Enforcement

SEC Enforcement Action Highlights “Cherry-Picking” Trade Allocation Fraud

Summary: The U.S. Securities and Exchange Commission obtained a final judgment against a former California-registered investment adviser for engaging in a fraudulent “cherry-picking” scheme that favored a personal trading account over client accounts. According to the SEC, the adviser placed trades through a block trading account and allocated them after observing their performance, assigning profitable trades to a personal account while allocating losing trades to clients. A federal court entered a final judgment ordering permanent injunctions, disgorgement of $507,996.42 plus $112,340.03 in prejudgment interest, and a civil penalty of $507,996.42 for violations of anti-fraud provisions of the federal securities laws.

Why it Matters: This action highlights the SEC’s continued focus on trade allocation practices and conflicts of interest involving investment advisers. Regulators expect allocations to be made fairly and contemporaneously rather than after performance is known. “Cherry-picking” schemes are viewed as a serious breach of an adviser’s fiduciary duty, particularly where the adviser benefits at the expense of client accounts.

Potential Action: Investment advisers should review their trade allocation policies and procedures to ensure trades are allocated fairly and documented at the time of execution. Firms may also consider strengthening controls around block trading and personal trading activity, as well as implementing monitoring processes to identify unusual allocation patterns or performance disparities across accounts. Clear disclosures and effective compliance oversight can help mitigate regulatory risk in this area.

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What Regulators are Saying

SEC Staff Updates Fund of Funds FAQs Under Rule 12d1-4

Summary: The SEC staff updated its Fund of Funds Arrangements Frequently Asked Questions relating to Rule 12d1-4 under the Investment Company Act. The guidance clarifies that an acquiring fund relying on Rule 12d1-4 must enter into a fund of funds investment agreement with an acquired fund if it exceeds the 5% or 10% investment limits, even if it does not exceed the 3% voting securities limit. The staff also stated it would not recommend enforcement action if acquired funds do not count CLO debt securities toward the rule’s 10% limit.

Why it Matters: The update provides additional clarity on how the SEC staff interprets key operational requirements under Rule 12d1-4. It confirms when investment agreements are required in fund of funds structures and provides practical relief for funds holding CLO debt securities that could otherwise raise technical compliance questions.

Potential Action: Fund sponsors and advisers should review their fund of funds structures to determine whether they are relying on Rule 12d1-4 and confirm that required investment agreements are in place where applicable. Firms with CLO debt exposure may also want to review how those holdings are treated within their compliance monitoring processes.

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SEC Chair Calls for Greater Regulatory Coordination Between SEC and CFTC

Summary: As a prelude to the historic memorandum of understanding (MOU) between the SEC and CFTC, SEC Chair Paul Atkins, on March 10, 2026, emphasized the importance of stronger coordination between the two agencies to address products and markets that fall under overlapping regulatory frameworks. He announced that the agencies will begin holding joint meetings on product applications and launched a harmonization webpage where market participants can request coordinated discussions with both regulators. Atkins stressed that firms should not be “shuffled back and forth” between agencies when products implicate both securities and derivatives regulations and encouraged closer cooperation to provide clearer regulatory responses.

Why it Matters: The remarks signal a broader effort by the SEC and CFTC to reduce duplicative oversight and provide clearer regulatory pathways for financial products that touch both securities and commodities markets. Greater coordination between the agencies may also help accelerate the review of innovative products and reduce regulatory uncertainty for market participants operating across both regimes.

Potential Action: Market participants developing products that may fall under both SEC and CFTC jurisdiction should consider engaging early with regulators and monitoring developments from the agencies’ harmonization initiative. Firms may also want to assess whether new products, trading strategies, or market structures could benefit from coordinated regulatory discussions as the agencies continue to expand joint engagement efforts.

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U.S. Banking Regulators Clarify Capital Treatment for Tokenized Securities

Summary: U.S. banking regulators clarified that banks will not face additional capital charges solely because a security is tokenized. According to Reuters, the Federal Reserve, FDIC, and OCC stated that tokenized securities generally will receive the same capital treatment as traditional securities because the agencies’ approach is intended to be technology-neutral.

Why it Matters: The announcement provides helpful clarity as interest in tokenized securities continues to grow across the banking and digital asset sectors. By confirming that the use of blockchain technology does not, by itself, change capital treatment, the agencies may reduce a potential regulatory barrier to broader bank involvement in tokenized products.

Potential Action: Banks and other market participants exploring tokenized securities should continue monitoring how existing prudential, custody, disclosure, and operational risk frameworks apply to these products. Firms may also want to assess whether this clarification affects internal planning around digital asset infrastructure, product development, or strategic partnerships.

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In the News

SEC Chair Emphasizes “Guardrails” for Retail Access to Private Markets

Summary: According to The Wall Street Journal, SEC Chair Paul Atkins said the agency supports broader access to private-market investments, but only with appropriate investor protections in place. In related SEC remarks from the agency’s March 4, 2026, Private Markets Roundtable, Atkins described the SEC’s approach as “responsible retailization,” focused on expanding access while using guardrails to guide proper investment into private assets.

