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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.