Philadelphia partner Mary Hansen and New York partner Kay Gordon were quoted in a Compliance Intelligence article titled, "New IM Enforcement Chiefs Scope Trade Allocations." The article discussed the SEC's asset management enforcement unit and its hunt for potential violations from investment advisers' allocations of trades and investments.
The Enforcement Division targets misconduct by investment advisers, investment companies and private funds. It looks for unlawful allocations of trades or investment opportunities where an adviser favors one client over another – often called "cherry-picking." The asset management unit has only recently taken on a formal initiative to combat it.
"The previous co-heads, Bruce Karpati and Robert Kaplan, started using initiatives to strategically map out the areas the asset management unit would focus on," said Mary, who was also former assistant director in the Division of Enforcement.
She continued, "The Commission uses initiatives when it has a reason to believe there is widespread misconduct happening. It is a way for the Commission to identify areas where it believes it is likely to find more than one possible case to bring and, at the time, send a message to the industry."
"The cherry-picking initiative means that firms that run multiple funds or accounts should ensure they have sufficient policies and procedures in place. When firms with side-by-side accounts are visited by the SEC, examiners will often ask for copies of such procedures," said Kay.
Examiners will evaluate if such policies are adequate and whether trades are being allocated equitably.
"If you have side-by-side accounts, some of which have performance fees and some don't or some with higher performance fees, examiners will want to see that your policies and procedures specifically address those conflicts," said Kay.
She continued, "There has to be a legitimate reason [for deviating from the policy], and the decision should be made after the fact."
Mary also noted that "you want to be particularly careful and maybe document them in preparation of one day having to explain them to examiners."
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