In re Polaris Equity Management

 UNITED STATES OF AMERICA 
 Before the 
 SECURITIES AND EXCHANGE COMMISSION 
 
 
INVESTMENT ADVISERS ACT OF 1940 
Release No. 6115 / September 9, 2022 
 
ADMINISTRATIVE PROCEEDING 
File No. 3-21052 
 
 
In the Matter of 
 
Polaris Equity Management, 
Inc. 
 
Respondent. 
 
ORDER INSTITUTING ADMINISTRATIVE 
AND CEASE-AND-DESIST PROCEEDINGS, 
PURSUANT TO SECTIONS 203(e) AND 
203(k) OF THE INVESTMENT ADVISERS 
ACT OF 1940, MAKING FINDINGS, AND 
IMPOSING REMEDIAL SANCTIONS AND 
A CEASE-AND-DESIST ORDER  
   
 
I. 
 
 The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 
public interest that public administrative and cease-and-desist proceedings be, and hereby are, 
instituted pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 
(“Advisers Act”) against Polaris Equity Management, Inc. (“Polaris” or “Respondent”).   
 
II. 
 
 In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 
purpose of these proceedings and any other proceedings brought by or on behalf of the 
Commission, or to which the Commission is a party, and without admitting or denying the findings 
herein, except as to the Commission’s jurisdiction over it and the subject matter of these 
proceedings, which are admitted, Respondent consents to the entry of this Order Instituting 
Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and 203(k) of the 
Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a 
Cease-and-Desist Order (“Order”), as set forth below. 
 
 

 2 
III. 
 
 On the basis of this Order and Respondent’s Offer, the Commission finds
1
 that: 
 
Summary 
 
1. Polaris, formerly a registered investment adviser, was an investment adviser to a 
private fund.  This matter concerns Polaris’s violations of the federal securities laws in connection 
with the financial statement audits of private funds that Polaris advised.  Polaris failed to timely 
distribute annual audited financial statements prepared in accordance with Generally Accepted 
Accounting Principles (“GAAP”) to investors in certain private funds that it advised.  These failures 
resulted in violations of Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder, 
commonly referred to as the “custody rule.”       
 
Respondent 
 
2. Polaris Equity Management, Inc. (“Polaris”) is a California corporation with its 
principal place of business in San Rafael, California.  Polaris registered with the Commission as an 
investment adviser in September 2018 and withdrew its registration in May 2022.  On its Form 
ADV dated April 5, 2022, Polaris reported that it had approximately $5.3 million in regulatory 
assets under management, all of which was managed in a pooled investment vehicle.    
 
Other Relevant Entities 
 
3. Polaris NMX Fund, LLC (“NMX”) was a private fund formed as a Delaware limited 
liability company.  At all relevant times, an affiliate under common control with Polaris was the 
general partner of NMX.  Polaris was the investment adviser to NMX from June 2018 until May 
2022, when the fund was liquidated. 
 
Polaris Failed to Distribute Required Audited Financial Statements 
 
4. The custody rule requires that registered investment advisers who have custody of 
client funds or securities implement an enumerated set of requirements to prevent the loss, misuse, 
or misappropriation of those assets.   
 
5. An investment adviser has custody of client assets if it holds, directly or indirectly, 
client funds or securities, or if it has the ability to obtain possession of those assets.  See Advisers 
Act Rule 206(4)-2(d)(2).  A related person of Polaris has served as the managing member or 
general partner of NMX at all relevant times, and has had the authority to make decisions for, and 
act on behalf of, NMX.  Polaris was therefore deemed to have custody of NMX’s assets as defined 
in Advisers Act Rule 206(4)-2.  
 
                                                 
1
 The findings herein are made pursuant to Respondent’s Offer and are not binding on any other person or entity in 
this or any other proceeding.  
 

