SEC Cherry-Picking Enforcement
What Happened?
The SEC filed charges against the former Co-Chief Investment Officer of Western Asset Management Company, for orchestrating a fraudulent "cherry-picking" scheme. The complaint alleges that the CIO misused his trade allocation authority between 2021 and 2023, favoring certain portfolios with profitable trades while assigning losses to others. Let’s dive in:
Key Takeaways
The Scheme:
The CIO delayed allocating trades to client accounts for several hours until he could observe market performance.
Over $600M of first-day gains were allocated to favored portfolios, while a similar amount of first-day losses were allocated to disfavored portfolios.
Despite procedures and compliance training conducted to ensure trades are allocated promptly after execution, the CIO ignored these directions.
Many of the portfolio managers utilized an electronic trade management system to execute and allocate trades promptly, but the CIO placed trades verbally with brokerages and allocated trades to client accounts after the markets had closed.
Conflicts:
The CIO had shifted millions of his own money into the favored portfolios during the period in which the scheme took place.
Although the strategies invested in similar fixed income securities, the firm received higher fees for the favored portfolios. This increased profit for the firm, which was also tied to the CIO’s bonus compensation.
Violations:
A breach of fiduciary duties owed to clients.
Failure to disclose all material facts of the trading process in regulatory filings and DDQ responses.
The SEC cites violations of the Securities Act, Exchange Act, Advisers Act, and Investment Company Act.
CCG’s Guidance
Firms should develop robust trade allocation policies to ensure fairness and avoid conflicts of interest.
Compliance teams should regularly train staff on policies and best practices, ensuring alignment between business operations and compliance requirements.
Implement comprehensive monitoring and surveillance programs to ensure trade allocations are consistent with firm policies and regulatory standards.
In an ever-changing regulatory landscape, preparation is key. The SEC’s focus on fiduciary duty serves as a reminder of the volume, velocity, and complexity of the new regulation promulgation.
The Chenery Compliance team is here to help you navigate these changes and ensure your firm is prepared for the inevitable SEC exam.
If you're looking to enhance your compliance program, contact us to learn more about how we can help you!