Enforcement

SEC Settles Charges Against Investment Adviser Related to Alleged Cherry-Picking Scheme

Summary: The SEC announced settled charges against an investment adviser for failing to take reasonable steps to detect and prevent a former senior investment executive’s alleged cherry-picking scheme, in which profitable trades were disproportionately allocated to favored accounts while losing trades were assigned to other client portfolios. The SEC found that the firm failed to adequately oversee trading allocation practices, did not properly implement its own allocation policies, and failed to reasonably supervise the executive’s conduct. Without admitting or denying the findings, the adviser agreed to a cease-and-desist order, a censure, and a $100 million civil penalty.

Why it matters: The action underscores the SEC’s continued focus on investment advisers’ fiduciary obligations, trade allocation controls, and supervisory systems. Advisers should expect heightened scrutiny of allocation methodologies and whether compliance programs effectively detect preferential treatment among client accounts.

Potential action: Investment advisers should review trade allocation and reallocation procedures, test surveillance around portfolio manager allocation practices, ensure supervisory reviews are documented, and confirm that written policies and client disclosures accurately reflect actual allocation practices and fiduciary obligations.

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SEC Charges Investment Adviser and Former CEO for Fiduciary Duty Breaches Related to Conflicted Investment Recommendations

Summary: The SEC announced settled charges against an Arizona-based investment adviser and its former chief executive officer for breaching their fiduciary duties by recommending investments that generated significant compensation for the firm and its affiliates without adequately disclosing the resulting conflicts of interest to clients. The SEC found that the adviser failed to provide full and fair disclosure regarding the financial incentives associated with certain investment recommendations and failed to adopt and implement adequate compliance policies designed to address those conflicts. Without admitting or denying the findings, the respondents agreed to cease-and-desist orders, censures, and monetary sanctions.

Why it matters: The action highlights the SEC’s continued focus on advisers’ fiduciary obligations, particularly the duty to fully disclose conflicts of interest and ensure that recommendations are made in clients’ best interests. Revenue-sharing arrangements, affiliated products, and compensation incentives remain key examination and enforcement priorities.

Potential action: Investment advisers should review compensation and referral arrangements, confirm that all material conflicts are fully and clearly disclosed to clients, evaluate whether recommendations involving affiliated or higher-fee products are appropriately documented, and ensure compliance policies adequately address fiduciary obligations and conflict management.

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Supreme Court Unanimously Upholds SEC’s Disgorgement Authority

Summary: The U.S. Supreme Court unanimously ruled that the SEC may continue seeking disgorgement of ill-gotten gains in enforcement actions without proving that investors suffered direct financial losses. The decision, Sripetch v. SEC, resolved a split among federal appellate courts and reaffirmed disgorgement as a key equitable remedy available to the SEC in fraud cases. The Court concluded that depriving wrongdoers of unlawful profits does not require a showing of pecuniary harm to investors, preserving one of the agency’s most significant enforcement tools.

Why it matters: The ruling strengthens the SEC’s enforcement program by making it easier for the agency to recover illicit profits in securities fraud cases, even where investor losses cannot be precisely quantified. The decision is expected to bolster the SEC’s ability to pursue market manipulation, insider trading, and other misconduct while limiting a defense that had emerged in several federal courts.

Potential action: Investment advisers, broker-dealers, and other market participants should continue to prioritize robust compliance programs, surveillance, and internal controls designed to prevent fraudulent conduct. Firms involved in SEC investigations should recognize that the Commission’s ability to seek disgorgement remains a powerful enforcement remedy, even absent evidence of measurable investor losses.

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Rulemaking

SEC Raises Qualified Client Thresholds for Performance-Based Fees

Summary: The SEC issued an order adjusting the dollar thresholds used to determine whether a client qualifies as a "qualified client" under Rule 205-3 of the Investment Advisers Act, as required by the Dodd-Frank Act’s five-year inflation adjustment. Effective June 29, 2026, the assets-under-management threshold will increase from $1.1 million to $1.4 million, and the net worth threshold will increase from $2.2 million to $2.7 million (excluding the value of a primary residence and certain related debt). Existing advisory relationships are generally grandfathered under the prior thresholds.

Why it matters: The updated thresholds affect when SEC-registered investment advisers may charge performance-based fees, including carried interest and incentive allocations. The changes are particularly relevant for advisers to 3(c)(1) private funds, separately managed accounts, and other advisory arrangements that rely on the qualified client exemption under Rule 205-3.

