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.
In its Order, the SEC emphasized that Sands Brothers had been repeatedly late and charged both the company and its co-founders Steven Sands and Martin Sands, along with Christopher Kelly, the firm’s Chief Operating Officer and Chief Compliance Officer.
Custody violations continue to be a matter of priority and emphasis for the SEC. Registered Investment Advisers should carefully review their business practices to determine whether they are considered to have custody under the SEC or state custody rules and, if so, to assure that all safekeeping procedures are properly met.
Parker MacIntyre’s attorneys regularly advise in the area of broker-dealer, investment adviser, and securities law compliance.