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From Securities Regulation Daily, November 19, 2015

Repeat custody rule violators to pay $1M

By Kevin Kulling, J.D.

A New York based SEC registered investment advisory firm and its two owners will pay $1 million, retain an independent compliance monitor and be suspended for one year from raising money from new or existing investors to settle charges that they violated the custody rule for the second time since 2010. Meanwhile, the firm’s chief compliance officer has agreed to pay $60,000 and be suspended from acting as a CCO or appearing or practicing before the SEC as an attorney for one year (In the Matter of Sands Brothers Asset Management, LLC, Release No. IA- 4273).

The Sands Brothers firm. Steven Sands and Martin Sands were co-chairmen of Sands Brothers Asset Management (SBAM), with offices in New York, Connecticut, and California. The firm provides investment advisory services to various pooled investment vehicles. As of July 2014, the firm had approximately $64 million under management.

Steven Sands and Martin Sands were principals, co-founders, and controlling persons of SBAM, where they both acted as senior portfolio managers. In addition, they both served as controlling persons or directors of the managing members/general partners for the pooled investment vehicles that SBAM advised.

Christopher Kelly served as Chief Compliance Officer, Chief Operating Officer and was a partner at SBAM beginning in 2008. Kelly was responsible for all of SBAM’s operations other than those that involved investment decision-making. Kelly is a New York licensed lawyer.

Custody rule requirements. Under the custody rule, SEC-registered investment advisers who have custody of their clients’ funds or securities must safeguard those funds as required by the rule. Custody includes holding client funds or securities, directly or indirectly, or having the authority to obtain possession of them. Advisory firms with custody of private fund assets can comply with the rule by distributing audited financial statements to fund investors within 120 days of the end of the fiscal year, which is intended to provide investors with regular independent verification of their assets as a safeguard against misuse or theft.

The violations. According to the settlement, for the fiscal years 2010, 2011, and 2012, SBAM failed to timely distribute audited financial statement to the investors of the pooled investment vehicles managed by SBAM, in violation of the custody rule. The firm was at least 40 days late in distributing the audited financial statements to investors in 10 private funds for fiscal year 2010, while in 2011, the statements were delivered between six months to eight months late, and for 2012, the statements were delivered approximately three months late, according to the allegations.

Kelly allegedly aided, abetted, and caused SBAM’s custody rule violations, and failed to implement any procedures or safeguards to ensure compliance. Kelly made no adequate efforts to ensure that SBAM met its custody rule obligations, either by disseminating the audited financial statements that investors in certain of SBAM’s managed funds were entitled to receive, or alternatively by submitting to a surprise examination to verify client assets, according to the settlement.

Previously sanctioned. The Sands brothers and the firm were previously sanctioned in 2010 for custody rule violations. They agreed to settle charges in that action by paying a fine of $60,000 and were subject to a cease and desist order prohibiting any future violations of the custody rule.

In a press release, Andrew Calamari, Director of the SEC’s New York Regional Office, said that “the Sands brothers missed their opportunity to right a previous wrong and instead merely repeated their custody rule violations, so now they face more severe consequences.”

In settling the current charges, SBAM, Martin Sands, and Steven Sands did not admit or deny the charges but consented to the SEC’s order finding that the firm violated the custody rule and the brothers caused and willfully aided and abetted the violations.

Kelly likewise did not admit or deny the charges but consented to the SEC order finding that he caused and willfully aided and abetted the firm’s custody violations.

The releases are Nos. IA-4273 , IA-4274 and 34-76477.

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