The SEC has brought an enforcement proceeding against an accounting firm and two of its partners, claiming that they had engaged in improper professional conduct by failing to satisfy auditing standards when auditing certain of an investment adviser’s private funds that held “Level 3” assets and to satisfy the independence requirement under the custody rule, Rule 206(4)‑2 under the Investment Advisers Act of 1940. As a result, the unnamed adviser improperly relied on the so‑called “audit exception” to the surprise annual examination requirement under the custody rule, which requires preparation of annual audited financial statements in accordance with generally accepted accounting principles by an independent auditor. This article analyzes the settlement order, which hews closely to the allegations the SEC made in the order commencing the enforcement proceeding. See “SEC Enforcement Action Accuses Fund Auditor and Partners of Widespread Failures Valuing Level 3 Assets and Lack of Independence” (Sep. 9, 2021).