The Securities and Exchange Commission’s (SEC) Rule 204a-1 or the “Code of Ethics,” requires all persons of a registered investment adviser (RIA) firm to submit securities holdings and transaction reports to the firm’s chief compliance officer (CCO) or other designated person(s). In order to mitigate potential risk, RIA firms must carefully manage their employee’s transactions and holdings, implementing a thorough preclearance and monitoring process.
Frequently asked questions about employee trade monitoring for RIA firms
To help your investment firm create a culture of compliance and understanding regarding personal trading, we’ve gathered and answered some frequently asked questions about employee trade monitoring.
- What regulation(s) require RIAs to monitor employee trades?
The SEC’s Rule 204a-1 or the “Code of Ethics” requires all persons of an RIA firm to submit securities holdings and transaction reports to the firm’s CCO or other designated person(s).
- What are regulators’ expectations around employee trade surveillance?
As a result of the COVID-19 pandemic and the trend toward remote work, RIA firms are now expected to capture and analyze trade data and communications from any location of their regulated employees.
RIA firms are expected to submit accurate transaction data to regulators under the reporting requirements. They also recognize that market abuse rapidly changes as criminals adopt new tactics. Therefore, regulators expect RIA firms to be flexible and adaptive in how they perform trade surveillance and detect and respond to new risks and threats. Regulators also expect RIA firms to maintain appropriate documentation and an audit trail for all preclearance and monitoring so they are readily available during examinations.
- What should be included in an RIA’s employee trade monitoring process?
An RIA firm’s employee trade monitoring process should include a means of recording, monitoring and consolidating employee personal securities and transactions in one location which is easy to access in times of review or examinations.
Firms are also encouraged to determine preclearance rules, or pre-approval rules. This is a process where employees request permission from their employers to purchase securities and other products. Having preclearance rules in place for employees’ personal trading saves compliance teams time in examining those trades to determine whether they are in compliance with the Code of Ethics.
- What is an appropriate preclearance process for employee trading?
Each RIA firm will have its own rules as to how the preclearance process works. However, it is common practice for employees to be restricted from investing in certain issuers or various types of financial products. There might also be different rules for different departments at the RIA firm, if certain designated employee groups, such as the board of directions, are considered high risk for employee trading violations.
- Is my firm obligated to keep a preclearance list?
While a preclearance list isn’t mandatory, it helps employees understand what transactions and holdings are permitted and ensures compliance with the regulations.
- What is the regulatory risk?
Regulatory risks are high at any RIA firm. Having a robust and enforceable Code of Ethics which encompasses employee trade monitoring helps reduce risk and ultimately prevents any reputation-damaging actions by employees.
- How do I level up my firm’s preclearance process?
Automating your RIA firm’s preclearance process can be a game changer. Automation allows your firm to:
- Streamline the transactions, holdings and accounts attestations process.
- Proactively identify and resolve potential trading and firm-level policy violations by automatically flagging potential violations.
- Automate the personal trading preclearance process.
- Minimize regulatory risks with seamless integration capabilities.
RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.
