SEC Slaps 3 Advisors for Custody Violations

FLAM and Araiz additionally engaged in fraud related to a fund-of-funds under their control. They caused the fund to acquire a promissory note from another entity that Araiz owned without informing investors in writing that the fund might acquire related party promissory notes or otherwise materially deviate from its fund-of-funds investment strategy. The order details other securities law violations, including FLAM and OGI engaging in securities transactions with advisory clients on a principal basis without providing prior written disclosure to clients or obtaining their consent. In consenting to a censure and cease-and-desist order, Araiz, FLAM and OGI agreed to pay disgorgement and prejudgment interest totaling $347,122. Araiz additionally agreed to pay a $150,000 penalty and be suspended from the industry for one year.  FLAM consented to comply with certain compliance-based undertakings.

GW & Wade

According to the SEC’s order against GW & Wade, the firm was subject to the custody rule in part due to its practice of using pre-signed letters of authorization and then transferring client funds without always obtaining contemporaneous client signatures. The firm did not have proper safeguards as a custodian of client funds, and failed to identify itself as a custodian to its independent auditors or in public disclosures.

This practice exposed clients to potential harm and ultimately contributed to a third-party fraud in one client account in June 2012, when someone hacked into the client’s e-mail account and posed as the client. The imposter requested that GW & Wade wire the client’s funds to a foreign bank, and the scheme was not discovered until three separate wires totaling $290,000 had been sent to the foreign bank.

The firm reimbursed the client. GW & Wade additionally made inaccurate Form ADV disclosures about the amount of client assets in custody and its custody arrangements. In consenting to a censure and cease-and-desist order, GW & Wade agreed to pay a $250,000 penalty.

Knelman Asset Management Group

According to the SEC’s order against Knelman Asset Management Group (KAMG) and its CEO and chief compliance officer, Irving P. Knelman, KAMG had custody of the assets of a fund of private equity funds named Rancho Partners I. However, Rancho’s funds were not subject to annual surprise examinations and Rancho members did not receive quarterly account statements from a qualified custodian.

Alternatively, Rancho’s financial statements were not audited or distributed to Rancho members. The order details other violations of the securities laws, including improper discretionary cash distributions to Rancho members, failure to adopt and implement controls designed to safeguard client assets, and failure to conduct annual compliance reviews. In consenting to a censure and cease-and-desist order, KAMG agreed to pay a $60,000 penalty. Knelman agreed to pay a $75,000 penalty and be barred from acting as a chief compliance officer for at least three years.

—

Check out How the SEC Plans to Be ‘Everywhere’ on ThinkAdvisor.