SEC Charges Investment Adviser with Custody Rule and Compliance Violations

ADMINISTRATIVE PROCEEDING
File No. 3-22104

September 10, 2024 - The Securities and Exchange Commission today announced settled charges against New York City-based investment advisory firm Hi2 Investment Management, LLC for violating Commission rules designed to protect advisory clients from the misuse or misappropriation of their assets.

According to the SEC's order, from 2018 through 2023, Hi2 Investment Management had custody of client assets related to five funds but failed on 17 occasions to provide timely annual audited financial statements to investors or otherwise comply with the custody rule's requirements. In addition, the SEC's order finds that Hi2 Investment Management failed to adopt and implement written policies and procedures reasonably designed to prevent custody rule violations. Registered investment advisers that have custody of client assets are subject to the "custody rule," which requires the advisers to undergo an annual surprise examination to verify the existence of assets or, where permissible, to distribute to investors, within 120 days of each fiscal year's end, annual audited financial statements for the fund prepared by a PCAOB-registered auditor in accordance with Generally Accepted Accounting Principles (GAAP).

The SEC's order finds that Hi2 Investment Management violated Section 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-2 and 206(4)-7 thereunder. Without admitting or denying the order's findings, Hi2 Investment Management consented to a cease-and-desist order and a censure, and agreed to pay a civil penalty of $75,000.

The SEC's investigation was conducted by Christopher M. Castano, Michael S. DiBattista, and Michael Paley, and was supervised by Tejal Shah, all of the New York Regional Office. The examination that led to the investigation was conducted by Eric Baltuch, John Herrera, Edward Moy, Rachel Lavery, and Raymond Slezak.