The U.S. Securities and Exchange Commission (“SEC”) recently instituted administrative cease-and-desist proceedings against a Washington-based registered investment adviser. The SEC alleges the investment adviser engaged in several schemes meant to defraud clients and unjustly enrich the investment adviser’s personal accounts. Among the alleged wrongdoing was the investment adviser’s scheme to “cherry pick” favorable trades for his personal accounts while allocating unfavorable trades to client accounts. During one relevant period, the SEC claims the investment adviser’s accounts showed a return of 1.39% while the affected client accounts had a -0.78% return. In total, the SEC asserts that the investment advisor profited almost $500,000 while client accounts suffered losses of more than $2 million.
Notably, the SEC alleges that the investment adviser’s broker-dealer raised concerns that the investment adviser’s trading practices did not match his ADV Part 2A, ultimately terminating the relationship on those grounds. However, the investment adviser’s clients remained unaware of the issue, and the investment adviser continued trading with a new broker-dealer.
In addition to cherry-picking, the SEC also alleges that the investment adviser misrepresented the fees clients would incur if they invested in a mutual fund managed by the investment adviser. Furthermore, as manager of the mutual fund, the SEC claims the investment adviser fraudulently caused the fund to deviate from its fundamental investment limitations resulting in loss of diversification and financial harm to clients. The SEC has ordered the investment adviser to respond to the allegations contained in the cease-and-desist order and has also ordered a public hearing on the matter. Click here to read the SEC’s Order Instituting Administrative and Cease-and-Desist Proceedings.
Investment adviser firms of all sizes should take care to ensure that the firm’s actual practices conform to the procedures and policies called for in the investment adviser firm’s compliance manual. RIA Compliance Consultants can help your investment adviser firm evaluate its current practices and develop a compliance program tailored to your unique needs.
Posted by Bryan Hill
Labels: Enforcement, SEC, Uncategorized