In a recent enforcement action (In the Matter of Sands Brothers Asset Management, LLC, Steven Sands, Martin Sands, and Christopher Kelly), the SEC charged an investment advisory firm, its two owners and former chief compliance officer for alleged violations of the custody rule (Rule 206(4)-2) under the Investment Advisers Act of 1940.
It is not unusual for registrants to avoid enforcement actions by the SEC where there have been violations of the custody rule and prompt actions taken by the registrant to remedy the violations. However, in this case, the advisory firm and its owners had been the subject of a previous SEC enforcement action in 2010 for the same type of violations.
The SEC will generally apply a heavy enforcement hand when a registrant repeats the same unlawful conduct. According to Andrew M. Calamari, Director of the SEC’s New York regional office, “There is no place for recidivism in the securities markets.” Calamari cited that the firm and its owners had the opportunity since the previous enforcement action to get things right and they failed to do so.
The SEC’s findings in this matter indicated that the advisory firm failed to timely distribute to investors audited financial statements of the private funds managed by the advisory firm. Accordingly, the SEC alleges the firm was not only in violation of the custody rule but also in violation of the SEC’s 2010 cease and desist order issued against the firm and its owners for the same violations.
In order to settle the matter without admitting to any of the violations alleged by the SEC, the advisory firm and its co-owners agreed to pay a $1 million penalty and be suspended for a year from raising money from new or existing investors. The firm also agreed to engage a compliance monitor for each of the next three years. The firm’s former CCO agreed to pay a $60,000 penalty and to be suspended for a year from acting as CCO or appearing or practicing before the SEC as an attorney.