Rule 206(4)‑2 – the so-called “custody rule” – under the Investment Advisers Act of 1940 requires SEC-registered investment advisers that are deemed to have custody of client funds and securities under the rule to have those assets verified through a surprise annual examination. In lieu of the surprise examination, an adviser to a pooled investment vehicle may engage an “independent public accountant” to conduct an annual audit of the fund’s financial statements and deliver the audited financials to investors within 120 days after the end of the fund’s fiscal year. Other SEC regulations require broker-dealers, public issuers and certain employee benefit plans to file financial statements that have been prepared by an independent auditor. Lack of auditor independence, even if inadvertent, can result in a violation of these requirements. The SEC recently imposed significant sanctions on an accounting firm that allegedly caused numerous violations of the custody rule and other SEC rules by 15 of its clients by performing audits when it was not actually independent. The SEC claimed that these deficiencies were caused by poor quality controls around auditor independence, including inadequate procedures, systems and training. This article analyzes the relevant independence requirements and the terms of the settlement order. See “Advisers Must Ensure Auditor Independence to Satisfy Custody Rule” (Nov. 1, 2018); and “The Importance of Exercising Due Diligence When Hiring Auditors and Other Vendors” (Jun. 21, 2018).