SEC Announces Charges Against Investment Advisory Firm and Top Officials for Custody Rule Violations
The Securities and Exchange Commission today announced charges against an investment advisory firm and three top officials for violating the “custody rule” that requires firms to follow certain procedures when they control or have access to client money or securities.
Advisory firms with custody of private fund assets can comply with the custody rule by distributing audited financial statements to fund investors within 120 days of the end of the fiscal year. This provides investors with regular independent verification of their assets as a safeguard against misuse or theft. The SEC’s Enforcement Division alleges that Sands Brothers Asset Management LLC has been repeatedly late in providing investors with audited financial statements of its private funds, and the firm’s co-founders Steven Sands and Martin Sands along with chief compliance officer and chief operating officer Christopher Kelly were responsible for the firm’s failures to comply with the custody rule. Sands Brothers has offices in Greenwich, Conn., New York City, and Tiburon, Calif.
“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 M. 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.”
According to the SEC’s order instituting an administrative proceeding, Sands Brothers was at least 40 days late in distributing audited financial statements to investors in 10 private funds for fiscal year 2010. The next year, audited financial statements for those same funds were delivered anywhere from six months to eight months late. The same materials for fiscal year 2012 were distributed to investors approximately three months late. According to the SEC’s order, Sands Brothers and the two co-founders were previously sanctioned by the SEC in 2010 for custody rule violations.
The SEC’s investigation has been conducted by Janna Berke, Nancy Brown, and Wendy Tepperman of the New York office. The SEC’s litigation will be led by Ms. Brown and Ms. Berke, and the case is being supervised by Sanjay Wadhwa.
Investor Bulletin: Custody Rule