SEC Brings Settled Action Charging Compliance Failures in Trade Allocation Scheme

ADMINISTRATIVE PROCEEDING
File No. 3-22216

September 27, 2024 - The Commission today announced that Cetera Investment Advisers LLC, a registered investment adviser based in Illinois, and First Allied Advisory Services, Inc., formerly a registered investment adviser based in California, agreed to settle charges relating to the separate multi-year cherry-picking schemes of two investment adviser representatives associated with First Allied and later associated with Cetera. Cherry-picking is the fraudulent practice of preferentially allocating profitable trades or failing to allocate unprofitable trades to an adviser's personal accounts at the expense of the adviser's client accounts.

According to the SEC's order, from 2015 to approximately August 2022, William Carlton of Washington, and separately from July 2020 to approximately February 2022, Hans Hernandez of New Jersey, disproportionately allocated profitable trades to their personal accounts and disproportionately allocated unprofitable trades to their client accounts.

The order found that First Allied and Cetera failed reasonably to supervise the two investment adviser representatives and failed to design and implement policies and procedures reasonably designed to prevent unfair trade allocations. The order also found that during the relevant period, First Allied's and Cetera's Forms ADV contained misleading statements that representatives were not permitted to disadvantage advisory clients while trading in their own accounts.

The SEC's order against First Allied and Cetera found that each violated Sections 206(2) and 206(4) of the Investment Advisers of 1940 Act and Rule 206(4)-7 thereunder, and failed reasonably to supervise Carlton and Hernandez within the meaning of Section 203(e)(6) of the Advisers Act. Without admitting or denying these findings, First Allied and Cetera each consented to the entry of a cease-and-desist order, a censure, and a penalty of $200,000.

The case originated from the Market Abuse Unit's (MAU) Analysis and Detection Center, which uses data analysis tools to detect suspicious trading patterns. The SEC's investigation was conducted by David Scheffler, Andrew Palid, and Michele T. Perillo of the MAU in the Boston Regional Office (BRO) and Susan Cooke and David D'Addio of the BRO, with assistance from John Rymas of the MAU and Stuart Jackson and Stephen Graham of the Division of Economic and Risk Analysis.