Recent Regulatory Enforcement for Cherry Picking

February 15, 2017

Last month the U.S. Securities and Exchange Commission ("SEC") announced that it had brought charges against a Massachusetts-based investment adviser for an alleged “cherry picking” scheme. To settle the case, the firm’s founder agreed to be banned from the securities industry and, in a related criminal proceeding, pled guilty to securities fraud charges. The SEC noted that its Market Abuse Unit had uncovered the cherry-picking by using data analysis to detect suspicious trading patterns.

How does this affect my firm?
The SEC has invested considerably in data management tools and conducting statistical analysis to help identify and evaluate patterns of “favorable account” treatment and other deviations in allocation policies. Yet many of today’s commercial OMS and compliance offerings lack the functionality to generate allocations that, on the front end, conform to the firm’s stated allocation policy and required fund mandates, nor to verify, on the back end, that allocations have in fact conformed to the allocation policy and mandates. This is a regulatory and redemption risk to any firm that allocates to multiple funds or managed accounts.

How ACA can help
ACA’s NorthPoint Investment Management System (“IMS”) provides a single-step trade allocation workflow that simultaneously accounts for provisions defined by your allocation policy and compliance mandates. During this workflow, the IMS's built-in compliance system extrapolates the necessary limits and restrictions (based on your predefined concentration and eligibility tests) that are referenced and refreshed by the allocation engine, along the trade lifecycle.

The final result is a set of proposed allocations that conform to both your allocation policy and compliance mandates. In addition, the IMS allows you to configure your approval workflow and posting processes and maintains audit snapshots that provide full transparency into the step-by-step decision process. This can be indispensable for your firm as it allows you to quickly provide justification of allocation decisions for use in compliance testing or during a regulatory examination.

For more information
If you have questions about the Investment Management System, please contact Craig FitzPatrick at (212) 951-1030.

About ACA Technology Solutions
ACA Technology Solutions is a division of ACA Compliance Group, a leading provider of regulatory compliance services and products, technology solutions, cybersecurity and risk assessments, and performance services to regional, national, and global firms in the financial services industry. ACA currently serves more than 70 of the top 100 hedge fund managers (Hedge Fund Alert, April 2016), more than 50 of the top 100 private equity firms (PEI 300, May 2016), and over 60 of America’s top 100 money managers (Institutional Investor, 2016). For the past 13 years, ACA Technology has successfully provided solutions to over 175 investment managers. Our team of financial technologists has real-world industry experience and understands the dynamic needs of today’s investment managers.