On September 9, 2022, the Securities and Exchange Commission (“SEC”) announced charges against several investment advisers for failure to comply with requirements of Section 206(4) of the Advisers Act and the rules promulgated thereunder (commonly known as the “Custody Rule”) and deficiencies related to Form ADV filings. The advisers included BiscayneAmericas Advisers L.L.C., Garrison Investment Group, LP, Janus Henderson Investors US LLC, Lend Academy Investments, LLC, Polaris Equity Management, Inc., QVR, LLC, Ridgeview Asset Management Partners, LLC, Steward Capital Management, Inc., and Titan Fund Management, LLC. The advisers all agreed to settle the charges and will pay combined penalties of over $1 million.
The enforcement actions seem harsh in light of some of the charges. In particular, QVR’s failure solely to update its Form ADV after receiving audited reports (described in more detail below), resulted in an investigation, public sanction, and a civil monetary penalty. Compliance failures of these sorts more routinely are addressed in examination deficiencies or Division of Examination risk alerts before the Enforcement Division pursues enforcement actions.
With these enforcement measures in mind, advisers should take care to monitor compliance with the Custody Rule and corresponding reporting obligations on the Form ADV. In particular, advisers relying on the alternatives available in the Custody Rule should be aware of the SEC’s interest in this area of compliance. In addition, these cases are another sign that the SEC has ramped up its use of automated tools to screen Form ADVs for particular issues and flag those that merit examination or investigation.
Custody Rule Violations
Several advisers were charged with failure to comply with the requirements of the Custody Rule. These advisers had been relying on the alternative to complying with the requirements of the Custody Rule, whereby an investment adviser is deemed to be in compliance with the Custody Rule with respect to a fund if that fund is subject to audit at least annually and distributes audited financial statements within 120 days of the end of the fund’s fiscal year. Biscayne, Garrison, Janus, Lend, Polaris, Ridgeview, Steward, and Titan failed to timely deliver the audited financials to investors in various funds and therefore failed to satisfy the alternative. Garrison and Lend were also charged with failure to conduct the required audits with respect to certain funds. Because the alternative was not satisfied, these advisers also failed to otherwise comply with the Custody Rule’s requirements that became mandatory absent the alternative compliance.
Form ADV Deficiencies
Several of the advisers were also charged with failure to promptly amend information in their Form ADV concerning the audit of certain private funds. In particular, the SEC charged Biscayne, Garrison, Ridgeview, Steward, QVR, and Titan with failure to promptly file an amendment to their Form ADV after receiving audit reports for relevant advised funds. This represented a failure to comply with instructions to Form ADV, Part 1A, Schedule D, Section 7.B.23.(h) stating that an adviser that reports that audit reports are “not yet received” must promptly file an amendment to the Form ADV and update responses when the reports become available. Lend was charged with failure to update and amend its Form ADV where it continued to check “yes” where asked whether certain private funds’ financial statements were subject to annual audit, even though the relevant funds’ financial statements were no longer subject to such audit.
For these deficiencies, the advisers were censured, ordered to cease and desist from the relevant violations, and subjected to various civil penalty amounts: Biscayne was made subject to a civil penalty of $135,000, Garrison was made subject to a civil penalty of $330,000, Janus was made subject to a civil penalty of $150,000, Lend was subject to a civil penalty of $75,000, Polaris was subject to a civil penalty of $50,000, QVR was subject to a civil penalty of $50,000, and Ridgeview was subject to a civil penalty of $70,000, Steward was subject to a civil penalty of $75,000, and Titan was subject to a civil penalty of $95,000.