In a recent cease-and-desist order, the U.S. Securities and Exchange Commission (“SEC”) censured and fined two investment adviser firms for allegedly failing to supervise “cherry-picking” practices by two of its investment adviser representatives (IARs).
The U.S. Attorney’s Office (District of Connecticut) announced that it entered into a plea agreement with an owner/investment adviser representative of an investment adviser firm based in Connecticut. This CT investment adviser representative waived his right to be indicted and pled guilty to defrauding clients of $2.7 million through a cherry-picking scheme. Last month, the U.S. Securities and Exchange Commission (“SEC”) also issued a cease-and-desist order against this investment adviser representative and firm. This blog post will review the cherry-picking allegations and offer several best practices for a chief compliance officer (“CCO”) to detect such activity within his or her own investment adviser firm.
Challenges Facing a CCO Supervising Against Insider Trading
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.
The STOCK Act, a bill that is designed to restrict the ability of elected officials to make securities trades based on non-public inside information, is gaining support in Congress.
