Large institutional money managers undergoing routine examinations from the Securities and Exchange Commission are now being asked to disclose their trade allocation policies.
The request for disclosure follows recent SEC actions against smaller, retail money managers over charges the firms were, in the agency's terms, “cherry-picking” — giving preferential treatment on trades to clients who pay higher fees to use pooled investments, leading to unfair distribution of trade proceeds.
The concern with institutional managers, sources said, is that asset owners investing through separate accounts might not get the same benefits on trades as investors in mutual funds or other pooled or commingled funds.
“It's not a witch hunt,” said Josh Hall, global head, investment operational due diligence, Willis Towers Watson PLC, New York. “During routine exams, the SEC is asking managers about trade allocation as part of their trading procedures. (The SEC is) trying to see that all clients, whether discretionary or non-discretionary, are being treated fairly.”
SEC officials declined to comment.
Mr. Hall said he's been in contact with “five or six large money managers” that have been asked about allocation policies during a review or expect to be asked when they are reviewed.
“That's how many have either disclosed to us that the SEC has talked with them or asked us for advice on what the SEC might be looking at,” Mr. Hall said.
Mr. Hall would not identify the managers.
For asset owners, fair trade allocation “is a big deal to them,” said Gregg Sommer, Denver-based partner, head of operational risk assessments, at Mercer Sentinel Group. “With RFPs, when we look at managers to run the same allocation, one thing we particularly look at is their trade allocation policies... This is becoming an additional focus (for the SEC). There really are variations in pricing and fees. And there is an opportunity there for those (firms) without the policies or governance structure in place to take advantage of some clients.”
None of more than a dozen money managers contacted for this story would comment on whether they've undergone an SEC review or are scheduled to do so in the near future.
Three money manager officials, who spoke on condition of anonymity, said their trading policies already preclude favoring one group of clients over another, regardless of the fee structure.
Mr. Sommer said most institutional money managers have “finalized, objective trade allocation policies. Most use a pro-rata (proportional) approach across all strategies that allocates average pricing in and out of all accounts.”
Those policies often include stipulations for fair allocation in the event that a trade is skewed, such as when fractional shares are bought or trade flows are issued at the end of the trading day.