By Joanne Cursinella, J.D.
The Commission has accepted offers of settlement in a cease-and-desist proceeding against an Ohio CPA firm and a partner in the firm for failing, pursuant to the Advisers Act custody rule, to conduct required surprise examinations of its investment adviser client (In the Matter of Michael S. Wilson, CPA and Cotterman-Wilson, CPAs, Inc., Release No. 34-75298, June 25, 2015).
Custody rule requirements. Investment Advisers Act Section 206(4) and Rule 206(4)-2 thereunder (the so-called custody rule), require registered investment advisers with custody of client funds or securities to implement certain controls designed to protect those client assets from loss, misappropriation, misuse, or the adviser’s insolvency. Professional Investment Management, Inc. (PIM) is a registered investment adviser subject to the rule. The firm hired Cotterman-Wilson, CPAs (respondents) to complete its required surprise examinations for the periods ending April 30, 2009, April 30, 2010, and May 31, 2011. According to the Commission’s order, Wilson, also a CPA and a Cotterman-Wilson shareholder, served as the engagement partner for all of the services provided to PIM, including the surprise examinations.
SEC files suit. The SEC filed suit against PIM and its owner Douglas E. Cowgill in the Southern District of Ohio in 2014 claiming that they violated the antifraud provisions of the U.S. securities laws, and that PIM violated, and Cowgill aided and abetted and caused PIM’s violations of, the registration provisions of the Advisers Act and the custody rule. In an amended complaint, the Commission also alleged that PIM and Cowgill hid a shortfall of more than $700,000 in client assets by sending false account statements to clients.
According to the Commission, PIM was obligated in 2009, pursuant to the relevant custody rule requirements, to have the client assets held in omnibus accounts by custodians verified through surprise examination by an independent public accountant because none of these custodians sent quarterly account statements directly to PIM’s clients (and PIM did not have a reasonable basis for believing that they did so), and also was obligated in 2010 and 2011 to have the client assets held in omnibus accounts at by certain custodians verified through surprise examination by an independent public accountant because PIM had custody of those assets.
Commission deems respondents’ work deficient. According to the Commission, the respondents’ 2009 report lacked reasonable basis in that they did not obtain a management assertion upon which their opinion is purportedly based, and they had identified material variances in the records of certain of PIM’s client securities-holding accounts that were never explained. Also, the respondents never filed a Form ADV with the Commission in connection with this examination.
For 2010 and 2011, the Commission said that the respondents neither completed the exams nor did they timely withdraw from them. Again they never filed the required Form ADV in connection with either of the examinations.
Findings and sanctions. The Commission found that the respondents caused PIM’s custody rule violations by their actions during the 2009-2011 exams. It also found that they engaged in improper professional conduct resulting in violations of applicable professional standards that indicated a lack of competence to practice before the Commission.
As a result of the findings, which the respondents neither admitted nor denied, the SEC barred Wilson from appearing or practicing before the Commission as an accountant and ordered him to pay a $50,000 penalty. The SEC also denied Cotterman-Wilson the privilege of appearing or practicing before the Commission as an accountant, but the firm can request reinstatement in three years. Cotterman-Wilson was also ordered to pay civil money penalty of $25,000; disgorgement in the amount of $10,868, which represents profits gained; and prejudgment interest of $1,029.
This is Release No. 34-75298.