RIA to Pay $115K Fine Over Custody Rule Violations

News January 02, 2025 at 03:53 PM
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What You Need To Know

  • Driftwood Advisors advises three pooled investment vehicles.
  • In August, the firm said it had about $821 million in regulatory assets under management.
  • The firm failed to timely distribute audited statements to investors in pooled vehicles it advised, the order states.
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The Securities and Exchange Commission has ordered Driftwood Advisors to pay a $115,000 penalty for violations related to the Custody Rule.

According to the SEC's order, Driftwood Advisors had custody of the assets of its pooled investment vehicle clients.

However, for its fiscal years ended Dec. 31, 2021, and 2022, Driftwood Advisors failed to timely distribute audited financial statements prepared in accordance with generally accepted accounting principles to investors in pooled investment vehicles that it advised.

These failures resulted in violations of the rule, the order states.

"For fiscal years 2021 and 2022, with respect to the funds, Driftwood Advisors purported to rely on the Audited Financials Alternative in order to comply with the custody rule, but Driftwood Advisors failed to timely deliver the audited financials to the investors in the Funds," the SEC order states.

"Accordingly, Driftwood Advisors did not satisfy the requirements of the Audited Financials Alternative" in the custody rule.

Driftwood Advisors is a Delaware limited liability company with its principal place of business in Coral Gables, Florida.

Driftwood Advisors advises three pooled investment vehicles. On its Form ADV dated Aug. 1, 2024, Driftwood Advisors reported that it had about $821 million in regulatory assets under management.

As the order explains, an RIA has custody of client assets if it holds, directly or indirectly, client funds or securities, or if it has any authority to obtain possession of those assets.

An advisor "has custody if a related person holds, directly or indirectly, client funds or securities, or has authority to obtain possession of them in connection with advisory services provided to clients," the order states.

A related person of Driftwood Advisors "served as the general partner or managing member of the Funds at all relevant times and had the authority to obtain possession of the Funds’ funds and securities and make decisions for, and act on behalf of, the Funds," according to the order.

Driftwood Advisors willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-2, which, among other things, require registered investment advisors "with custody of pooled investment vehicle client funds or securities to have independent public accountants conduct surprise examinations of those client funds and securities or comply with the requirements of Rule 206(4)-2(b)(4)," the order states.

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