Brite Advisors USA, a New York-based registered investment advisor with roughly $468 million in assets under management, has been charged with multiple violations of the Investment Advisers Act and failing to disclose conflicts of interest when an affiliated firm borrowed tens of millions of dollars secured against Brite Advisors clients’ assets, according to the Securities and Exchange Commission.
According to a complaint by the SEC filed in the U.S. District Court for the Southern District of New York, from 2019 to the present, Brite Advisors failed to comply with the SEC’s custody rule, which requires an annual report from an independent public accountant when related companies are engaged in asset custody.
In this case, it was the relationship between Brite Advisors and Brite Australia that was under scrutiny, as Brite Advisors sent its client assets to Brite Australia for custody, where they were held in an omnibus account.
At the same time, Brite Advisory Group, the parent company of the two investment advisors, sent millions of dollars in operational funding to Brite Advisors secured by the omnibus account held at Brite Australia, in effect using Brite Advisors client money to fund Brite Advisors’ operations, the complaint said.
“Brite USA’s reliance on the Brite Group for funding creates conflicts of interest that Brite USA, as an investment advisor, has a fiduciary duty to fully and fairly disclose to its advisory clients. Brite USA has failed to do so,” the complaint said. “Moreover, Brite USA has failed to comply with its fiduciary duty to fully disclose that, during the relevant period, a primary source of the funding to cover its operating expenses has been margin loans or other debt secured by client assets, including the assets of Brite USA clients.”
The purpose of the custody rule is to require investment advisors who have custody of client funds to “maintain them in such a way that they will be insulated from and not be jeopardized by financial reverses, including insolvency, of the investment advisor” and to “provide for a more robust set of controls over [investment advisor] client assets designed to prevent those assets from being lost, misused, misappropriated, or subject to advisors’ financial reverses.”
The violations came to light when, in October 2023, an Australian regulator announced it had persuaded an Australian federal court to freeze Brite Australia’s assets because the value of Brite Australia’s funds under management had not been reported in an audited balance sheet since December 2019, the complaint said.
The SEC is seeking a jury trial and final judgment that permanently enjoins Brite Advisors from violating the Advisers Act and levies civil money penalties against the firm.
