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Regulation and Compliance > Federal Regulation > SEC

SEC Charges Sands Brothers With Custody Rule Violations

By Melanie Waddell

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The Securities and Exchange Commission announced Wednesday that it has charged Sands Brothers Asset Management and three of the firm’s top officials — including its chief compliance officer — with violating the custody rule by failing to provide timely statements on the firm’s private funds.

The SEC’s Enforcement Division alleges that Sands Brothers has been “repeatedly late” in providing investors with audited financial statements of its private funds, and that the firm’s co-founders Steven Sands and Martin Sands along with Christopher Kelly, the firm’s chief compliance officer and chief operating officer, were responsible for the firm’s failures to comply with the custody rule.

The SEC also charged Sands Brothers with custody rule violations related to its private funds in 2010.

Sands Brothers has offices in Greenwich, Connecticut, New York City, and Tiburon, California.

“The custody rule is not a technicality,” said Andrew Calamari, director of the SEC’s New York Regional Office, in a statement. “It is a critical investor protection provision designed to help ensure that investor assets are safe. 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.”

Compliance with the custody rule was among the SEC’s top exam and enforcement priorities for 2014.

Under the custody rule, advisors with custody of private fund assets are required to distribute 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 states.

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. 

— Check out 3 Tests for Whether an Advisor Compliance Issue Is Hot, or Not on ThinkAdvisor.

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