SECURITIES EXCHANGE ACT OF 1934
Release No. 50017 / July 14, 2004

Admin. Proc. File No. 3-11548


In the Matter of

SEI Investments Distribution Company and SEI Investments Company,

Respondents.



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ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER PURSUANT TO SECTIONS 15(b) AND 21C OF THE SECURITIES EXCHANGE ACT OF 1934

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 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against SEI Investments Distribution Company ("SIDCO"), and that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Exchange Act against SEI Investments Company ("SEI") (collectively, the "Respondents").

II.

In anticipation of the institution of these proceedings, Respondents have submitted Offers of Settlement (the "Offers"), 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 them and the subject matter of these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.

III.

On the basis of this Order and Respondents' Offers, the Commission finds that:

Respondents

1. SEI Investments Distribution Company has been registered with the Commission as a broker-dealer since 1982, and maintains its headquarters in Oaks, Pennsylvania. SIDCO is a wholly-owned subsidiary of SEI. For the fiscal year ended December 31, 2002, SIDCO reported net income of approximately $16 million.

2. SEI Investments Company is a Pennsylvania corporation with its headquarters in Oaks, Pennsylvania. SEI is not registered with the Commission as a broker-dealer or investment adviser. SEI Investments Management Corporation, a wholly-owned subsidiary of SEI, is an investment adviser registered with the Commission. SEI, through its wholly-owned subsidiaries, administers $254 billion in mutual fund and pooled assets, manages almost $90 billion in assets, and processes almost $50 trillion of investment transactions annually. SEI's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and is listed on the NASDAQ National Market and trades under the symbol "SEIC".

Background

3. This matter involves violations by SEI's wholly-owned subsidiary, SIDCO, of the net capital, customer protection, reporting, and books and records provisions of the Exchange Act, and SEI's causing of SIDCO's violations.

4. SIDCO acts as both an introducing broker, distributing shares in various mutual funds, and formerly acted as an intermediary broker between institutional clients and government securities dealers in repurchase agreement transactions. In its role as an intermediary broker, SIDCO has custody of customer funds and securities. SIDCO has a commission recapture/rebate program where customers are rebated a portion of their commission dollars. SIDCO also provides directed brokerage services, which allows it to pay a portion of customers' expenses out of commission monies.

5. In August 2002, the NASD conducted a routine examination of SIDCO, finding that its books and records were incomplete and its net capital computations were inaccurate. In particular, the NASD identified issues relating to an account for the exclusive benefit of customers established under Rule 15c3-3(k)(2)(i) of the Exchange Act, including the commingling of customer funds and SIDCO's failure to include this account in its financial records, as well as SIDCO's failure to include certain error accounts in its books and records. At that time, SIDCO informed the NASD that it would correct these problems. In fact, it did not.

6. In April 2003, the staff conducted a cause examination of SIDCO's directed brokerage and commission rebate programs. The staff concluded that SIDCO had not remedied the problems previously noted by the NASD and many of the problems, including the commingling of customer funds, remained.

7. The examiners concluded that SIDCO incorrectly had calculated and reported its net capital from at least September 2002 through February 2003. In particular, SIDCO's failure to reflect a balance of over $94 million in an account established under Rule 15c3-3(k)(2)(i),1 used for SIDCO's repurchase agreement program2 (the "(k)(2)(i) account") as both an allowable asset and as an aggregate indebtedness liability at month end February 28, 2003, resulted in an increase in SIDCO's minimum required net capital of $6,267,444, which caused the company to fall below its 120% minimum net capital requirement for that month. SIDCO failed to timely notify the Commission of this net capital deficiency as required by Rule 17a-11(c)(3) of the Exchange Act.

