More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
The demands of keeping up with a growing practice—adding staff, adding clients, meeting regulatory requirements—can become burdensome. As practices grow, many look for operational efficiency gains in all aspects of the business, one of which is monitoring personal trading.
As you know, SEC and FINRA regulations require investment advisors, broker/dealers, hedge funds and other asset managers to supervise employee personal trading activity.
Advisor activities at RIA firms are governed by Rule 204A-1 under the Investment Advisoers Act of 1940 which requires the establishment, maintenance and enforcement of a written Code of Ethics. This Code of Ethics includes provisions that require “access persons” to report their personal securities transactions and holdings periodically.
Rules regarding personal trading for registered representatives of a broker-dealer are spelled out in NASD Rule 3050 and NYSE Rule 407.
Small Firm Personal Trading Compliance
To ensure compliance with regulations, firms gather information on employees’ personal accounts from hard-copy statements, an emailed PDF or electronic feed a few days after the settlement date of a transaction. Manually scanning for restricted securities or trades during black-out periods can pinpoint inadvertent issues that could cause a regulatory problem.
To cut down on the manual process of collecting and monitoring this activity, many firms restrict employee trading to a single (or limited number of) brokerage institution(s) where electronic access is available. Others may also adopt the approach of using their portfolio management system (PMS) for manually tracking employee trades.
Restricting employee trading to specific brokerages can be a barrier to attracting top talent as the practice grows. Moreover. tracking trades in a PMS is still a manual and potentially time consuming activity.
Recognizing the Burdens of Growth
As the co-founder of four businesses, I can tell you from firsthand experience that there comes a point in the lifecycle of a business when running a firm can distract you from growing it. It is the responsibility of the CEO/founder/owner to recognize this pivotal point (or have it brought to his/her attention) and then to introduce needed operational efficiencies.
Though it can differ by the firm, in many cases when an advisory practice surpasses a handful of employees, monitoring personal trading can become a distraction from spending more time with clients or more time on marketing and business development activities. Often this is the point that many firms consider using a rules-based platform – an employee trade tracking tool.
There are several providers of rules-based personal trading software. Many offer a variety of services and support—from pre-clearance authorization, to transaction review, to reporting— to help ensure documented compliance for firms subject to personal trading regulations.
Advisory practices that are ready to use employee trade tracking tools to scale for growth face the task of making smart decisions for the future of their practice. Consider the following:
- How many accounts do you need to monitor on a daily basis?
- Do you need access to accounts in brokerages where no direct feed is available?
- Do you need a tool that provides access to thousands of brokerages?
If you need access to multiple brokerages, another consideration when evaluating solutions is whether a personal trading software provider offers integrations with data aggregation services. With data aggregation built into the tool, not only do transactions and holdings flow into the system daily, but they also have the ability to retrieve data from literally thousands of custodians; as opposed to a the limited, fixed number of institutions otherwise accessible to applications without an integration with an aggregation provider.
What’s more, no additional paperwork or authorization agreement with the carrying brokerage may be necessary. Aggregation services also solve the problem of monitoring trades in a scalable way.
As a CEO, I am always on the look-out for operational efficiency gains, because at the end of the day, my goal is to create a smoothly running business that can be effectively scaled for growth. With the right solution to fit the needs of the firm, using technology can be the right move, especially when adding staff isn’t scalable.
Do yourself a favor by investigating services that could save you time in the future.
If you’d like more information on personal trading monitoring, click here to read my interview with Dan Bernstein, director of research and development at MarketCounsel: “PERSONAL TRADE MONITORING: Compliance Officers Implement Leading Practices to Better Manage Risk”