The U.S. Securities and Exchange Commission (SEC) recently fined UCB Financial Advisors $5.7 million for cherry-picking. This is a form of trading misconduct that occurs when an investment advisor allocates profitable trades to favored accounts while assigning losing trades to less-favored accounts. This unethical practice can lead to significant financial losses for investors and is strictly prohibited by the SEC.
An Overview of UCB Fines
From 2012 to 2017, it was said that UCB Financial Advisors, an investment firm based in Atlanta, Georgia, was cherry-picking. According to the SEC, UCB’s owner and Chief Compliance Officer, Charles A. Adams, engaged in a scheme to allocate profitable trades to his own accounts and those of his family members and friends, while assigning less profitable trades to his clients.
The SEC found that Adams used a manual order entry system to pick and choose which trades to make. He did this to get around UCB’s policies and procedures for allocating trades. By choosing which trades to take, Adams was able to make a lot of money for himself and his close friends while hurting his clients a lot.
The SEC also found that UCB did not have enough policies and procedures in place to find or stop cherry-picking.
In addition to trade allocation, client onboarding, and supervisory controls, UCB’s compliance program was found to be lacking in several other areas as well. As a result, UCB failed to properly supervise Adams and his trading activities.
99% of the time, the SEC’s investigation found that Adams put profitable trades into his own accounts and the accounts of his family and friends. The other 1% of the trades were given to UCB’s clients, who lost a lot of money as a result. The SEC estimates that UCB’s clients lost approximately $1.8 million due to Adams’ cherry-picking scheme.
In addition to the $5.7 million fine, UCB Financial Advisors has agreed to hire an independent compliance consultant to look at and improve its compliance program.UCB has also agreed to give back $1.8 million in profits and $391,205 in interest from the cherry-picking scheme.
With its action against UCB Financial Advisors, the SEC shows how important compliance programs are for preventing and finding wrongdoing. Investment advisers have a fiduciary duty to look out for their client’s best interests. Cherry-picking goes against this duty because it unfairly helps some clients more than others.
Before putting their money in the hands of an investment advisor, investors should always do their research. One way to do this is to check an advisor’s registration status with the SEC and review any disciplinary history. Investors should also find out how a financial advisor prevents and finds wrongdoing, such as cherry-picking.
The SEC has made it clear that it will not tolerate cherry-picking or any other form of trading misconduct. Investment advisers must prioritize compliance and take active measures to prevent and detect misconduct. Failure to do so can lead to significant financial penalties, reputational damage, and even criminal charges.
In the end, the SEC‘s action against UCB Financial Advisors is a reminder to all investment advisers of how important it is to follow SEC rules and put their client’s interests first. Cherry-picking is a serious violation that can have devastating consequences for investors. It is up to investment advisers to ensure that they have robust compliance programs in place to prevent and detect misconduct and to act in the best interests of their clients at all times.
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