Enforcement

Last month, the Securities and Exchange Commission (SEC) announced that registered investment adviser Guggenheim Partners Investment Management, LLC had consented to settle charges that it breached its fiduciary duty to its clients in connection with a $50 million loan made by a client to one of Guggenheim’s senior executives. Specifically, Guggenheim failed to disclose the existence of the loan and the conflicts of interests created by the loan, to its clients. Guggenheim agreed to pay a total of $20 million dollars to settle the charges.

According to the order instituting the administrative proceeding, the senior executive borrowed the funds from an advisory client so that he could make a personal investment in another corporation that was being acquired by Guggenheim’s parent company. The client who made the loan was one of several advisory clients of Guggenheim that invested, at Guggenheim’s recommendation, in two unrelated transactions. The client who made the loan, however, was permitted to invest in the unrelated transactions on different terms than the investors who had not made a loan to Guggenheim.
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The Securities and Exchange Commission announced last week that it has charged Sands Brothers Asset Management, LLC and three of its officers with violating the custody rule as it relates to firms who manage funds in which their clients invest. Investment advisers who have custody, as defined by Rule 20642, must engage in certain “safekeeping practices.” If the adviser has custody by virtue of any reason other than the mere authority to deduct client fees from advisory accounts, one of the safekeeping requirements is that of obtaining an independent audit of fund assets. In the case of a private fund, that requirement can be met by the employment of an auditor approved by the Public Company Accounting Oversight Board who audits and reports to shareholders, (i.e., investors in the funds), annually and reports to shareholders within 120 days from the end of the fiscal year.

In its recent enforcement action, the SEC enforcement division alleged that Sands Brothers had been late in providing investors with audited financial statements. According to the Order instituting administrative proceeding, Sands Brothers was 40 or more days late in distributing the financial statements for ten different private funds for the fiscal year 2010. In the following year, the financial statements for those same funds were between six and eight months past due. In 2012, the financial statements for those funds were distributed approximately 90 days late.
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Articles Posted in Enforcement

Investment Adviser Settles Charges of Failure to Disclose Conflicts of Interest

SEC Institutes Charges Against Fund Manager for Custody Rule Violations