Adviser Charged with Marking-the-Close to Inflate Customer Statements
The SEC has instituted enforcement proceedings against a registered investment adviser and its President/CCO for using a broker-dealer to artificially inflate the prices of thinly-traded securities in order to report inflated performance to clients. The SEC alleges that the respondents executed a “mark-the-close” scheme whereby they placed orders near the close of trading for thinly-traded securities held by advisory customers. As a result, the reported closing prices of the securities increased substantially, allowing the adviser to report higher valuations and better performance in monthly account statements.. The SEC charges the respondents with violating the anti-fraud rules, the duty to obtain best execution, the Advisers Act’s compliance rule, and the recordkeeping rules.
OUR TAKE: When testing valuations, compliance officers should review patterns of price movements near the ends of months and quarters to ferret out manipulative practices.