8. In addition, for the year ended December 31, 2002, SIDCO reported net capital of more than $8 million, when based upon its books and records at that time, it should have reported negative net capital of $53 million. This net capital deficiency was largely due to an overdraft of approximately $61.9 million that occurred on December 31, 20023 as a result of a transaction in the (k)(2)(i) account by SEI Investments Management Corporation ("SIMCO"),4 through its activities as transfer agent for SEI mutual funds and certain non-SEI mutual funds.5

9. This SIMCO-related transaction in SIDCO's (k)(2)(i) account resulted from the fact that the account was being used for cash movements in connection with both SIDCO and SIMCO transactions. This commingling of customers' funds with funds belonging to shareholders of the various mutual funds resulted in SIDCO's failure to maintain its exemption from the provisions of Rule 15c3-3 under paragraph (k)(2)(i) of the rule.6

10. SIDCO failed to make and keep current accurate books and records reflecting all assets and liabilities from at least September 2002 through February 2003. Specifically, SIDCO failed to include several accounts in its books and records and, conversely, erroneously included accounts in its books and records that did not belong to SIDCO but, rather, to SEI's transfer agent. The accounts not included in SIDCO's records consisted of two accounts for the exclusive benefit of customers under Rule 15c3-3(k)(2)(i), at least eleven error accounts, and at least eight clearing accounts. The accounts erroneously included on SIDCO's books and records included two accounts in its general ledger that belonged to SIMCO. SIDCO did not notify the Commission of its failure to make and keep current books and records as required by Rule 17a-11(d) of the Exchange Act.

11. As a result of its failure to accurately reflect all assets and liabilities on its books and records, SIDCO materially misstated its net capital in certain monthly FOCUS reports filed with the Commission from at least September 2002 through February 2003.

12. By omitting the (k)(2)(i) account from its financial records, SIDCO materially misstated its audited financial statements for the year ended December 31, 2002. SIDCO reported positive net worth of more than $60 million and net capital of more than $8 million when based upon its books and records at that time, it should have reported a negative net worth of approximately $1.5 million, and negative net capital of over $53 million. SIDCO failed to file a Rule 17a-11 notification letter as required by Rule 17a-11(b)(1) of the Exchange Act to report this net capital deficiency, which has since been eliminated.

13. In addition, in its audited financial statements for the year ended December 31, 2002, SIDCO incorrectly reported that it had maintained its exemption from the provisions of Rule 15c3-3.

14. As SIDCO's parent company, SEI was ultimately responsible for the reliability and completeness of SIDCO's books and records. SEI effectively controlled SIDCO's functions and activities. SIDCO shared SEI's clients and facilities, and even some of SEI's officers. These officers, which included SIDCO's former chief financial officer and general counsel, also held positions at SEI. In addition, SIDCO's former Board consisted solely of individuals who were also officers and directors of SEI. Despite this overlapping of directors and officers, and apparent control exerted by SEI over SIDCO, the staff found that inadequate time and attention was devoted to the operations of SIDCO, resulting in the violations discussed above.

15. In particular, little attention was given to SIDCO's books and records, causing SIDCO to fail to include several accounts in its books and records, and improperly including accounts in its books and records that belonged to SIMCO. One account, which was not included in SIDCO's books and records or any books and records of any SEI affiliated entity, was the (k)(2)(i) account in which customer funds were commingled with funds belonging to shareholders of various mutual funds.

16. Since the staff's examination, SIDCO has taken corrective action on several fronts with respect to the financial and operations concerns the staff raised, and continues to do so. Among the more significant steps taken, SIDCO has hired a new president and a new Financial and Operations Principal; it has replaced its former general counsel and hired an adviser to the Board; and it has taken steps to formalize the Board's functions, including adding an independent director. Further, as to the (k)(2)(i) account, SIDCO closed its repurchase agreement program as of October 24, 2003. In addition, SIDCO has engaged Deloitte & Touche LLP ("Deloitte") to address the financial and operational issues raised by the staff, and to conduct a comprehensive review of SIDCO's operations, including SIDCO's business activities and organizational structure, as well as its record keeping and financial reporting processes. In connection with this engagement, SIDCO has undertaken a comprehensive review of its accounts to ensure that all accounts have been included on SIDCO's books and records.

