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.