 3 
6. An investment adviser with custody of client assets must, among other things:  
(i) ensure that a qualified custodian maintains the client assets; (ii) notify the client in writing of 
accounts opened by the adviser at a qualified custodian on the client’s behalf; (iii) have a 
reasonable basis for believing that the qualified custodian sends account statements at least 
quarterly to clients, except if the client is a limited partnership or limited liability company for 
which the adviser or a related person is a general partner or managing member, the account 
statements must be sent to each limited partner or member; and (iv) ensure that client funds and 
securities are verified by actual examination each year by an independent public accountant at a 
time chosen by the accountant without prior notice or announcement to the adviser.  See Advisers 
Act Rule 206(4)-2(a)(1)-(5).   
  
7. The custody rule provides an alternative to complying with the requirements of 
Advisers Act Rule 206(4)-2(a)(2), (3) and (4) for investment advisers to limited partnerships or 
other types of pooled investment vehicles.  The custody rule provides that an investment adviser 
“shall be deemed to have complied with” the independent verification requirement and is not 
required to satisfy the notification and accounts statements delivery requirements with respect to a 
fund if the fund is subject to audit at least annually and “distributes [the fund’s] audited financial 
statements prepared in accordance with generally accepted accounting principles to all limited 
partners . . . within 120 days of the end of [the fund’s] fiscal year” (“Audited Financials 
Alternative”).  See Advisers Act Rule 206(4)-2(b)(4).  The accountant performing the audit must 
be an independent public accountant that is registered with, and subject to regular inspection by, 
the Public Company Accounting Oversight Board (“PCAOB”).  See Advisers Act Rule 206(4)- 
2(b)(4)(ii).  An investment adviser to a limited partnership that fails to meet the requirements of the 
Audited Financials Alternative to timely distribute audited financial statements prepared in 
accordance with GAAP would need to satisfy all of the requirements of Rule 206(4)-2(a)(2)-(4) in 
order to avoid violating the custody rule.  
 
8. In 2018, 2019, and 2020, with respect to NMX, Polaris purported to rely on the 
Audited Financials Alternative in order to comply with the custody rule, but Polaris failed to timely 
deliver the audited financials to NMX’s investors.  Accordingly, Polaris did not satisfy the 
requirements of the Audited Financials Alternative in Rule 206(4)-2(b)(4).  It was therefore 
obligated to comply with Advisers Act Rule 206(4)-2(a)(2), (3) and (4), which Polaris also failed 
to do.   
 
Violations 
 
9. As a result of the conduct described above, Polaris willfully
2
 violated Section 
206(4) of the Advisers Act and Rule 206(4)-2 thereunder. 
                                                 
2
 “Willfully,” for purposes of imposing relief under Section 203(e) of the Advisers Act “‘means no more than that the 
person charged with the duty knows what he is doing.’”  Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) 
(quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)).  There is no requirement that the actor “also be aware 
that he is violating one of the Rules or Acts.”  Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965).  The decision in The Robare 
Group, Ltd. v. SEC, which construed the term “willfully” for purposes of a differently structured statutory provision, 
does not alter that standard.  922 F.3d 468, 478-79 (D.C. Cir. 2019) (setting forth the showing required to establish that 
a person has “willfully omit[ted]” material information from a required disclosure in violation of Section 207 of the 
Advisers Act). 

 4 
 
IV. 
 In view of the foregoing, the Commission deems it appropriate and in the public interest to 
impose the sanctions agreed to in Respondent Polaris’s Offer. 
 
 Accordingly, pursuant to Sections 203(e) and 203(k) of the Advisers Act, it is hereby 
ORDERED that: 
 
 A. Respondent cease and desist from committing or causing any violations and any 
future violations of Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder. 
 
B. Respondent is censured. 
 
C. Respondent shall, within 10 days of the entry of this Order, pay a civil money 
penalty in the amount of $50,000 to the Commission for transfer to the general fund of the United 
States Treasury, subject to the Securities Exchange Act of 1934 Section 21F(g)(3).  If timely 
payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717.   
 
