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An adviser may defraud its clients by waiting to decide how to allocate a trade among its clients' accounts based on subsequent market movements.11 The concern is that the adviser could allocate the trade to favored clients if the price movement was favorable and allocate the trade to other accounts if the price movement was unfavorable. This practice is known as "cherry-picking," and violates the Advisers Act.
An adviser may defraud its clients when it fails to use the average price paid when allocating securities to accounts participating in bunched trades and fails to adequately disclose its allocation policy. This practice violates the Advisers Act if securities that were purchased at the lowest price or sold at the highest price are allocated to favored clients without adequate disclosure.
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