The SEC on Monday issued an alert for broker-dealers and investment advisers to help firms prevent and detect unauthorized trading in brokerage and advisory accounts.  Issued by OCIE, the SEC's Office of Compliance Inspections and Examinations, the National Examination Risk Alert forewarns that both broker-dealers and investment adviser face similar risks of financial and reputational losses arising from unauthorized trading - even through they're subject to different regulatory requirements. The alert is the 2nd this year and the 4th in a continuing series of Risk Alerts that the SEC’s examination staff expects to issue. Unauthorized Trading - When, Where and By Whom. Unauthorized trading can include: (i) rogue trades in customer, client, or proprietary accounts;  or (ii) trades that exceed firm limits on position exposures, risk tolerances, and losses. Unauthorized trading can be done by:  (i) traders;  (ii) assistants on trading desks; (iii) portfolio managers;  (iv) brokers;  (v) risk managers; or  (vi) other personnel, including those in administrative positions in a firm’s back office. What to Look Out For. OCIE notes that additional scrutiny may be warranted in the presence of these red flags:

• Changes in trading patterns
• high volume of trade cancellations or corrections
• manual trade adjustments
• unexplained profits for a particular trader or client.

Suggested Compliance Measures. OCIE suggests some compliance measures that firms might want to use to protect themselves and their clients from unauthorized trading:

• stress testing
• independent trading reviews.
• policies requiring traders to take vacations without remote access to trading accounts
• mandatory special reviews of a trader’s portfolio for signs of unusual activity, during a trader's vacation periods.

SEC Staff Credits. Helped prepare this Risk Alert: Marita Bartolini, Julius Leiman-Carbia, Olin Filyaw, Dan Gregus, George Kramer, Lesley Ward, Margaret Willenbucher. For further details, go to:   [SEC PR 12-33, 2/27/12] and [National Examination Risk Alert notice]