SEC’s Division of Examinations published its priorities for 2022. There was a significant focus area on private funds. In particular, looking at:

“compliance with the Advisers Act Custody Rule, including the “audit exception” to the surprise examination requirement and related reporting and updating of Form ADV regarding the audit and auditors that serve as important gate-keepers for private fund investors”.

Earlier today the SEC announced a swath of actions against firms for custody rule failures. The charged advisors advisers failed to have audits performed or to deliver audited financials to investors in private funds in a timely manner, thereby violating the Investment Advisers Act’s Custody Rule.

The SEC added on a technical filing violation as well.

Firms are strongly encouraged to ensure their compliance with the Custody Rule and the related Form ADV reporting and amending obligations. In particular, private fund advisers registered with the SEC are reminded that per the instructions to Form ADV, Part 1A, Schedule D, Section 7.B.23.(h), “If you check ‘Report Not Yet Received,’ you must promptly file an amendment to your Form ADV to update your response when the report is available.”

The Custody Rule for private funds have some bright lines, making it easy to comply with (if you ignore the costs of audits). It also makes failure to comply with the Custody Rule very obvious. You either deliver the audited financial statements on time or you don’t.

If you don’t deliver on time, the SEC is going to notice.



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