Violations

17. As a result of the conduct described above, SIDCO willfully violated Section 17(a) of the Exchange Act and Rule 17a-3 thereunder, which require that broker-dealers registered with the Commission make and keep for prescribed periods such records, furnish such copies thereof, and make and disseminate such reports as the Commission has prescribed as necessary or appropriate in the public interest, or for the protection of investors.

18. As a result of the conduct described above, SIDCO willfully violated Section 17(a) of the Exchange Act and Rule 17a-5 thereunder, which require that broker-dealers registered with the Commission file with regulators periodic unaudited financial reports, or FOCUS reports, as well as an annual audited report that includes a statement of financial condition, statement of income, and a statement of changes in financial position. SIDCO willfully violated Section 17(a) and Rule 17a-5 thereunder by filing inaccurate FOCUS reports from at least September 2002 through February 2003, and by filing inaccurate audited financial statements for the year ended December 31, 2002.

19. As a result of the conduct described above, SIDCO, while doing business as a broker-dealer, willfully violated Section 17(a) of the Exchange Act and Rule 17a-11(b)(1) thereunder, which require broker-dealers registered with the Commission whose net capital declines below the minimum amount required to give notice to the Commission of such deficiency that same day.

20. As a result of the conduct described above, SIDCO, while doing business as a broker-dealer, willfully violated Section 17(a) of the Exchange Act and Rule 17a-11(c)(3) thereunder, which require broker-dealers registered with the Commission whose total net capital is less than 120 percent of the broker-dealer's required minimum net capital to give notice promptly to the Commission.

21. As a result of the conduct described above, SIDCO, while doing business as a broker-dealer, willfully violated Section 17(a) of the Exchange Act and Rule 17a-11(d) thereunder, which require broker-dealers registered with the Commission to give notice to the Commission of their failure to make and keep current prescribed books and records.

22. As a result of the conduct described above, SIDCO, while doing business as a broker-dealer, willfully violated Section 15(c)(3) of the Exchange Act and Rules 15c3-1 and 15c3-3 thereunder, which require broker-dealers to (a) have and maintain sufficient net capital; and (b) maintain bank accounts for the benefit of customers separate from any other bank account.

23. As a result of the conduct described above, SEI caused SIDCO's violations of Sections 15(c)(3) and 17(a) of the Exchange Act and Rules 15c3-1, 15c3-3, 17a-3, 17a-5 and 17a-11 thereunder in that it knew or should have known that its acts would contribute to SIDCO's violations.

Remedial Efforts

24. In determining to accept the Offers, the Commission considered the remedial acts as described in Paragraph 16 above and cooperation afforded to the Commission staff.

IV.

In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Offers of Respondents SIDCO and SEI.

Accordingly, it is hereby ORDERED that:

A. Pursuant to Section 15(b) of the Exchange Act, SIDCO is hereby censured.

B. Pursuant to Section 21C of the Exchange Act, SIDCO shall cease and desist from committing or causing any violations and any future violations of Sections 15(c)(3) and 17(a) of the Exchange Act and Rules 15c3-1, 15c3-3, 17a-3, 17a-5 and 17a-11 thereunder.

C. SIDCO shall, within ten days of the entry of this Order, pay a civil money penalty in the amount of $375,000 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies SIDCO as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Arthur S. Gabinet, District Administrator, Philadelphia District Office, Securities and Exchange Commission, 701 Market Street, Suite 2000, Philadelphia, PA 19106.

D. SIDCO shall comply with the following undertakings:

  1. SIDCO shall continue to employ Deloitte (a) to conduct a review of and make findings regarding SIDCO's internal controls, policies, practices, procedures, organizational structure, and staffing reasonably designed to detect and prevent the types of violations of Rules 15c3-1, 15c3-3, 17a-3, 17a-5 and 17a-11 described in this Order; (b) to conduct a review of any internal controls, policies, practices and procedures that SIDCO has adopted and implemented since the activities described in this Order, to determine whether and to what extent there is a need for additional or amended policies and procedures designed reasonably to detect and prevent, insofar as practicable such violations; and (c) to make findings regarding any additional internal controls, policies, or procedures which Deloitte believes are necessary to provide reasonable assurance that SIDCO can detect and prevent the types of violations of Rules 15c3-1, 15c3-3, 17a-3, 17a-5 and 17a-11 described in this Order.
     
