Investment Adviser Settles Charges for Custody Rule and Compliance Rule Violations
Sept. 25, 2018
File No. 3-18837
Washington, D.C., September 25, 2018 - The Securities and Exchange Commission announced that New York-based investment advisory firm Hudson Housing Capital LLC (HHC) has agreed to settle charges that, since the firm registered with the SEC in 2012, it did not comply with the custody rule and failed to conduct annual reviews of its compliance policies and procedures.
Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-2 thereunder, commonly referred to as the "custody rule," are designed to protect advisory clients from the misuse or misappropriation of their assets. The custody rule requires a registered adviser who has custody of client funds or securities to ensure that such client assets are verified by actual examination each year by an independent public accountant at a time chosen by the accountant without prior notice or announcement to the adviser. The custody rule also provides an alternative to this "surprise examination" requirement for certain advisers if the adviser "distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) within 120 days of the end of its fiscal year" and the audits are conducted by a PCAOB-registered independent public accountant.
Rule 206(4)-7 of the Advisers Act, commonly referred to as the "compliance rule," requires registered advisers to adopt and implement written policies and procedures reasonably designed to prevent violation of the Advisers Act and the rules thereunder, and to review at least annually the adequacy and effectiveness of those policies and procedures.
An SEC investigation revealed that HHC, which was not subjected to an annual surprise examination at any time, failed to timely distribute annual audited financial statements to investors in numerous private investment funds that it advised in each year since it registered with the Commission in 2012. The SEC investigation further revealed that HHC failed to adopt and implement reasonably designed written policies and procedures and failed to review at least annually its policies and procedures, as required by the compliance rule.
Without admitting or denying the SEC's findings, HHC agreed to be censured and to cease and desist from committing or causing any violations and future violations of Section 206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-7 thereunder, and to pay a civil penalty of $65,000.
The SEC's investigation was conducted by Hane L. Kim and Wendy B. Tepperman in the New York office, and supervised by Sanjay Wadhwa. The examination that led to the investigation was conducted by George V. DeAngelis, Nell Spekman, Rachel Lavery, and Michael Paolo.