In March 2018 the U.S. Securities and Exchange Commission (SEC) instituted an administrative cease-and-desist proceeding against an investment adviser firm in response to an alleged fraudulent “cherry-picking” scheme. The SEC asserts that from 2012-2015 the investment adviser firm disproportionately allocated profitable trades to a personal account, while disproportionately allocating unprofitable trades to client accounts. The firm, which had approximately $7.5-$9 million in assets under management, was fined $48,000 by its state securities regulator for failure to enforce its own supervisory procedures concerning trade allocation. Specifically, the state regulator found the investment adviser firm did not always pre-allocate block trades and did not retain a record of how block trades were pre-allocated. Click here to read the SEC’s full action.
This SEC action highlights the importance of ensuring your investment adviser firm’s actual practices conform to the written compliance manual and Form ADV representations. In this case, the investment adviser firm had written policies and procedures regarding trade allocation and “cherry picking” but did not follow its procedures.
Whether your investment adviser firm needs help creating written policies and procedures regarding trade allocation and “cherry-picking” or reviewing these documents vis- à-vis actual practices, RIA Compliance Consultants can help. RIA Compliance Consultants’ Compliance Review Tool poses important questions about “cherry-picking” and personal securities transactions for your investment adviser firm to review. Contact your consultant or click here to schedule an introductory call.