SEC Charges Exempt Reporting Advisor With Registration and Custody Rule Violations Due to Operational Integration With A Registered Affiliate

ADMINISTRATIVE PROCEEDING
File No. 3-22150

SEC Charges Exempt Reporting Advisor With Registration and Custody Rule Violations Due to Operational Integration With A Registered Affiliate

September 20, 2024 – The Securities and Exchange Commission today announced settled charges against ACP Venture Capital Management Fund LLC (“ACPVC”), an exempt reporting adviser based in Hauppauge, New York, for failure to register as an investment adviser and for failure to comply with the Custody Rule between November 2018 and January 2023 (the “Relevant Period”). As of January 2023, ACPVC had approximately $137 million in regulatory assets under management, belonging to twelve private funds (the “Funds”) for which it served as investment adviser. 

According to the SEC’s order, ACPVC took the position during the Relevant Period that it qualified for an exemption from registration available to investment advisers that manage only private funds and that have assets under management of less than $150 million (see Section 203(m) of the Investment Advisers Act of 1940 (“Advisers Act”) and Rule 203(m)-1 thereunder). The order finds that ACPVC did not qualify for this exemption because there was operational and ownership overlap between ACPVC and an affiliate of ACPVC that is registered with the Commission as an investment adviser (the “Affiliate”). The order further finds that ACPVC and the Affiliate had overlapping owners, managers, advisory personnel, and operations, including shared office space, without any policies or procedures to ensure separation of the two advisers. According to the order, because the operationally integrated enterprise did not solely advise private funds, but also advised individuals, and because the operationally integrated enterprise had combined regulatory assets under management that exceeded the threshold for Commission registration, ACPVC did not qualify for an exemption from registration, and should have registered as an investment adviser during the Relevant Period. 

The order further finds that, during the Relevant Period, ACPVC failed to comply with the Custody Rule (Section 206(4) and Rule 206(4)-2 of the Advisers Act). In order to protect advisory clients from the misuse or misappropriation of their assets, registered investment advisers that have custody of client assets are subject to the “custody rule,” which requires, among other things, that the advisers undergo an annual surprise examination to verify the existence of assets or, where permissible, undergo an annual audit and distribute to investors, within 120 days of each fiscal year’s end, annual audited financial statements for the fund prepared in accordance with Generally Accepted Accounting Principles. According to the order, ACPVC had custody of securities belonging to its Funds because it served as the investment manager of each of the Funds and related person of ACPVC served as a manger of each of the Funds throughout the Relevant Period. The order finds, however, that ACPVC did not obtain annual audits or surprise examinations to verify its custody of these securities during the Relevant Period. 

The order finds that, subsequent to the Relevant Period, ACPVC and the Adviser have taken steps to disaggregate their operations from one another including instituting operational separation policies and related procedures.

Without admitting or denying the findings in the SEC’s order, ACPVC consented to an Order (a) finding that it violated Section 203(a) of the Advisers Act, and Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder; and ordering it to (b) cease-and-desist from committing or causing any violations and any future violations of those provisions; (c) pay a civil penalty of $45,000 and (d) undertake to obtain a verifying examination of the funds and securities held by the funds for which it serves as adviser by an independent public accountant.

The investigation was conducted by Nicholas A. Flath and Steven G. Rawlings, under the supervision of Sheldon L. Pollock of the New York Regional Office.  The SEC examination that led to the investigation was conducted by Krysia-Jo Cole, Kathleen Furey, Gerard Sansobrino, and David Eidelman.