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SEC's current views related to trade allocation practices
The manner in which advisers allocate investments among client and other managed accounts is a high-risk compliance area. Currently, the SEC is highlighting certain problematic investment allocation practices by investment advisers. These practices include, for example, allocating profitable trades to proprietary or other accounts that the adviser may wish to favor (e.g., accounts with a higher fee structure) or, conversely, “dumping” unprofitable trades in less favored accounts without proper disclosure to advisory clients. Another issue was advisers’ failure to keep proper books and records with respect to trade orders and allocations. In addition, the SEC has scrutinized management’s supervision of investment advisers’ trading activities and allocation practices.
These investment allocation issues continue to be a high priority for the SEC, as evidenced by its current examinations and enforcement actions. This article analyzes the specific allocation practices challenged by the SEC and provides guidance on how investment advisers may fortify their investment allocation practices by: (1) implementing and following effective written allocation policies and procedures; (2) ensuring proper disclosure of allocation practices to clients and investors; and (3) keeping proper books and records with respect to trade orders and allocations.
