Personal Accounts: Rule 407 and You

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Nathan is partner and Tiffany A. The Securities and Exchange Commission for the first time brought charges against a broker-dealer for failure to adequately protect against insider trading by its employees. The SEC previously charged the broker with insider trading in a separate action.

The broker-dealer that broker dealer personal trading policy the broker settled charges of violations of the securities laws for failing to adequately establish, maintain, and enforce policies and procedures reasonably designed to prevent insider trading by employees with access to confidential client information. Sincethe federal securities laws have required broker-dealers to establish, maintain, and enforce written policies and procedures, consistent with the nature of their business, to prevent the misuse of material broker dealer personal trading policy information.

The policies and procedures must be tailored to the specific circumstances of the business, and broker-dealers and investment advisers must not only adopt such procedures but also vigilantly review, update, and enforce them. These various channels of obtaining MNPI and the risks of potential misuse make monitoring of trading by the firm, its registered representatives, and its customers critical to complying with the supervision requirements.

In its settlement order, the SEC found that the broker-dealer, failed to establish, maintain, and enforce policies and procedures reasonably designed to prevent the misuse of MNPI, specifically, any MNPI obtained from its customers and advisory clients. Inthe risk became reality when a registered representative of the firm used information from one of his customers before the information was publicly announced.

The representative traded on the basis of that information and also tipped others, including several customers of the broker-dealer. Among other things, the firm did not provide appropriate guidance on actions to be taken by employees with respect to:. The firm also failed to implement the policies and procedures in several ways, according to the Order.

Because the policies and procedures implemented by the broker-dealer did not assign responsibility to particular units and did not address coordination, in the instance of insider trading underlying this action, each broker dealer personal trading policy the units failed to: The SEC found that the compliance officer responsible for the look-back procedure incorrectly concluded, in reviewing the particular trading broker dealer personal trading policy issue, that several suspicious factors were not red flags.

These included the fact that the broker and his customers had purchased the subject securities within 10 days before the announcement of the acquisition, and that their purchases were the top four positions in those securities across the entire firm. Accordingly, the compliance officer failed to escalate the matter or contact the branch, and closed the review with no findings. Because of that disposition, her supervisors were unaware that the review had been conducted and failed to coordinate with other departments in the firm, including the anti-money laundering group, and the central unit that reviewed trade data, which also had received indications suggesting the misuses of Broker dealer personal trading policy by the representative in the particular security.

Means of doing so include: As stated, regulators have emphasized this area, and if past trends are any indication, they will seek to build on this case by looking for other control systems failures. Indeed, any instance of insider trading by a registered representative is likely to prompt an investigation of any gaps that might have failed to detect it.

Firms risk getting swept up in the vortex surrounding prosecution of insider trading. To avoid it, they should ensure that their policies and procedures reflect all of the applicable guidance, and that those broker dealer personal trading policy and procedures are being implemented appropriately.

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Stay informed on the latest business law practice news and information that will benefit you and your clients. Rowe About the Authors: Among other things, the firm did not provide appropriate guidance on actions to be taken by employees with respect to: For a period broker dealer personal trading policy 10 months, the compliance department failed to perform reviews in a timely manner of at least 40 instances of suspected insider trading flagged for review; The procedures requiring the reviewer to print news stories for the review file was not consistently met and doing so was not an adequate means of ensuring enforcement; The requirement that the reviewer contact the branch if any red flags were found was not enforced.

Recognize the significance of the indications of insider trading; Properly consider those indications; and Elevate those indications within their own group or communicate with other groups responsible for surveillance of trading activity. The potential procedural gaps that firms should look for include: The failure to devote sufficient personnel to regular review of trading prior to material public announcements; Insufficient communication, cooperation, and assignment of responsibility among groups or units with overlapping responsibility regarding insider trading policies and procedures; Inconsistencies in application of policies and procedures; and Insufficient guidance to compliance personnel responsible for those policies and procedures.

The guidance should be broker dealer personal trading policy specific as possible, and those carrying out the policies should be closely supervised. Print Feedback A A. New Broker dealer personal trading policy Analytics Committee! Basics of Accounting for Broker dealer personal trading policy

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Posted by RIA in a Box. Earlier this year, the SEC released a National Exam Program Risk Alert which listed "access persons not identified" and "untimely submission of transactions and holdings" as two of the most common regulatory deficiencies discovered during regulatory examinations.

Additionally, the SEC staff provided this additional guidance in regards to identifying "access persons":. Access persons will include portfolio management personnel and, in some organizations, client service representatives who communicate investment advice to clients. These employees have information about investment recommendations whose effect may not yet be felt in the marketplace; as such, they may be in a position to take advantage of their inside knowledge.

