SEC Brings Another Custody Rule Case

by Dorsey & Whitney LLP
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The SEC brought another in what may become a series of custody rule cases. This action was brought against Professional Investment Management, Inc., and its principal, Douglas Cowgill. SEC v. Cowgill, Case No. 2:14 CV 396 (S.D. Oho. Filed May 5, 2014).

Professional Investment Management provides third-party administration services and investment advisory services for about fifteen retirement plans with approximately 3,000 participants. It also provides investment advisory services for about 20 -25 individuals for their after-tax accounts.

Currently the firm has about $120 million in assets under management. A portion of those funds are invested through the SEI mutual fund and financial complex. The firm also maintains an omnibus account with SEI Transfer Agency, Inc. It holds a number of different SEI funds, one of which is the SEI Liquid Trust Prime Obligation money market fund know as Fund 12. The defendants receive periodic reports showing, among other things, client funds or securities held.

Under the custody rule investment advisers with custody of client funds or securities must implement certain controls to protect those assets. Generally, those assets must be maintained at a qualified custodian and clients must be given notice detailing how the assets are held. Those assets are also subject to an annual surprise examination by an independent public accountant that verifies the existence of client assets. After the surprise exam a filing is to be made with the Commission.

From 2010 through 2013 the form regarding the surprise exam for Professional Investment was not filed with the Commission. At the end of September 2013 Mr. Cowgill dismissed this failure in a communication with the staff as an administrative oversight. He also noted that the firm was going to switch its registration to the State of Ohio. Later that day a form was filed to withdraw the firm’s registration with the Commission. Professional Investment did not register with Ohio however.

An exam in November 2013 confirmed that the firm continued to have custody of client assets. Nevertheless, Professional Investment had failed to arrange for clients who assets were being held to receive quarterly account statements from a qualified custodian. Mr. Cowgill, as CCO for the firm, also had an obligation to engage an independent public accountant to conduct the required verification of client assets. While he purportedly engaged a firm to conduct surprise exams for 2010 and 2011, there is no report for the engagements. An audit by the staff demonstrated that the month end balances were consistently overstated for Fund 12.

Defendants then took steps to conceal the shortfall in the accounts. During the November exam, Mr. Cowgill made false entries in the accounts which were later reversed. In response to a subpoena issued in January 2014 he again provided the staff with false reports regarding the accounts. During his investigative testimony Mr. Cowgill did admit, however, that he had entered a fake trade in an effort to demonstrate to the staff that the balances for Fund 12 could be reconciled. Subsequent to his testimony Mr. Cowgill made an additional attempt to conceal the shortfall.

The Commission’s complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2), 203(a) and 206(4). The action is pending. See Lit. Rel. No. 22985 (May 5, 2013).

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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