SEC Charges Another Investment Advisory Firm for Custody Rule Violations

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The Securities and Exchange Commission (SEC) today released an order instituting administrative and cease-and-desist proceedings against an investment advisory firm and three top officials for violating the custody rule that requires firms to follow certain procedures when they control client money or securities. Advisory firms can comply with the custody rule by distributing audited financial statements to fund investors within 120 days of the end of the fiscal year. The custody rule provides investors with verification of their assets to protect against misuse or theft.

According to the SEC’s order instituting an administrative proceeding, Sands Brothers Asset Management LLC (SBAM) provides investment advisory services to a number of pooled investment vehicles, and wrongly stated in its Form ADV that it does not have custody of client assets. The SEC alleges that SBAM violated the custody rule by not timely distributing audited financial statements to investors in ten private funds. According to the SEC, SBAM was at least 40 days late to distribute statements in 2010.  SBAM was allegedly six months to eight months late in delivering the audited financial statements for those same funds late the very next year.  The same statements for 2012 were distributed approximately three months late.

Notably, in 2010, SBAM and two co-founders were sanctioned by the SEC for custody rule violations. The SEC’s order found that that SBAM “willfully violated the custody rule by improperly relying on the pooled investment vehicle alternative, which allowed for the distribution of audited financial statements in lieu of submitting to a surprise examination by an independent public accountant to verify custody of assets, among other requirements.”

“The custody rule is not a technicality.  It is a critical investor protection provision designed to help ensure that investor assets are safe,” said Andrew Calamari, director of the SEC’s New York Regional Office.  “Sands Brothers and its senior-most officers have persistently disregarded their obligations under the law and left their clients waiting for months at a time to have the materials they need to verify the existence and value of fund assets.”

For more information on this and other related subjects, please contact us at info@jackolg.com or (619) 298-2880.

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