Administrative, technical, and clerical personnel may also be access persons if their functions or duties give them access to nonpublic information. 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. Furthermore, the Code of Ethics Rule requires that holdings and transactions reports be filed for "each reportable security in which the access person has any direct or indirect beneficial ownership.

In regards to the content and timing of holdings report submissions, the Code of Ethics Rule states the following:. In relation to the content and timing of transaction report submissions, the Code of Ethics Rule states the following: The Code of Ethics Rule requires that " your access persons to obtain your approval before they directly or indirectly acquire beneficial ownership in any security in an initial public offering or in a limited offering.

It's also important to note that many private fund investments such as a hedge fund or private equity investment fall under the definition of a "limited offering. In general, RIA firms should be careful to ensure that all potential "reportable securities" are properly disclosed, recorded, and reviewed. For example, SEC staff has previously provided guidance " that investment advisers consider treating open-end exchange-traded fund "ETF" shares as Reportable Securities.

Rule , the "Books and Records Rule" requires the following in regards to personal securities recordkeeping for access persons: In regards to books and records requirements related to the Code of Ethics Rule, SEC staff has also provided this additional commentary:.

The standard retention period required for books and records under rule is five years, in an easily accessible place, the first two years in an appropriate office of the investment adviser. Advisers must maintain the records required under amended rule a 12 and 13 for this standard period, subject to special holding requirements for certain categories of records as specified in amended rule a 12 and Codes of ethics must be kept for five years after the last date they were in effect.

Supervised person acknowledgements of the code must be kept for five years after the individual ceases to be a supervised person. Similarly, the list of access persons must include every person who was an access person at any time within the past five years, even if some of them are no longer access persons of the adviser. As it relates to employee securities trading, monitoring, and reporting, the principals and CCO of RIA firms should consider this SEC staff guidance in relation to crafting personal securities trading policies and procedures: However, it's important to note that simply establishing tailored and robust policies and procedures is not enough.

The CCO of RIA firms needs to not only establish such policies and procedures but also ensure that they are properly implemented. CCOs should ensure that not only all required reports are being submitted by all properly identified access persons, but also that all reports, pre-clearance approvals, and trading activity are being carefully reviewed and monitored. You should always consult your relevant regulatory authorities or legal counsel if applicable. Hear from industry experts as they keep you up to date on the latest regulatory developments and practice management topics.

You should always consult your relevant regulatory authorities as this information should not be relied upon as currently accurate.

This information is provided for educational purposes only and is not an exhaustive list of regulatory requirements. Who is considered an access person? The Code of Ethics Rule defines an "access person" as follows: A Who has access to nonpublic information regarding any clients' purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any reportable fund, or B Who is involved in making securities recommendations to clients, or who has access to such recommendations that are nonpublic.

Additionally, the SEC staff provided this additional guidance in regards to identifying "access persons": Each holdings report must contain, at a minimum: Your access persons must each submit a holdings report: Each transaction report must contain, at a minimum, the following information about each transaction involving a reportable security in which the access person had, or as a result of the transaction acquired, any direct or indirect beneficial ownership: Each access person must submit a transaction report no later than 30 days after the end of each calendar quarter, which report must cover, at a minimum, all transactions during the quarter.

Trade or Investment Pre-Approval The Code of Ethics Rule requires that " your access persons to obtain your approval before they directly or indirectly acquire beneficial ownership in any security in an initial public offering or in a limited offering. In regards to books and records requirements related to the Code of Ethics Rule, SEC staff has also provided this additional commentary: Similarly, the list of access persons must include every person who was an access person at any time within the past five years, even if some of them are no longer access persons of the adviser Compliance Best Practices As it relates to employee securities trading, monitoring, and reporting, the principals and CCO of RIA firms should consider this SEC staff guidance in relation to crafting personal securities trading policies and procedures: Prior written approval before access persons can place a personal securities transaction "pre-clearance".

Maintenance of lists of issuers of securities that the advisory firm is analyzing or recommending for client transactions, and prohibitions on personal trading in securities of those issuers. Maintenance of "restricted lists" of issuers about which the advisory firm has inside information, and prohibitions on any trading personal or for clients in securities of those issuers. Reminders that investment opportunities must be offered first to clients before the adviser or its employees may act on them, and procedures to implement this principle.

Prohibitions or restrictions on "short-swing" trading and market timing. Requirements to trade only through certain brokers, or limitations on the number of brokerage accounts permitted. Requirements to provide the adviser with duplicate trade confirmations and account statements.

Procedures for assigning new securities analyses to employees whose personal holdings do not present apparent conflicts of interest. Subscribe to Email Updates.

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