SEC Charges Adviser with Circumventing OMS to Cherry-Pick Trades
The SEC has initiated an action against an investment and its principals for cherry-picking profitable trades. The principals used a third party bank to custody client accounts and informed the bank how to allocate block trades several days after executing the trades through large brokerage firms. The SEC indicates that other firm personnel used the Moxy order management software system, which requires pre-trade allocation, but the defendants did not use the OMS. Instead, they provided the custodian with a spreadsheet indicating allocations, even though the bank suggested different procedures. According to the SEC, over a four-year period, more than 75% of 13,500 trades allocated to the principals were profitable, and fewer than 25% of trades allocated to clients were profitable. The SEC noted that the principals did not make any compensation from the adviser but relied solely on their personal trading profits. Although the adviser was not federally registered, the SEC indicated that “same-day or pre-trade allocations are considered best practices because they protect against unfair allocation schemes such as cherry picking.” Moreover, “it is an industry standard…to have a written trade allocation policy.”
OUR TAKE: This is an example of how technology can help compliance. All firms should consider using one of the industry-leading OMS tools, which assist trade allocation, execution, and portfolio compliance.