Adviser Fined $60,000 for Custody Rule Violation
WHAT HAPPENED?
On May 22, 2020, the United States Securities and Exchange Commission published information on an enforcement action against a registered investment adviser, TSP Capital. The firm was investigated, and subsequently disciplined by the SEC for violating the Custody Rule, which requires, among other things, that a firm having custody of client securities follow a set of regulations which “prevent loss, misuse, or misappropriation of those assets.”
TSP Capital violated the Custody Rule in connection with its largest private fund client, Cameroon Enterprises, LLC Fund, a $31.5 million fund which invests in private Cameroonian agricultural assets. For several years, TSP Capital attempted to utilize the Audited Financials Alternative in place of typical independent verification requirements to comply with the Custody Rule for Cameroon Fund. Advisers to limited partnerships and other types of pooled investment vehicles are eligible to utilize the Audited Financials Alternative to provide account information to all limited partners by seeking an annual audit and distributing audited financial statements to required parties.
Provisions of the Audited Financials Alternative requires advisers to engage an independent public accountant registered with the Public Company Accounting Oversight Board (“PCAOB”) and for audited financial statements to be distributed within 120 days of a fund’s fiscal year end. Although TSP Capital hired a PCAOB-registered firm to perform the work, statements for 2014 and 2015 were delivered 686 and 927 days late, respectively. In the years 2016-18, the firm failed to engage an independent public accountant entirely.
The firm’s decision not to comply with the Audited Financials Alternative and other requirements resulted in a violation of the Custody Rule. The Commission also found that TSP Capital did not adopt and implement policies and procedures to prevent violations of the Adviser’s Act, creating an additional compliance issue.
In response to TSP Capital’s compliance failures, the Commission ordered the firm cease and desist from further violating the Custody Rule, censured the firm, and required the firm to pay a fine of $60,000.
WHAT DOES THIS MEAN FOR ME?
If your firm is subject to the Custody Rule and chooses to utilize the Audited Financials Alternative in place of satisfying the notification and accounts statements delivery requirements under the rule, it must engage a PCAOB-registered independent public accountant to perform an annual audit of the private fund and to distribute annual audited financial statements, which are prepared in accordance with U.S. GAAP, to the private fund’s investors. Failure to comply with all provisions of the Custody Rule can result in enforcement action by the Commission.*
If you have questions about compliance with the Custody Rule, Fairview is here to help. Contact us today with questions about how the Custody Rule applies to your firm or for assistance with drafting meaningful and comprehensive compliance policies and procedures.
* “Pooled vehicles organized outside of the United States, or having a general partner or other manager with a principal place of business outside the United States, may have their financial statements prepared in accordance with accounting standards other than U.S. GAAP so long as they contain information substantially similar to statements prepared in accordance with U.S. GAAP. Any material differences with U.S. GAAP must be reconciled. The Division would not recommend enforcement action if that reconciliation is included only in the financial statements delivered to U.S. persons.” Source: “Staff Responses to Questions About the Custody Rule,” Question VI.5 https://www.sec.gov/divisions/investment/custody_faq_030510.htm
