On September 28, 2020, the U.S. Securities and Exchange Commission (“SEC”) filed a complaint against an investment adviser representative located in Nebraska for allegedly cherry picking profitable trades for his personal investment account, while disproportionately assigning unprofitable trades to investment advisory client accounts. During the alleged scheme, which ran from January 2017 to March 2018, the SEC asserts that the investment adviser representative earned a 4.4% return on his personal investment account while his disfavored clients earned a negative 12.56% return. Click here to read the SEC’s complaint.
According to the SEC, the investment adviser representative used the investment adviser firm’s omnibus account to make securities and options trades, including personal trades, but waited to allocate the trades among his personal account and client accounts until observing the trades’ gains and losses. The SEC alleges that the qualified custodian of the investment advisory accounts detected the suspect trading patterns in February 2018 and subsequently terminated the investment adviser firm from its platform. At the time that the alleged conduct was discovered, the investment adviser representative was the firm’s chief executive officer and had previously served as the firm’s chief compliance officer.
While the SEC’s charges in this case focus solely on the investment adviser representative, it is important to recognize that an investment adviser firm has an obligation to supervise its supervised persons and should maintain policies and procedures designed to detect inappropriate personal securities transactions and trading allocations. The SEC noted in its charges that the investment adviser firm did not conduct periodic reviews of its investment adviser representatives’ block trading practices nor did the firm disclose to investment advisory clients in the Form ADV Part 2A disclosure brochure conflicts of interest related to the representative’s options trading.
RIA Compliance Consultants has developed a number of sample forms to help your investment adviser firm implement, maintain, and review its personal securities transactions policies and procedures, which are available for purchase a la carte below or through one of our Annual Compliance Program Packages.
- Personal Securities Transactions – Annual/Initial Personal Securities Holding Report
- Personal Securities Transactions – Brokerage Account Disclosure Form
- Personal Securities Transactions – Letter to Request Duplicate Confirmations & Statements
- Personal Securities Transactions – Personal Securities Trading Request Form
- Personal Securities Transactions – Pre-Clearance Form
- Personal Securities Transactions – Quarterly Personal Securities Transaction Report
- Personal Securities Transactions – Supervising for Insider Trading Checklist
- Personal Securities Transactions Form – Non-Access Person Acknowledgment
- Insider Trading – Identifying and Mitigating Risk Checklist
If your investment adviser firm is an existing client of RIA Compliance Consultants and would like assistance developing customized policies and procedures for personal securities transactions, we encourage you to speak with your compliance consultant. Or, if you are not an existing client of RIA Compliance Consultants, click here to set up an introductory call with our Business Development Team.
Cherry Picking – SEC Cease-and-Desist Proceeding – (March 28, 2018)
SEC Fines Investment Adviser Firm $300,000 for Failure to Prevent Cherry Picking – (January 18, 2017)