The SEC has initiated an action against a firm that is not required to be registered. The SEC has stated that the firm cherry-picked profitable trades. The firm principals used a third party bank to custody client accounts and told the bank how to allocate block trades several days after executing the trades through large brokerage firms. 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. 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.“
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