More On Legal & Compliancefrom The Advisor's Professional Library
- The New and Improved Form ADV Whether an RIA is describing its investment strategy in advertisements or in the new Form ADV Part 2, it is important the firm articulates material risks faced by advisory clients and avoids language that might be construed as a guarantee.
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
The Securities and Exchange Commission on Monday released a Risk Alert to help firms prevent and detect unauthorized trading in brokerage and advisory accounts.
The Risk Alert issued by the agency’s Office of Compliance Inspections and Examinations notes that although broker-dealers and investment advisors are subject to different regulatory requirements, both face similar risks of financial and reputational losses arising from unauthorized trading.
Says the SEC: “Unauthorized trading can include rogue trades in customer, client, or proprietary accounts or trades that exceed firm limits on position exposures, risk tolerances, and losses. Unauthorized trading can be done by traders, assistants on trading desks, portfolio managers, brokers, risk managers, or other personnel, including those in administrative positions in a firm’s back office.”
Carlo di Florio, director of OCIE, said in a statement announcing the alert that “unauthorized trading is not a new problem, and the risks it poses should be a perennial concern to financial firms as well as to regulators.” The Risk Alert’s observations should be helpful for firms “as they review their compliance and supervisory controls to detect and deter unauthorized trading,” he said.
The alert notes that changes in trading patterns, a high volume of trade cancellations or corrections, manual trade adjustments, or unexplained profits for a particular trader or client may warrant additional scrutiny.
The alert suggests compliance measures that firms might want to use to protect themselves and their clients from unauthorized trading, such as stress testing and independent trading reviews, and also discusses policies that require traders to take vacations without remote access to trading accounts. These policies could be enhanced, for instance, by using the trader’s vacation to conduct a special review of the trader’s portfolio for signs of unusual activity.
The alert is the second one issued this year and the fourth in a continuing series of Risk Alerts that the SEC’s examination staff expects to issue, the SEC says.