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SEC Charges Three Firms For Violating Custody Rule

Sandra Kilhof

29 October 2013

Three investment firms have been sanctioned by the US for violating a custody rule designed to ensure the safekeeping of customer funds, the regulator said.

The SEC said New York-headquartered Further Lane Asset Management, GW & Wade of Wellesley, MA, and Knelman Asset Management Group of Minneapolis failed to maintain customer assets with qualified custodians, or hire independent public accountants to conduct "surprise exams" to verify the assets exist.

According to the commission, the charges were based on a 2010 amendment to a rule adopted under the Investment Advisers Act of 1940. The rule requires advisors to have surprise exams and to have a reasonable basis to believe that custodians are sending account statements to investors at least once a quarter.

"The heart of the relationship between advisors and their customers is the safety of client assets," said Andrew Ceresney, co-director of the SEC enforcement division.

"Surprise exams or procedures associated with audited financial statements provide additional safeguards against assets being stolen or misused."

Further Lane, chief executive Jose Miguel Araiz and an affiliated advisor agreed to pay $347,122 to settle with the SEC, while Araiz also agreed to pay a $150,000 penalty and accept a one-year industry ban.

GW & Wade and Knelman agreed to pay respective penalties of $250,000 and $60,000 to settle, while chief executive Irving Knelman accepted a $75,000 penalty and three-year ban from serving as a chief compliance officer, the SEC added.

Neil Goldberg, a principal with GW & Wade, said in the SEC statement that his firm had responded promptly to the regulator’s concerns and has enhanced oversight.