August 13, 1992
TO: INVESTMENT ADVISER MEMBERS NO. 40-92
INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 32-92
COMPLIANCE COMMITTEE NO. 11-92
RE: SEC CENSURES INVESTMENT ADVISER AND ITS PRESIDENT WITH
RESPECT TO TRADING ERROR
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The Securities and Exchange Commission recently (1)
censured an investment adviser for failing to supervise its
president and (2) issued a cease and desist order against the
adviser’s president, in connection with certain trading errors.
The portfolio manager of twelve accounts managed by the
adviser placed a "buy" order for securities, which were
inadvertantly executed by the adviser’s trader as a "sell" order.
The trader discovered the error the next day, and alerted the
adviser’s president, who settled the trade by delivering the same
securities from two other accounts. One of the accounts
subsequently repurchased half the shares that it had owned, at a
higher price. After the SEC’s initial inquiry, the adviser paid
certain amounts to the two accounts.
The SEC found that the president aided and abetted the
violation of Sections 206(1) and 206(2) of the Investment
Advisers Act, and that the adviser failed to reasonably supervise
the president with a view to preventing his violation within the
meaning of Section 203(e)(5) of the Investment Advisers Act. In
particular, the SEC found that the adviser had no procedure
directing that trading errors be handled in a particular, proper
manner or that disclosure of the error and the means of
rectification be made to any particular person. The SEC also
found that the adviser had left the handling of the error to the
president’s discretion.
The president, without admitting or denying the
allegations, consented to an order to cease and desist from
committing or causing a violation of Sections 206(1) and 206(2)
of the Investment Advisers Act. The adviser, without admitting
or denying the allegations, consented to a censure and to an
undertaking to retain certified public accountants to review its
policies and procedures with respect to trading errors and to
make recommendations. The adviser also undertook to adopt
policies and procedures reasonably designed to prevent a
recurrence of the alleged violation.
Copies of the SEC’s orders are attached.
Thomas M. Selman
Assistant Counsel
Attachment