The SEC fined and censured an investment adviser for insufficient supervision and compliance procedures, which allowed one of its investment advisers to cherry-pick trades for the benefit of favored accounts. The adviser used an omnibus brokerage account to allocate profitable trades to favored accounts to the detriment of other accounts, notwithstanding the firm’s policies and procedures and Form ADV that indicated that it would allocate trades fairly and equitably. The SEC acknowledges that the firm did conduct daily reviews of the trading but focused on suitability and concentrations, rather than trade allocation.
OUR TAKE: Failure to prevent wrongdoing creates a burden and inference that your compliance policies and procedures do not measure up. In this case, the SEC did not offer insight into how the firm should conduct allocation testing or whether such testing would have stopped the misconduct. Instead, the SEC argues that the cherry-picking itself proves that the firm failed to implement reasonable policies and procedures. This is why firms need to implement testing and monitoring and not just write a nice policy.