The US Securities and Exchange Commission (SEC) charged Sands Brothers Asset Management and three of its top executives with sending late audited financial statements to investors.
Under the complicated custody rule, GPs must send investors the fund’s audited financial statement within 120 days of fiscal year-end (180 days for fund of funds). A small percentage of GPs avoid this reporting requirement by allowing for the possibility of a surprise audit instead.
Sands Brothers chose to forego the surprise audit, but was anywhere from 40 days to eight months late in distributing materials for ten different funds to its investors from 2010 to 2012, according to the SEC order. The firm’s chairmen Steven Sands and Martin Sands along with chief compliance/chief operating officer Christopher Kelly were responsible for aiding, abetting and causing the custody rule violations, the order said.
In a call to Sands Brothers pfm learned that, as of May, Kelly was no longer employed at the firm. The SEC will hold a public hearing in the next two months to investigate the allegations.
The custody rule requires firms with “custody” (or access to) fund assets to safe-keep them at an investment bank, broker-dealer or some other qualified custodian. The rule’s purpose is to prevent investors’ cash and assets from becoming misappropriated, lost or misused.
This is not the first time that Sands Brothers has been in hot water with the SEC over custody issues. The firm was previously sanctioned by the SEC in 2010, which resulted in an order to cease and desist from violating the Advisers Act and to pay a $60,000 civil money penalty.
The custody rule has been the cause of much industry gripe of late, and was a hot topic at the Private Equity Growth Capital Council’s recent Chief Financial Officers’ Day. The complicated rule is partly an issue because the costs incurred by GPs are far more expensive than the value add for investors, one CFO argued to pfm.
In its press release describing the Sands Brothers case, the SEC made it clear that compliance with the custody rule will remain high on its agenda.
“The custody rule is not a technicality,” said Andrew Calamari, director of the SEC’s New York regional office, in the statement. “It is a critical investor protection provision designed to help ensure that investor assets are safe.”