Payment must be made in one of the following ways:   
 
(1) Respondent may transmit payment electronically to the Commission, which 
will provide detailed ACH transfer/Fedwire instructions upon request;  
 
(2) Respondent may make direct payment from a bank account via Pay.gov 
through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or  
 
(3) Respondent may pay by certified check, bank cashier’s check, or United 
States postal money order, made payable to the Securities and Exchange 
Commission and hand-delivered or mailed to:  
 
Enterprise Services Center 
Accounts Receivable Branch 
HQ Bldg., Room 181, AMZ-341 
6500 South MacArthur Boulevard 
Oklahoma City, OK 73169 
 
Payments by check or money order must be accompanied by a cover letter identifying 
Polaris as a Respondent in these proceedings, and the file number of these proceedings; a copy of 
the cover letter and check or money order must be sent to Kimberly L. Frederick, Assistant 
Regional Director, Denver Regional Office, Securities and Exchange Commission, 1961 Stout 
Street, Suite 1700, Denver, CO 80294.   
 
 D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be 
treated as penalties paid to the government for all purposes, including all tax purposes.  To 
preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor 

 5 
Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any 
award of compensatory damages by the amount of any part of Respondent’s payment of a civil 
penalty in this action (“Penalty Offset”).  If the court in any Related Investor Action grants such a 
Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting 
the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the 
Penalty Offset to the Securities and Exchange Commission.  Such a payment shall not be deemed 
an additional civil penalty and shall not be deemed to change the amount of the civil penalty 
imposed in this proceeding.  For purposes of this paragraph, a “Related Investor Action” means a 
private damages action brought against Respondent by or on behalf of one or more investors based 
on substantially the same facts as alleged in the Order instituted by the Commission in this 
proceeding. 
 
 By the Commission. 
 
 
 
Vanessa A. Countryman 
       Secretary 
 
 
 

UNITED STATES OF AMERICA 

 Before the 

 SECURITIES AND EXCHANGE COMMISSION 

 

 

INVESTMENT ADVISERS ACT OF 1940 

Release No. 6115 / September 9, 2022 

 

ADMINISTRATIVE PROCEEDING 

File No. 3-21052 

 

 

In the Matter of 

 

Polaris Equity Management, 

Inc. 

 

Respondent. 

 

ORDER INSTITUTING ADMINISTRATIVE 

AND CEASE-AND-DESIST PROCEEDINGS, 

PURSUANT TO SECTIONS 203(e) AND 

203(k) OF THE INVESTMENT ADVISERS 

ACT OF 1940, MAKING FINDINGS, AND 

IMPOSING REMEDIAL SANCTIONS AND 

A CEASE-AND-DESIST ORDER  

   

 

I. 
 

 The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 

public interest that public administrative and cease-and-desist proceedings be, and hereby are, 

instituted pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 

(“Advisers Act”) against Polaris Equity Management, Inc. (“Polaris” or “Respondent”).   

 

II. 
 

 In anticipation of the institution of these proceedings, Respondent has submitted an Offer 

of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 

purpose of these proceedings and any other proceedings brought by or on behalf of the 

Commission, or to which the Commission is a party, and without admitting or denying the findings 

herein, except as to the Commission’s jurisdiction over it and the subject matter of these 

proceedings, which are admitted, Respondent consents to the entry of this Order Instituting 

Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and 203(k) of the 

Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a 

Cease-and-Desist Order (“Order”), as set forth below. 

 

 



 2 

III. 
 

 On the basis of this Order and Respondent’s Offer, the Commission finds1 that: 

 

Summary 
 

1. Polaris, formerly a registered investment adviser, was an investment adviser to a 

private fund.  This matter concerns Polaris’s violations of the federal securities laws in connection 

with the financial statement audits of private funds that Polaris advised.  Polaris failed to timely 

distribute annual audited financial statements prepared in accordance with Generally Accepted 

Accounting Principles (“GAAP”) to investors in certain private funds that it advised.  These failures 

resulted in violations of Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder, 

commonly referred to as the “custody rule.”       

