Advisers Must Adopt and Implement Appropriate Trade Allocation Policies and Monitor Employee Trading

Supervision of personnel is one of an adviser’s fundamental compliance duties. Advisers must adopt appropriately crafted policies and procedures to ensure effective supervision and must comply with those policies and any related disclosures. In a recently settled enforcement proceeding, the SEC claimed that an investment adviser failed on all counts. One of its investment adviser representatives, who is the subject of a parallel enforcement proceeding, allegedly ran a cherry picking scheme under the adviser’s nose for most of his eight-year tenure with the firm. The adviser allegedly failed to supervise the representative; failed to have appropriate policies and procedures governing trade allocations; and made materially misleading disclosures about its trade allocation policies, practices and monitoring. This article analyzes the alleged cherry picking scheme; the adviser’s compliance violations; and the terms of the settlement orders against both the adviser and its representative. See our three-part series on the duty to supervise: “Recent SEC Enforcement Actions Claim Violations by Broker-Dealers and Investment Advisers” (Sep. 6, 2018); “Conduct Proper Trade and Electronic Communications Surveillance” (Sep. 13, 2018); and “Respond to Red Flags; Implement Reasonable Policies and Procedures; and Conduct Adequate Training” (Sep. 20, 2018).

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