Adviser Under Scrutiny for Allocating Trades to Proprietary Accounts

The SEC has launched an enforcement action against an investment adviser and one of its principals for allowing portfolio managers to cherry-pick trades that benefited proprietary accounts over client accounts. According to the SEC, the portfolio managers, who engaged in a day-trading strategy, were allowed to allocate trades after the order had been filled and pricing obtained. The SEC claims that the significant outperformance of the proprietary accounts evidenced the cherry-picking scheme. Additionally, the SEC alleges that the firm and its supervising principal knew about the significant disparity in performance and ignored red flags including SEC exam findings about trade allocations. The SEC charges violations of the anti-fraud rules because of a misleading ADV and recordkeeping violations.

OUR TAKE: Firms that engage portfolio managers for proprietary accounts should analyze performance disparity and take action where proprietary accounts out-perform client accounts. Also, polices and procedures should not allow post-pricing allocations.

http://www.sec.gov/litigation/admin/2009/ia-2962.pdf
http://www.sec.gov/litigation/admin/2009/ia-2961.pdf