  2. SIDCO shall promptly provide Deloitte with any and all requested documents and other information pertaining to SIDCO's brokerage operations, and permit Deloitte to meet with any officer, agent or employee of SIDCO.
     
  3. No later than three months from the date of this Order, SIDCO shall require Deloitte to submit its report, in writing, to SIDCO, with a copy to the staff, detailing findings regarding SIDCO's internal controls, policies, practices, procedures, organizational structure, and staff and its recommendations, if any, for revised or additional measures reasonably designed to detect and prevent the types of violations of Rules 15c3-1, 15c3-3, 17a-3, 17a-5 and 17a-11 described in this Order.
     
  4. Within 30 days after the date of the issuance of Deloitte's report, SIDCO shall remedy any deficiencies in its internal controls, policies, practices, procedures, organizational structure, or staffing identified by Deloitte and adopt, implement, and maintain any revised or additional measures recommended by Deloitte, or alternatives proposed in writing by SIDCO and accepted in writing by Deloitte or the staff. Upon written request and good cause being shown, the staff or Deloitte may grant SIDCO such additional time as the staff or Deloitte deems necessary to remedy such deficiencies or adopt such measures or alternatives.
     
  5. Within 30 days after the issuance of Deloitte's report, SIDCO shall (a) submit amended FOCUS reports to the NASD (with copies to the Commission) for the period from September 2002 through June 2003 if required based on adjustments to SIDCO's financial statements and net capital computations recommended by Deloitte; and (b) file a Rule 17a-11 notification letter for December 31, 2002 with the Commission based on a recalculation of SIDCO's net capital and required minimum net capital. Upon written request and good cause being shown, the staff or Deloitte may grant SIDCO such additional time as the staff or Deloitte deems necessary to submit these reports.
     
  6. No later than 30 days from the date of the issuance of Deloitte's report (or from such date as SIDCO is allowed by the staff or Deloitte to remedy such deficiencies or adopt such measures or alternatives pursuant to Section IV.D.4), SIDCO, through an officer, shall file an affidavit with the staff stating that SIDCO has remedied any deficiencies in its internal controls, policies, practices, procedures, organizational structure, and staffing identified by Deloitte (stating the means by which such remedy has been accomplished), and stating further that SIDCO has adopted, implemented, and will maintain any revised or additional internal controls, policies, practices, or procedures recommended in Deloitte's report, or the alternatives proposed in writing by SIDCO and accepted in writing by Deloitte or the staff. Upon written request and good cause being shown, the staff may grant SIDCO such additional time as the staff deems necessary to submit an affidavit.
     
  7. SIDCO shall require Deloitte to review SIDCO's implementation of the recommendations contained in Deloitte's report, or such alternatives proposed in writing by SIDCO and accepted in writing by Deloitte or the staff. SIDCO shall require that this review by Deloitte take place on the following two occasions, within 30 days after (a) the first year anniversary of the date of the affidavit described in Section IV.D.6 and (b) the second year anniversary of the date of such affidavit, commencing on a date selected by Deloitte. SIDCO shall require that within 30 days after the commencement of such review, Deloitte shall report its findings to the staff and SIDCO. Upon good cause being shown, the staff may grant Deloitte such additional time as the staff deems necessary to submit its report.
     

IT IS FURTHER ORDERED that pursuant to Section 21C of the Exchange Act, SEI cease and desist from causing any violations and any future violations of Sections 15(c)(3) and 17(a) of the Exchange Act and Rules 15c3-1, 15c3-3, 17a-3, 17a-5 and 17a-11 thereunder.

By the Commission.

Jonathan G. Katz
Secretary


Endnotes