 

Respondent 

 

2. Polaris Equity Management, Inc. (“Polaris”) is a California corporation with its 

principal place of business in San Rafael, California.  Polaris registered with the Commission as an 

investment adviser in September 2018 and withdrew its registration in May 2022.  On its Form 

ADV dated April 5, 2022, Polaris reported that it had approximately $5.3 million in regulatory 

assets under management, all of which was managed in a pooled investment vehicle.    

 

Other Relevant Entities 

 

3. Polaris NMX Fund, LLC (“NMX”) was a private fund formed as a Delaware limited 

liability company.  At all relevant times, an affiliate under common control with Polaris was the 

general partner of NMX.  Polaris was the investment adviser to NMX from June 2018 until May 

2022, when the fund was liquidated. 

 

Polaris Failed to Distribute Required Audited Financial Statements 

 

4. The custody rule requires that registered investment advisers who have custody of 

client funds or securities implement an enumerated set of requirements to prevent the loss, misuse, 

or misappropriation of those assets.   

 

5. An investment adviser has custody of client assets if it holds, directly or indirectly, 

client funds or securities, or if it has the ability to obtain possession of those assets.  See Advisers 

Act Rule 206(4)-2(d)(2).  A related person of Polaris has served as the managing member or 

general partner of NMX at all relevant times, and has had the authority to make decisions for, and 

act on behalf of, NMX.  Polaris was therefore deemed to have custody of NMX’s assets as defined 

in Advisers Act Rule 206(4)-2.  

 

                                                 
1 The findings herein are made pursuant to Respondent’s Offer and are not binding on any other person or entity in 

this or any other proceeding.  

 



 3 

6. An investment adviser with custody of client assets must, among other things:  

(i) ensure that a qualified custodian maintains the client assets; (ii) notify the client in writing of 

accounts opened by the adviser at a qualified custodian on the client’s behalf; (iii) have a 

reasonable basis for believing that the qualified custodian sends account statements at least 

quarterly to clients, except if the client is a limited partnership or limited liability company for 

which the adviser or a related person is a general partner or managing member, the account 

statements must be sent to each limited partner or member; and (iv) ensure that client funds and 

securities are verified by actual examination each year by an independent public accountant at a 

time chosen by the accountant without prior notice or announcement to the adviser.  See Advisers 

Act Rule 206(4)-2(a)(1)-(5).   

  

7. The custody rule provides an alternative to complying with the requirements of 

Advisers Act Rule 206(4)-2(a)(2), (3) and (4) for investment advisers to limited partnerships or 

other types of pooled investment vehicles.  The custody rule provides that an investment adviser 

“shall be deemed to have complied with” the independent verification requirement and is not 

required to satisfy the notification and accounts statements delivery requirements with respect to a 

fund if the fund is subject to audit at least annually and “distributes [the fund’s] audited financial 

statements prepared in accordance with generally accepted accounting principles to all limited 

partners . . . within 120 days of the end of [the fund’s] fiscal year” (“Audited Financials 

Alternative”).  See Advisers Act Rule 206(4)-2(b)(4).  The accountant performing the audit must 

be an independent public accountant that is registered with, and subject to regular inspection by, 

the Public Company Accounting Oversight Board (“PCAOB”).  See Advisers Act Rule 206(4)- 

2(b)(4)(ii).  An investment adviser to a limited partnership that fails to meet the requirements of the 

Audited Financials Alternative to timely distribute audited financial statements prepared in 

accordance with GAAP would need to satisfy all of the requirements of Rule 206(4)-2(a)(2)-(4) in 

order to avoid violating the custody rule.  

