By Cyril Tuohy
Three financial advisors and their firms registered in New York, Massachusetts and Minnesota face censure, disciplinary action and financial penalties for violating the “custody rule,” the Securities and Exchange Commission (SEC) has announced.
The rule requires advisors to meet certain standards when maintaining custody of client funds, stocks and bonds.
New York, N.Y.-based Further Lane Asset Management (FLAM); Wellesley, Mass.-based GW & Wade, and Minneapolis-based Knelman Asset Management Group (KAMG) failed to maintain assets with a qualified custodian or engage an independent public accountant to conduct surprise exams in accordance with strengthened custody rules passed in 2010, the SEC said.
“These firms failed to comply with their custody rule obligations, and other firms who hold client assets should take notice that we will vigorously enforce such requirements,” Andrew Ceresney, co-director of the SEC’s Division of Enforcement, said in a statement.
Most investment advisors do not maintain custody of client assets, and instead defer to institutions such as a bank or broker-dealer for custody services.
Further Lane and its chief executive officer, Jose Miguel Araiz, along with Osprey Group, an “affiliated advisor” of which Araiz is also CEO, have agreed to pay $347,122 and another $150,000, the SEC said. Araiz has agreed to a one-year suspension from the industry.
In a statement posted on FLAM’s website, FLAM, OGI and Araiz said they had “cooperated fully in the investigation and have entered into a forma settlement order,” beginning Oct. 25.
GW & Wade, which used pre-signed signatures to authorize fund transfers, was an apparent victim of its own oversight, the SEC said. Lacking proper safeguards against this practice, the company wired $290,000 to a foreign bank after an imposter hacked into a client’s email and posed as the client, the SEC said.
SEC investigators also said the company, which reimbursed the client and agreed to pay a $250,000 fine, also made inaccurate disclosures with regard to its custody arrangements.
Neil L. Goldberg, principal of GW & Wade, said a routine examination last year led to the investigation.
Before SEC investigators came calling, Goldberg said the company realized it needed a “tune up” regarding compliance procedures. “In a way we welcome it because it has made us better, and has made our clients more secure,” Goldberg said in an interview with InsuranceNewsNet.
The company has hired a new chief compliance officer to bolster its compliance department, and implemented tighter internal policies regarding fund authorizations, telephone confirmations and account access, he said.
In the case of KAMG and its chief executive officer and chief compliance officer, Irving P. Knelman, the SEC said private equity funds named Rancho Partners I -- the assets over which KAMG had custody -- were not subject to annual surprise examinations, nor did investors receive annual account statements.
KAMG has agreed to pay $60,000 in penalties. Separately, Knelman has agreed to pay a $75,000 penalty and be barred from acting as chief compliance officer for at least three years, the SEC said. He has also agreed to undergo compliance training.
A telephone message left with KAMG was not returned.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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