SEC Files Cherry Picking Case, Cites Components of Proper Trade Allocation

Background:

On June 3, 2025, the Securities and Exchange Commission (SEC) filed a case against a retail investment adviser⁽¹⁾ for cherry-picking.
The SEC’s order outlined specific steps the adviser could have taken to prevent the misconduct.

The investment adviser used an omnibus (block trading) account to place trades, with allocations made at the end of the trading day. Profitable trades were consistently allocated to favored accounts.
- Favored accounts had a win rate of 91.6%.
- Unfavored accounts had a win rate of just 31.3%.
The misconduct included same-day purchases and sales of securities, with the resulting profits directed to favored accounts.
Notably, unlike prior enforcement actions, this order suggests that using an “average price” methodology or implementing a “pre-allocation” approach may have satisfied the adviser’s duty of best execution.

Best Execution: The duty of best execution for investment advisers is not explicitly defined by statute or regulation, making it a gray area for many firms. This order appears to suggest that, in the absence of specific disclosure, the use of an average price methodology or a pre-allocation approach could satisfy that duty. While settlement orders are not legally binding and do not set precedent, this case provides a useful reference point for advisers when designing their policies and procedures.

(1) North East Asset Management Group, Inc. and Gregory A. Zandlo File No. 3-22481