The Securities and Exchange Commission (“SEC”) recently issued fraud charges against an investment adviser and the adviser’s owner for improper trade allocation. The charges stemmed from the adviser’s alleged allocating of options trades that appreciated in value during market hours to his personal and business accounts while allocating options that declined in value to the client accounts.
It appears that for some time the SEC’s enforcement division has been monitoring for improper trade allocation, referred to as “cherry picking”, by analyzing large volumes of trade allocation data from registered investment advisers in order to identify instances of cherry picking. According to Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, without a client bringing these types of issues to the attention of the SEC, fraudulent trade allocations are typically difficult to detect. Therefore, they devised the monitoring program to identify specific custodians providing institutional services to investment advisers and their clients in order to allow them to more efficiently monitor trade allocations.
The SEC’s Asset Management Unit and regional offices in Boston and Los Angeles have led this data monitoring program to help in the detection and prevention of cherry picking. The process combines monitoring of the advisers trades allocations and statistical analysis to determine the likelihood of profitable trades allocated to non-client accounts. Please click here to read the full story.
It is critical that advisers have a robust surveillance and monitoring system to detect trade allocation issues. If you are unsure how your trade allocations are being monitored or would like a review of your current system, let Red Oak Compliance Solutions assist you.
About Red Oak Compliance Solutions
Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes.