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Monitoring Employee Trades and Reporting

Sunday, September 3, 2017

Rule 204A-1 requires each adviser’s code of ethics to set forth a standard of business conduct that the adviser requires of all its supervised persons. Each adviser’s code of ethics must require an adviser’s “access persons” to periodically report their personal securities transactions and holdings to the adviser’s chief compliance officer or other designated persons. Earlier this year as part of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) risk alert, two of the most common deficiencies were “access persons not identified” and “untimely submission of transactions and holdings”.

Rule 204A-1 defines “access person” as – A supervised person who has access to nonpublic information regarding clients’ purchase or sale of securities, is involved in making securities recommendations to clients or who has access to such recommendations that are nonpublic. A supervised person who has access to nonpublic information regarding the portfolio holdings of affiliated mutual funds is also an access person. Access persons will include portfolio management personnel and, in some organizations, client service representatives who communicate investment advice to clients. Additionally, in many advisory firms, directors, officers and partners will also be access persons.

One key takeaway from the SEC rule is that organizations in which employees have broad responsibilities, and where information barriers are few, may see a larger percentage of their staff subject to the reporting requirements. In contrast, organizations that keep strict controls on sensitive information may have fewer access persons.

The content and timing of required submissions are as follows:

Initial and Annual Reports – The code of ethics must require a complete report of each access person’s securities holdings, at the time the person becomes an access person and at least once a year thereafter.

Quarterly Reports – The code of ethics must require quarterly reports of all personal securities transactions by access persons, which are due no later than 30 days after the close of the calendar quarter. The code of ethics may excuse access persons from submitting transaction reports that would duplicate information contained in trade confirmations or account statements that the adviser holds in its records, provided the adviser has received those confirmations or statements not later than 30 days after the close of the calendar quarter in which the transaction takes place.

Exceptions – The rule permits three exceptions:

  • Transactions effected pursuant to an automatic investment plan.
  • Securities held in accounts over which the access person had no direct or indirect influence or control.
  • When an advisory firm that has only one access person, they just need to maintain records of the holdings and transactions that rule 204A-1 would otherwise require be reported.

Reportable Securities – The rule treats all securities as reportable except the following:

  • Transactions and holdings in direct obligations of the Government of the United States.
  • Money market instruments — bankers’ acceptances, bank certificates of deposit, commercial paper, repurchase agreements and other high quality short-term debt instruments.
  • Shares of money market funds.
  • Transactions and holdings in shares of other types of mutual funds, unless the adviser or a control affiliate acts as the investment adviser or principal underwriter for the fund.
  • Transactions in units of a unit investment trust if the unit investment trust is invested exclusively in unaffiliated mutual funds.

To read more about best practices, content requirements and full details – Rule 204A-1. You can also give us a call and we will be happy to help guide you through the process.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.

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