The SEC Warns Firms Regarding Policing of Unauthorized Trades

In a February 28th., 2012 article written by Liz Skinner for InvestmentNews.com, Skinner writes that the top securities regulator in the U.S. wants investment advisers and brokers to take a closer look at certain trading behaviors to help root out unauthorized trading in accounts.

The Securities and Exchange Commission (SEC) said Monday in a risk alert that changes in trading patterns, a high volume of trade cancellations or corrections, manual trade changes and unexplained profits for a particular trader or client are all conditions that could warrant scrutiny.

Skinner goes on to say that unauthorized trades might include rogue trades in client or proprietary accounts, creation of records of sham transactions or trades that exceed risk tolerances, the commission noted. Perpetrators could include traders, assistants on trading desks, portfolio managers, brokers, risk managers, advisers or other personnel — even those in administrative positions in the back office.

The InvestmentNews.com article said the alert, issued by the Office of Compliance Inspections and Examinations, said firms should review their compliance and supervisory procedures to see where improvements could be made. The regulator said such heightened oversight might include stress testing, independent trading reviews and possibly policies that would not allow traders to have remote access to trading accounts. Firms also should consider how compensation and other incentives are aligned with “responsible risk-taking,” the alert said.

Todd Cipperman, a compliance attorney in Wayne, Pa., said it's noteworthy that the commission's exam staff is taking on this issue. Typically, rogue trading is addressed by the Financial Industry Regulatory Authority Inc., the self-regulatory organization for brokers writes Skinner.

In noting that advisers and brokers have different regulatory requirements, the alert stated that both professions face “financial and reputational losses” from unauthorized trading.

“Unauthorized trading is not a new problem, and the risks it poses should be a perennial concern to financial firms as well as to regulators,” said Carlo di Florio, director of OCIE.