Custody rule sweep yields five PF settlements

Five small fund managers were dinged in a Securities and Exchange Commission crackdown on custody rule violations, regulators said Tuesday. The cases involve:

• Disruptive Technologies ($1.1 billion in AUM), which has agreed to accept censure and pay $225,000 to settle accusations that it didn’t use a qualified custodian to watch assets from two dozen funds it advised.
• Bluestone Capital Management ($243 million in AUM), which has agreed to censure and to pay $75,000 to settle charges it failed to have GAAP-compliant audits performed and distributed to investors, and that it didn’t properly update its annual Form ADV.
• The Eideard Group ($263 million in AUM), which agreed to censure and to pay $80,000 to settle accusations it didn’t properly stow its assets with a qualified custodian and didn’t conduct or properly distribute GAAP audits for eight of its funds.
• Lloyd George Management (HK) ($52 million in AUM), based in Hong Kong, which agreed to accept censure and pay $50,000 to settle SEC accusations that it was late distributing its audits, that some of its audits relied on the wrong accounting standards and that its 2021 audit wasn’t with a PCAOB-registered firm.
• Apex Financial Advisers ($471 million in AUM), which agreed to censure and to pay $130,000 to settle accusations that its audits didn’t accord with GAAP standards and that it didn’t properly update its Form ADV.

Slim margins

A spokeswoman at Apex declined to comment for this story. Officials at the other four firms didn’t respond to Private Funds CFO’s requests for comment.

The quintet fell victim to a similar SEC enforcement sweep that netted nine separate settlements a year ago. Regulators adopted the custody rule in 2003, then widened its scope to include all assets – not just funds or securities – in the wake of the Bernie Madoff scandal. The commission is currently weighing broad changes to the rule – including changing its name to the Safeguarding Rule – that would make it even stricter, especially for private funds. The newly adopted private funds rules also require registered funds to audit their books yearly.

That puts private funds in a slight bind. Current rules require registered investment advisers to obtain audits from PCAOB-registered and PCAOB-inspected auditors. The difficulty is, the PCAOB only inspects broker-dealers and retail investment advisers. One workaround is for private funds to require their auditors to stipulate that they undergo inspections, but as the SEC has demonstrated repeatedly in the past few years, funds’ margins for error are slim.

SEC Chairman Gary Gensler has put the final safeguarding rules on the commission’s fall agenda.