Learn why employee trade monitoring is important for you RIA firm and best practices to follow.
The tracking of employee transactions and holdings is a key regulator focus area that if done manually is a time-consuming and high-risk task. The SEC’s Rule 204a-1 or the “Code of Ethics”, requires all persons of a registered investment advisor firm to submit securities holdings and transaction reports to the firm's Chief Compliance Officer or other designated person(s). Firms need to carefully manage their employees' transactions and holdings to mitigate risk and remain compliant.
Now is a great time to review your Code of Ethics and Policies and Procedures to ensure a culture of compliance around personal trading. As access persons have access to confidential client and investor information, it is critical that these persons are acting ethically and in the best interest of the clients. Furthermore, it is important to review your tech stack to ensure you have the best tool in place to detect and respond to potential trading violations efficiently and effectively.
To help create a culture of compliance and understanding regarding personal trading, we recommend implementing the following best practices:
- Validate that all employees have reviewed and attested to your firm’s Code of Ethics. Furthermore, develop Policies and Procedures that ensure ethical trading behavior from your employees. This includes regular reviewing and monitoring of the accounts, holdings, and transactions of your employees and their family members.
- Employ a technology solution to automatically record, monitor, and consolidate employee personal securities transactions and reduce errors related to manual entry and review.
- Proactively identify and resolve potential trading violations by setting up alerts to be notified in real-time of any potential Code of Ethics breaches.
- Establish an electronic data feed and ensure broker feeds are connected and secure.
- Ensure trade limits and restricted lists are updated and maintained.
- In periods of increased trading, consider if more frequent surveillance is right for your firm.
- Remind staff that compliance must remain at the forefront of their minds. Firms need to carefully manage their employees' transactions and holdings to mitigate risk and remain compliant.
- Automate the personal trading pre-clearance process with trade limits and restricted lists.