Mpls. Investment Adviser Agrees To Settle SEC Charges
A Minneapolis company has agreed to settle allegations that it violated the so-called “custody rule” and other federal securities laws, the U.S. Securities and Exchange Commission (SEC) recently announced.
Most investment advisers don’t hold client assets; rather, third-party custodians such as a bank or broker-dealer hold such assets, the SEC said. In an attempt to better protect investors, the agency in 2010 amended a rule that now requires advisers that have access to client assets to undergo an annual “surprise exam.” The exam is essentially meant to verify the existence of client assets.
The SEC said an investigation found that Minneapolis-based Knelman Asset Management Group “failed to maintain client assets with a qualified custodian or engage an independent public accountant to conduct surprise exams.” An investigation found similar violations at New York-based Further Lane Asset Management and Massachusetts-based GW & Wade, the agency said.
Each of the three firms—which the SEC also accused of committing other federal securities laws—agreed to settle the agency’s charges, the SEC said.
A Tuesday morning phone call to the attorney representing Knelman Asset Management Group was not immediately returned.
In the SEC’s order against Knelman, the agency alleges that Irving Knelman, the firm’s CEO and chief compliance officer, had custody of the assets of private equity funds. Those funds, however, weren’t subject to annual “surprise exams,” and investors weren’t given a required quarterly account statement from a qualified custodian.
Other alleged securities laws violations included “improper discretionary cash distributions” to investors, “failure to adopt and implement controls designed to safeguard client assets, and failure to conduct annual compliance reviews,” according to the SEC.
The Minneapolis firm agreed to pay a $60,000 penalty and consented to a cease-and-desist order, the SEC said. Knelman, meanwhile, agreed to pay a $75,000 penalty and be barred from acting as a chief compliance officer for at least three years.
“The heart of the relationship between advisers and their customers is the safety of client assets,” Andrew Ceresney, co-director of the SEC’s enforcement division, said in a statement. “Surprise exams or procedures associated with audited financial statements provide additional safeguards against assets being stolen or misused.”