Brite Advisors USA, Inc has been permanently barred from acting as an investment adviser after settling SEC charges related to custody rule violations and undisclosed conflicts of interest.

The firm, which oversaw nearly $400m in client assets held by an affiliated Australian entity, failed to obtain required internal control reports and did not disclose that client assets were used as collateral to fund related companies.

Without admitting or denying the allegations, Brite USA consented to a final judgment prohibiting future violations of the Investment Advisers Act. The case highlights the SEC’s continued focus on cross-border custody risks and the duty of investment advisers to fully disclose material risks and conflicts.

Key risks and conflicts of interest

At the heart of the SEC’s case against Brite Advisors USA is the creation of a pattern of regulatory noncompliance and undisclosed financial entanglements with its Australian affiliate.

The firm, which managed nearly $400m in client assets, relied heavily on Brite Advisors Pty Ltd in Australia to serve as custodian. Despite this arrangement, Brite USA failed to meet the basic requirements of the SEC’s Custody Rule, specifically, the obligation to obtain annual internal control reports from an independent auditor.

These safeguards are intended to verify that client funds are properly protected, particularly when assets are held overseas.

The SEC also alleged that Brite USA concealed key risks and conflicts of interest arising from its financial dependency on its Australian counterpart. During the period under investigation, Brite USA received millions in operational funding from Brite Australia and other affiliates within the Brite Group, some of which was backed by margin loans secured against US client assets.

This practice created serious conflicts, as client funds were effectively being used to support the broader corporate group’s cash flow, without clients being fully informed.

Complicating matters, Brite USA steered its clients, primarily UK expatriates in the US, toward transferring their pensions into structures managed through what it called the “Brite Platform.”

This platform operated omnibus accounts in Australia, pooling multiple client holdings under Brite Australia’s name. The client’s individual identities and allocations were invisible to the broker-dealer custodian, placing full reliance on Brite Australia for recordkeeping and fund movements.

Meanwhile, Brite Group executives, including the CEO and his spouse, retained authorization over the bank accounts holding client funds.

Adding to the controversy, Brite USA proposed a workaround to entice clients to switch custodians: for those facing hefty “exit fees” from prior arrangements, Brite Australia would front the cost, to be repaid in installments over 10 years.

While marketed as a client-friendly option, the mechanism underscored Brite USA’s dependence on internal group financing and further blurred the line between fiduciary responsibility and self-dealing.

Understanding the Custody Rule

At the core of the SEC’s enforcement action against Brite Advisors USA is the alleged breach of the Custody Rule: a cornerstone regulation designed to protect client assets from mismanagement or misuse.

Codified under Rule 206(4)-2 of the Investment Advisers Act of 1940, the Custody Rule prohibits investment advisers from holding or accessing client funds unless they follow specific safeguards. These include maintaining client assets with qualified custodians and, crucially in cases involving affiliated entities, securing an independent internal control report that verifies proper handling of client funds.

The Custody Rule was first introduced in 1962 to ensure that client assets were insulated from the financial instability of investment advisers themselves.

In 2010, following several high-profile scandals, the SEC tightened the rule’s provisions, requiring a more robust audit trail, especially where related parties are involved.

When custody is held by a firm under common control with the adviser, as in the case of Brite USA and its Australian affiliate, an additional layer of compliance is triggered: the firm must obtain an annual internal control report from an independent auditor.

This report is not a formality. It must include an opinion on whether the related entity’s custodial controls are both properly designed and effectively operating. It also requires the independent auditor to confirm that the records of client assets maintained by the affiliated custodian align with those held by an unaffiliated third party, such as a broker-dealer.

These cross-checks are intended to expose discrepancies and prevent the potential misuse of client assets, especially when internal relationships could create conflicts of interest.

By failing to obtain such reports since at least 2019, Brite USA placed itself in direct violation of these critical protections. The SEC deemed this lapse more than a mere technical error; it was a material regulatory failure with real-world implications, particularly given that client funds were used to collateralize loans within the adviser’s corporate group.

Common control

The SEC’s case against Brite Advisors USA underscores how the Custody Rule applies when investment advisers operate within complex multinational corporate structures.

Brite USA, Brite Australia, and their Hong Kong-based parent company functioned as a unified entity, with overlapping executives, shared finances, and centralized strategic control. The Brite Group CEO arranged the acquisition of Brite USA, directed its regulatory filings, appointed its leadership, and oversaw the transfer of client assets.

In practice, this meant that Brite USA had custody of its clients’ assets, held by its affiliated custodian, Brite Australia, yet failed to comply with the rule’s most basic safeguard: obtaining an annual internal control report from an independent auditor.

We believe it is important to use this case to clarify how the Custody Rule applies to multinational actors.

The Brite case illustrates that “custody” is not limited to physical possession, but extends to scenarios in which a related entity, under common control, holds client funds on behalf of the adviser. It also highlights that functional control, through shared executives, operational oversight, or financial interdependence, can trigger the rule.

Multinational advisers must recognize that global operations do not exempt them from US compliance standards. When client assets cross borders but remain under the adviser’s influence, the Custody Rule’s full requirements still apply.

SEC enforcement and outcome

The SEC brought two central claims against Brite Advisors USA.

First, it alleged violations of Section 206(2) of the Investment Advisers Act, which prohibits fraudulent or deceptive conduct by advisers. The SEC claimed that Brite USA, through misleading disclosures and the undisclosed use of client assets as collateral for margin borrowing, acted in a manner that deceived clients and breached its fiduciary duties.

Second, the SEC charged violations of Section 206(4) and Rule 206(4)-2, the Custody Rule, citing Brite USA’s failure to obtain annual internal control reports for assets held by its affiliated custodian, Brite Australia, an omission that left nearly $400m in client assets vulnerable.

In response, Brite USA consented to a final judgment without admitting or denying the allegations. The judgment, entered by the Southern District of New York, permanently enjoins the firm from violating the cited provisions of the Advisers Act and prohibits it from acting as an investment adviser in the future unless exempted.

Broader reflections

While the SEC recently withdrew 14 Gensler-era rule proposals, many related to predictive data analytics, cybersecurity, ESG, and crypto, its enforcement stance on custody remains robust. The agency has consistently pursued advisers who fail to ensure qualified custodianship or timely audit disclosures, as seen in parallel actions against firms such as Lloyd George Management (HK) Ltd and Disruptive Technology Advisers.

The Brite Advisors USA case illustrates a growing enforcement trend: the SEC’s willingness to pursue US-registered investment advisers whose custody arrangements are entangled with foreign affiliates.

With client assets custodied in Australia, key executive functions managed from Hong Kong and the UK, and SEC registration in the US, Brite operated through a fully global structure, but remained subject to domestic fiduciary and custodial obligations.

This case clarifies that cross-border operations do not dilute the Custody Rule’s force. On the contrary, international custody arrangements are increasingly viewed by the SEC as risk multipliers, especially where related-party control and opaque financing structures limit transparency.