A recent SEC settlement order (Order) highlights the importance of PE sponsors’ and other fund advisers’ obligations under Rule 206(4)‑2 – the so-called “custody rule” – of the Investment Advisers Act of 1940 to distribute audited annual financial statements on a timely basis to investors in private funds. The custody rule generally requires registered investment advisers that have custody of client funds or securities to implement certain safeguards to prevent the loss, misuse or misappropriation of the assets. The SEC recently sanctioned an investment adviser for failing to comply with the custody rule in connection with its role as an adviser to certain PE funds and funds of funds. In addition to failing to distribute audited annual financial statements in a timely manner, the adviser had several deficient practices that impeded its auditor’s efforts, such as a lack of pertinent information; inadequate policies and procedures; and improper reallocations of expenses. This article details the alleged misconduct and the terms of the Order. See “Adviser and CCO Sanctioned for Undisclosed Conflicts; Custody Rule Violations; and Deficient Policies and Procedures” (Dec. 21, 2021); and “SEC Continues to Bring Enforcement Actions for Compliance Infractions: Undisclosed Conflicts of Interest and Custody Rule Violations” (Sep. 14, 2017).