Western Asset faces SEC sanctions over trading controls failures

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Western Asset SEC sanctions

Highlights

SEC instituted proceedings and accepted Western Asset Management's settlement offer related to trade allocation failures from January 2021 through October 2023 involving hundreds of millions of dollars.
Former co-chief investment officer Stephen Kenneth Leech II allegedly ran a cherry-picking scheme, allocating first-day gains to favored portfolios and losses to disfavored portfolios.
Western Asset willfully violated Sections 206(2) and 206(4) of the Advisers Act, facing sanctions that reinforce regulatory focus on trade allocation controls and compliance for U.S. asset managers.

SEC settlement and alleged control failures

As reported by the Securities and Exchange Commission, the agency has instituted public administrative and cease-and-desist proceedings against Western Asset Management Company, LLC and accepted the firm's Offer of Settlement in advance of those proceedings.

The SEC says the case stems from Western Asset's conduct in relation to its former co-chief investment officer, Stephen Kenneth Leech II. In November 2024, the Commission charged Leech in district court with carrying out a cherry-picking scheme by disproportionately allocating trades with net realized and unrealized first-day gains to favored portfolios, while assigning trades with first-day losses to disfavored portfolios.

According to the order, the alleged scheme runs from January 2021 through October 2023 and involves hundreds of millions of dollars in trades. The Commission says Western Asset knew Leech's trading practices diverged from those of other firm personnel but did not take reasonable steps to detect and prevent the conduct or confirm that those actions matched its fiduciary duties and client disclosures.

Advisers Act violations and market implications

The SEC states that Western Asset willfully violated Sections 206(2) and 206(4) of the Advisers Act. The Commission says the sanctions are appropriate and in the public interest based on the conduct described in the order.

The case highlights regulatory pressure on investment advisers to maintain controls over trade allocation, portfolio oversight and compliance monitoring. For asset managers in the U.S., the action underscores that firms can face enforcement consequences not only for fraudulent activity by senior investment staff, but also for failing to identify and stop conduct that conflicts with fiduciary obligations.

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