Why it Matters: The remarks reflect continued regulatory attention on the growing push to make private equity, venture, private credit, and similar products more accessible to a wider range of investors. For private fund sponsors, advisers, and distribution platforms, the message is that broader retail participation may continue to develop—but likely alongside heightened expectations around disclosure, suitability, structure, and investor protection.

Potential Action: Firms involved in private-market product development or distribution should monitor SEC and broader policy developments closely, particularly any new guidance tied to retail access, retirement plan use, or investor protection standards. Sponsors and advisers may also want to review whether existing disclosures, suitability frameworks, and product structures are calibrated for a potentially broader investor base.

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CFTC Names Marc H. Sielski Executive Director

Summary: On March 9, 2026, the CFTC announced that Marc H. Sielski has been named Executive Director. In this role, he will oversee the Commission’s administrative operations, with a stated focus on organizational effectiveness, operational excellence, governance, internal controls, and modernization efforts.

Why it Matters: While this is a personnel announcement rather than a rulemaking or enforcement action, senior leadership changes can signal how an agency intends to manage its operations and priorities. The CFTC emphasized Sielski’s background in enterprise transformation, governance, and operational improvement, suggesting a continued focus on modernization and internal efficiency.

Potential Action: Firms may want to monitor whether this leadership change is followed by additional operational, administrative, or strategic announcements from the CFTC, particularly where agency modernization efforts could affect examinations, filings, or regulatory engagement.

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Nasdaq Expands Tokenization Push Through Kraken Partnership

Summary: Nasdaq announced a collaboration with Payward, Kraken’s parent company, to develop tokenization infrastructure aimed at supporting blockchain-based equities. Under the partnership, Nasdaq will use Payward’s xStocks platform to help clients move securities from traditional institutional trading infrastructure onto blockchain networks. Reuters also reported that Nasdaq separately partnered with Boerse Stuttgart’s tokenization settlement platform to support trading in blockchain-based equities across Europe.

Why it Matters: The announcement reflects continued momentum behind tokenized securities as major market infrastructure providers explore blockchain-based trading and settlement models. Reuters noted that Nasdaq had previously sought SEC approval to allow trading in either traditional digital or tokenized form, and that other market participants, including Robinhood, Gemini, and Kraken, have already launched tokenized stocks in Europe. The development suggests that tokenization is moving further into mainstream market infrastructure discussions, particularly around settlement, shareholder engagement, and always-on market access.

Potential Action: Firms exploring digital asset strategies or tokenized product offerings should continue monitoring regulatory developments, exchange initiatives, and infrastructure partnerships in this space. Broker-dealers, advisers, and market participants may also want to assess how tokenization could affect trading models, settlement processes, and investor communication frameworks as adoption continues to evolve.

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SEC Settlement Highlights Valuation Risks in Principal Transactions During Market Stress

Summary: A March 3, 2026, Gibson Dunn client alert discusses a recent SEC settled action involving a formerly registered investment adviser and private fund manager that sold portions of loans from its own balance sheet to affiliated private funds during the early-pandemic market disruption. According to the alert, the SEC alleged the adviser continued transferring loans at par value less than the unamortized loan fee during March through May 2020 without adequately determining the effect of market dislocation on fair value. The adviser settled negligence-based charges and agreed to pay a $900,000 penalty.

Why it Matters: The alert underscores the SEC’s continued focus on valuation practices, related-party transactions, and disclosure obligations in private fund structures, particularly where advisers warehouse assets and later sell them to affiliated funds. Even where firms follow an established valuation approach, the SEC appears to expect additional scrutiny and contemporaneous support when transactions occur during periods of unusual volatility or market stress.

Potential Action: Private fund sponsors and advisers should review valuation policies for principal and other affiliate transactions, particularly for illiquid assets transferred during volatile markets. Firms may also want to assess whether disclosures, consent processes, and documentation are sufficient to demonstrate that transaction pricing reflects current market conditions rather than default assumptions or historical practice.

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Events

SEC Announces Roundtable on Options Market Structure Reform

Summary: On March 5, 2026, the SEC announced that it will host a public roundtable on April 16, 2026, to discuss listed options market structure. The discussion will focus on competition in a quote-driven market, the customer experience, and opportunities and challenges tied to the market’s continued growth. The roundtable will be held at SEC headquarters, streamed live on SEC.gov, and will also accept public comments under File No. 4-887.

Why it Matters: The announcement reflects continued SEC attention to the rapid growth of the U.S.-listed options market, particularly among retail investors. For market participants, the roundtable may offer insight into how the SEC is thinking about competition, investor experience, and potential future market structure reforms in the listed options space.

Potential Action: Broker-dealers, exchanges, market makers, and other firms active in the options market should consider monitoring the roundtable and any related agenda materials, speaker announcements, or comment submissions. Firms with a stake in listed options market structure may also want to evaluate whether submitting comments would be appropriate.

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