The SEC recently settled two enforcement actions relating to a hedge fund adviser that allegedly failed to disclose payment of certain operational and administrative expenses to investors.  The first action – against the adviser, its CEO and its general counsel – alleged that the respondents violated the antifraud provisions of the Advisers Act and filed inaccurate Forms ADV.  The inadequate disclosures also allegedly violated the custody rule, because the funds’ financial statements failed to disclose adequately the related party transactions and, therefore, were not GAAP-compliant.  Inadequate disclosure of expense allocations remains a hot-button issue with the SEC.  See “Conflicts Remain an Overarching Concern for the SEC’s Asset Management Unit,” Hedge Fund Law Report, Vol. 8, No. 10 (Mar. 12, 2015); and “Battle-Tested Best Practices for Private Fund Expense Allocations,” Hedge Fund Law Report, Vol. 7, No. 38 (Oct. 10, 2014).  The second action, against the funds’ outside auditor, asserted that he aided and abetted the adviser’s violation of the custody rule and engaged in improper professional conduct.  For analysis of another enforcement action in which shortcomings in preparing and disseminating financial statements led to custody rule violations, see “SEC Charges Two Houston-Based Advisory Firms, Including a Hedge Fund Manager, with Principal Transaction, Custody Rule, Compliance Rule and Code of Ethics Violations,” Hedge Fund Law Report, Vol. 7, No. 4 (Jan. 30, 2014).  This article details the facts surrounding the inadequate disclosures, the SEC’s charges and the settlement terms.