Redwood Wealth got into trouble with the Securities and Exchange Commission for missing the custody compliance issues related to an investment program.
Redwood Wealth had some of its advisory clients invest in an affiliated mortgage company. Obviously, there are some disclosure items. Presumably, Redwood Wealth took take of that adequately.
The investment was structured as loans, with promissory notes documenting the loan from the advisory clients to the mortgage company. I’m going to guess that Redwood was not used to dealing with securities that are paper securities. Speaking from experience, it’s a pain in the neck to deal with these.
The question is how you deal with the custody issue. In this case Redwood Wealth has physical possession of the notes and therefore has custody of the securities. An investment adviser is not supposed to have custody like this. It looks like Redwood Wealth placed copies of the notes in an online dropbox. That doesn’t cut it for the Custody Rule.
The other problem is that the notes were not showing up on the clients’ account statements. Again, I would guess that Redwood was not used to dealing with securities that are paper securities. That also placed the notes outside the ability of CCO to review or evaluate whether it was a proper investment for the advisory client.
The SEC is not accusing Redwood of losing client money. Just the opposite. The SEC explicitly states that no Redwood client lost money. However, the SEC still brought an enforcement action and levied a $50,000 fine against Redwood and required it to hire an independent compliance consultant.
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