ledgerOur blog recently discussed how soft dollar arrangements can impact the bottom line for both advisers and investors, and therefore require adequate disclosure. Other compliance requirements involve non-client facing operations, but are equally important to monitoring and protecting against conflicts of interest. The Personal Trading Policy is one such requirement.

The Investment Advisers Act and the Code of Ethics rules adopted thereunder mandate that advisers have a personal trading policy to protect against misuse of material non-public information, such as timing trades to disadvantage clients, or the market itself- both breaches of fiduciary duty. The rule requires employees with access to such information to report personal securities holdings and transactions for the adviser to maintain and periodically review.

The Adviser must, first, determine which employees are “access persons”. Generally, an employee will be an “access person” if that person: a) has access to nonpublic information regarding clients’ transactions or portfolio holdings, and/or b) makes, or has access to, securities recommendations to clients. This includes not only those making the recommendations or accessing client information, but their supervisors, and company partners, officers and directors as well.

Advisers should be requesting access persons to report holdings within 10 days of assuming an “access” role, and seeking annually certification of holdings and interests (these may include others in their household). The Adviser’s Code should also require access persons to report personal trading of reportable securities on a quarterly basis, thereafter. Finally, Adviser’s are obligated to keep adequate books and records to show compliance with these requirements, and efforts to monitor trading. Many access persons meet reporting requirements by having duplicate trading statements sent directly to the adviser, while other firms require that employee trading accounts be held by an affiliate of the firm (where existing). Careful manual or automated surveillance will look for both trading in securities in common with clients, or impacted thereby (ie. options trades), or other peculiar transactions that precede market movements.

There are also classes of securities, such as money market funds or government securities, which represent a low risk for trading abuses and, therefore, are exempted from the reporting requirement. Though the Code must also require pre-clearance for access persons to participate in IPOs or certain private offerings, many firms have broader restrictions.

In our next blog post installment, we will be exploring the topic of proprietary trading.

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