SEC Sanctions Three Investment Advisory Firms for Custody Rule Violations

The SEC has sanctioned registered investment advisory firms Further Lane Asset Management, Knelman Asset Management Group, and GW & Wade with violating the rules that obligate them to fulfill certain standards while keeping custody of the securities or funds of clients. The regulator says that all three firms either did not keep up client assets with the help of a qualified custodian or failed to work with an independent public accountant to perform surprise exams. They also allegedly committed additional federal securities law violations. All three firms have consented to settle the charges against them.

Per the SEC order, although Further Lane Management, which is based in New York, and its CEO Jose Miguel Araiz did keep up custody of hedge fund assets that it managed along with Osprey Group Inc., they did not set up a yearly surprise exam to verify these assets. They also allegedly committed fraud involving fund-of-funds they controlled and other violations.

Araiz, Further Lane Management, and Osprey Group Inc. have consented to pay disgorgement and prejudgment interest of $347,122. Araiz also has to pay a $150,000 penalty and he is suspended from the industry for a year.

As for Massachusetts-based GW & Waid, the firm is accused of not having the right safeguards required of a client funds’ custodian and failing to identify itself as a custodian in public disclosures or to independent auditors. The SEC says that as a result clients were exposed to possible harm, including one customer who was exposed to third party fraud when someone got into an email account pretending to be that client. The scheme wasn’t discovered until three wires totaling $290,000 were transferred to a foreign bank at the imposter’s request. The client has since been reimbursed. GW & Wade has agreed to a cease-and-desist order and a censure. The firm will pay $250,000.

As for Knelman Asset Management Group in Minnesota, the SEC says that the firm and its chief compliance officer/CEO Irving P. Knelman did not subject the assets of a Rancho Partners I, a fund of private equities it had custody of, to yearly surprise exams. Fund members also did not get quarterly account statements from a qualified custodian.

The SEC is contending a number of securities law violations, including improper cash distributions to Rancho members, failure to perform yearly compliance reviews, and not putting put into place (and executing ) controls to protect client assets. Knelman Asset Management Group will pay a $60,000 penalty and Knelman will pay a $75,000 one. He also has agreed to a bar from serving as a chief compliance officer for at least three years.

Failure by a firm to follow custody rules can jeopardize customers’ assets, placing these funds at risk of fraud and/or financial loss. Contact our securities lawyers if you believe firm error or negligence caused your investment losses.

SEC Charges Three Firms With Violating Custody Rule, SEC, October 28, 2013

Staff Responses to Questions About the Custody Rule, SEC

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