SEC Seeks Final Judgment Against Former Western Asset Co-CIO Ken Leech in Cherry Picking Case

Cherry picking—allocating profitable trades to preferred accounts while assigning losing trades to others—can breach investment advisers’ duty of loyalty and care, trigger fraud charges and cause significant reputational damage. For compliance teams, this is a clear signal to revisit trade allocation policies, best-execution oversight and cross-trade controls. Actionable steps include: mapping allocation workflows to detect preferential treatment; enhancing surveillance for cherry picking, late trading and market timing; documenting allocation rationales in real time; reviewing personal trading and code-of-ethics compliance; testing adherence to client mandates and investment guidelines; and ensuring supervisory procedures are reasonably designed to prevent and detect misconduct.

Firms should also assess conflicts arising from portfolio managers managing multiple accounts, revisit disclosure language and train staff on allocation fairness. Boards and senior management should treat allocation integrity as a key conduct risk. While the case concerns an individual, the SEC’s approach can extend to adviser firms under supervision and compliance failures.

Smaller advisers may need to outsource or adopt RegTech surveillance, while larger firms should benchmark controls against enforcement precedents. The reputational and client-retention risks are high, but firms that demonstrate robust allocation controls can strengthen client trust and differentiate themselves in competitive institutional markets.