The SEC recently entered into a settlement order with a private fund manager that was accused of: failing to supervise an employee that forged checks to misappropriate assets from fund investors; engaging in violations of the custody rule (Rule 206(4)-2 under the Investment Advisers Act of 1940); and failing to have policies and procedures reasonably designed to prevent violations of the custody rule.  See “How Does the SEC Approach Custody Issues in the Course of Examinations of Hedge Fund Managers?,” Hedge Fund Law Report, Vol. 5, No. 18 (May 3, 2012).  This settlement is important for several reasons.  First, it highlights the dangers of failing to implement proper controls with respect to signing authority over client accounts.  See also, on this topic, “Ten Steps That Hedge Fund Managers Can Take to Avoid Improper Transfers among Funds and Accounts,” Hedge Fund Law Report, Vol. 4, No. 13 (Apr. 21, 2011).  Second, it represents one of the most prominent actions initiated against a private fund manager for a custody rule violation.  Additionally, the settlement sheds light on the SEC’s current approach to the imposition of sanctions against an investment adviser where the respondent self-reports violations to the staff and cooperates with the staff in its investigation.  For a discussion of another enforcement action in the private funds context involving self-reporting, see “SEC Enforcement Action Against a Private Equity Fund Manager Partner Calls into Question the Value of Self-Reporting in the Private Funds Context,” Hedge Fund Law Report, Vol. 4, No. 36 (Oct. 13, 2011).  This article describes the factual background, legal violations and sanctions in this case.  This article also offers several recommendations to reduce the risk of employee misappropriation of fund assets in similar situations.