Potential action: Investment advisers should update subscription documents, investor questionnaires, investment management agreements, and compliance policies to reflect the new thresholds before June 29, 2026. Firms with upcoming fund closings or new investor admissions should confirm that eligibility determinations are made using the appropriate thresholds based on the timing of the advisory relationship.

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What Regulators are Saying

CFTC Rescinds “No-Deny” Settlement Policy in Enforcement Actions

Summary: The CFTC voted to rescind its longstanding policy prohibiting settlements in which defendants publicly deny the agency’s allegations. By eliminating the “no-deny” requirement, the Commission stated that it is aligning its settlement practices with those of most other federal agencies and providing greater flexibility to resolve enforcement matters more efficiently. The CFTC also announced that it will no longer enforce existing no-deny provisions contained in prior settlements.

Why it matters: The policy change could make it easier for the CFTC to negotiate settlements with market participants while reducing litigation costs and expediting resolutions. The move reflects a broader shift toward providing enforcement staff with greater discretion in resolving cases without requiring respondents to refrain from publicly disputing the allegations.

Potential action: CFTC registrants and market participants involved in enforcement matters should consider how the revised settlement framework may affect litigation strategy and settlement negotiations. Firms should continue to prioritize strong compliance programs while consulting counsel regarding the implications of the Commission’s updated approach to enforcement resolutions.

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In the News

Private Credit Withdrawal Concerns Weigh on U.S. Asset Managers

Summary: Shares of major U.S. alternative asset managers declined as investors awaited second-quarter updates on withdrawal requests from non-traded private credit funds. The market reaction followed reports of elevated redemption requests at several large private credit vehicles, including Cliffwater’s flagship fund, raising concerns that liquidity pressures and investor caution toward the asset class remain elevated despite improving broader market conditions.

Why it matters: Continued redemption pressure could increase scrutiny of valuation practices, liquidity management, and investor disclosures for private credit funds. While many evergreen funds include redemption gates and other liquidity management tools, sustained withdrawal activity may heighten regulatory and investor focus on the resilience of semi-liquid private market products and the transparency of underlying valuations.

Potential action: Private fund managers should review liquidity management policies, redemption procedures, valuation governance, and investor communications to ensure they accurately reflect fund terms and portfolio risks. Firms should also be prepared to address investor inquiries regarding liquidity, valuation methodologies, and portfolio concentrations as market volatility persists.

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Events

SEC Announces 2026 Compliance Outreach Seminar for Investment Advisers and Investment Companies

Summary: The SEC New York Regional Office will host a virtual Compliance Outreach Program seminar for investment advisers and investment companies on June 16, 2026, from 9:15 a.m. to 2:15 p.m. ET. SEC examinations and enforcement staff will discuss a range of current compliance topics, including examination priorities, enforcement trends, and issues affecting newly registered advisers. The program is designed to provide practical insights for chief compliance officers and other senior personnel responsible for overseeing compliance programs.

Why it matters: The SEC’s outreach seminars often provide an early indication of the issues regulators are focusing on in examinations and enforcement actions. For advisers, the program offers a direct opportunity to hear from SEC staff on current expectations and emerging areas of scrutiny, including topics that may shape exam preparedness and compliance testing in the coming year.

Potential action: Chief compliance officers and legal teams should consider attending the seminar and reviewing the agenda to identify areas where internal policies, testing, and disclosures may warrant additional attention. Firms may also use the program as an opportunity to benchmark their compliance framework against current SEC expectations and prepare for future examinations.

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Orical Publications

Andrew Left Convicted in $21 Million Stock Market Manipulation Scheme

Summary: A federal jury convicted activist short seller Andrew Left on securities fraud charges stemming from a long-running scheme that generated more than $21 million in profits. Prosecutors alleged that Left used his public platform, including social media posts, research reports, and television appearances, to influence stock prices while concealing his true trading intentions. According to the government, Left publicly recommended long or short positions in certain securities and then quickly reversed or exited those positions after the market reacted to his statements. The conviction follows both criminal and civil actions brought by the Department of Justice and the SEC related to alleged market manipulation and misleading disclosures.

Why it matters: The case highlights regulators’ continued focus on market manipulation, social media-driven trading activity, and the obligations of market commentators, analysts, and investment professionals to provide accurate and transparent information. The outcome may also influence how regulators and courts evaluate the line between protected market commentary and fraudulent conduct designed to move stock prices for personal gain.

Potential action: Investment advisers, fund managers, and research personnel should review policies governing public communications, social media use, trading around published research, and conflicts of interest disclosures. Firms should ensure that employees' public statements accurately reflect their investment views and that trading activity is appropriately monitored for potential market manipulation risks.

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