 

8. In 2018, 2019, and 2020, with respect to NMX, Polaris purported to rely on the 

Audited Financials Alternative in order to comply with the custody rule, but Polaris failed to timely 

deliver the audited financials to NMX’s investors.  Accordingly, Polaris did not satisfy the 

requirements of the Audited Financials Alternative in Rule 206(4)-2(b)(4).  It was therefore 

obligated to comply with Advisers Act Rule 206(4)-2(a)(2), (3) and (4), which Polaris also failed 

to do.   

 

Violations 

 

9. As a result of the conduct described above, Polaris willfully2 violated Section 

206(4) of the Advisers Act and Rule 206(4)-2 thereunder. 

                                                 
2 “Willfully,” for purposes of imposing relief under Section 203(e) of the Advisers Act “‘means no more than that the 

person charged with the duty knows what he is doing.’”  Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) 

(quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)).  There is no requirement that the actor “also be aware 

that he is violating one of the Rules or Acts.”  Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965).  The decision in The Robare 

Group, Ltd. v. SEC, which construed the term “willfully” for purposes of a differently structured statutory provision, 

does not alter that standard.  922 F.3d 468, 478-79 (D.C. Cir. 2019) (setting forth the showing required to establish that 

a person has “willfully omit[ted]” material information from a required disclosure in violation of Section 207 of the 

Advisers Act). 



 4 

 

IV. 

 In view of the foregoing, the Commission deems it appropriate and in the public interest to 

impose the sanctions agreed to in Respondent Polaris’s Offer. 

 

 Accordingly, pursuant to Sections 203(e) and 203(k) of the Advisers Act, it is hereby 

ORDERED that: 

 

 A. Respondent cease and desist from committing or causing any violations and any 

future violations of Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder. 

 

B. Respondent is censured. 

 

C. Respondent shall, within 10 days of the entry of this Order, pay a civil money 

penalty in the amount of $50,000 to the Commission for transfer to the general fund of the United 

States Treasury, subject to the Securities Exchange Act of 1934 Section 21F(g)(3).  If timely 

payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717.   

 

Payment must be made in one of the following ways:   

 

(1) Respondent may transmit payment electronically to the Commission, which 

will provide detailed ACH transfer/Fedwire instructions upon request;  

 

(2) Respondent may make direct payment from a bank account via Pay.gov 

through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or  

 

(3) Respondent may pay by certified check, bank cashier’s check, or United 

States postal money order, made payable to the Securities and Exchange 

Commission and hand-delivered or mailed to:  

 

Enterprise Services Center 

Accounts Receivable Branch 

HQ Bldg., Room 181, AMZ-341 

6500 South MacArthur Boulevard 

Oklahoma City, OK 73169 

 

Payments by check or money order must be accompanied by a cover letter identifying 

Polaris as a Respondent in these proceedings, and the file number of these proceedings; a copy of 

the cover letter and check or money order must be sent to Kimberly L. Frederick, Assistant 

Regional Director, Denver Regional Office, Securities and Exchange Commission, 1961 Stout 

Street, Suite 1700, Denver, CO 80294.   

 

 D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be 

treated as penalties paid to the government for all purposes, including all tax purposes.  To 

preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor 

http://www.sec.gov/about/offices/ofm.htm


 5 

Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any 

award of compensatory damages by the amount of any part of Respondent’s payment of a civil 

penalty in this action (“Penalty Offset”).  If the court in any Related Investor Action grants such a 

Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting 

the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the 

Penalty Offset to the Securities and Exchange Commission.  Such a payment shall not be deemed 

an additional civil penalty and shall not be deemed to change the amount of the civil penalty 

imposed in this proceeding.  For purposes of this paragraph, a “Related Investor Action” means a 

private damages action brought against Respondent by or on behalf of one or more investors based 

on substantially the same facts as alleged in the Order instituted by the Commission in this 

proceeding. 

 

 By the Commission. 

 

 

 

Vanessa A. Countryman 

       Secretary