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Regulation and Compliance > Federal Regulation > SEC

SEC Fines RIA for Custody Rule Violations

By Melanie Waddell

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The Securities and Exchange Commission has fined ClearPath Capital Partners LLC $65,000 for failing to comply with requirements related to the safekeeping of client assets and for its use of impermissible liability disclaimers in its advisory and private fund agreements.

ClearPath is an investment advisor to retail investors and private funds.

According to the SEC’s order, ClearPath violated the federal securities laws in connection with the financial statement audits of private funds that the firm advised and its use of liability disclaimer language, commonly referred to as a hedge clause, in its advisory agreements and in private fund partnership and operating agreements.

From at least 2018 through 2022, “ClearPath failed to timely distribute annual audited financial statements prepared in accordance with Generally Accepted Accounting Principles (‘GAAP’) to investors in certain private funds that it advised,” resulting in violations of  the custody rule.

In addition, from at least 2019, in its advisory agreements and certain private fund partnership and operating agreements, “ClearPath used hedge clauses that contained misleading statements regarding the scope of its unwaivable fiduciary duty and could lead a client to believe incorrectly that the client had waived a non-waivable cause of action against the adviser provided by state or federal law.”

The SEC “remains focused on the custody rule, which is vital to investor protection,” said Andrew Dean, co-chief of the SEC Enforcement Division’s Asset Management Unit, in a statement. “In addition, all advisers, including private fund advisers, should be mindful about including hedge clauses in agreements. Even for private fund advisers, in certain circumstances, such clauses could be misleading.”

Without admitting or denying the SEC’s findings, ClearPath agreed to a censure, to cease and desist from further violations of the charged provisions, and to pay a $65,000 civil penalty.

Melanie Waddell

@Think_MelanieW

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