SEC Revokes Investment Adviser’s Registration Due to Improper Trade Allocations

June 25, 2008

The U.S. Securities and Exchange Commission (“SEC”) recently revoked the registration of an investment adviser located in Delray Beach, Florida as a result of improper allocation of trades.

In April 2005, the SEC filed a civil injunction action against the Delray Beach based investment adviser alleging the firm violated the anti-fraud provision of the Investment Advisers Act of 1940 by profiting, at the expense of its clients, from allocation of profitable trades to proprietary accounts of an affiliate of the investment adviser. The U.S. District Court for the Southern District of Florida found the investment adviser engaged in fraud upon the investment advisory clients by using discretionary authority over client accounts to allocate profitable trades to the proprietary accounts of an affiliate of the investment adviser. The Court noted that this cherry-picking netted the investment adviser’s affiliate $4.5 million of gains and passed $9 million of losses to the investment adviser’s clients. Based upon the Court’s findings in the civil injunction action and the investment adviser’s offer to settle the administrative proceeding, the SEC deemed it in the public interest to order the revocation of the investment adviser’s registration.

In addition to this administrative proceeding, the SEC’s Director of Compliance Inspections & Examinations, Lori Richards, recently noted in a public speech that SEC “[e]xaminers are looking for cherry-picking and favoritism in allocations [by investment advisers], to, for example, relatives, high profile clients, clients with performance–fee accounts, or other clients that the adviser may have an incentive to benefit.”

This administrative proceeding and the informal guidance by the SEC staff clearly underscore the need for federally registered investment advisers to develop, maintain, disclose and test policies and procedures that prevent improper trading activity. If your investment adviser requires further guidance and support regarding its trading allocation policies and procedures, RIA Compliance Consultants is available to assist you.

Posted by Bryan Hill
Labels: Trade Allocation