As we’ve previously discussed, Rule 204A-1 (“Code of Ethics Rule”) requires registered investment adviser (RIA) firms to “establish, maintain and enforce a written code of ethics.” A key element of the Code of Ethics Rule relates to personal securities trading by requiring all access persons of an advisory firm to submit securities holdings and transaction reports to the firm’s Chief Compliance Officer (CCO) or other designated person(s). On February 7, 2017, 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.
How do RIA firms monitor and record access person securities trading?
In our observations, we generally see RIA firms address this regulatory requirement in one of three ways:
Collect and review paper brokerage statements
Walk into most RIA firm offices with more than 5 to 10 access persons and there is often a stack of paper brokerage statements in the Chief Compliance Officer’s office. This approach is problematic for a number of reasons including:
- Highly inefficient to review each statement manually
- Very challenging to identify potential Code of Ethics violations as the securities trading information is not aggregated or organized
- Very difficult to keep track of all access person’s information to ensure timely submission of transactions and holdings reports
- Potential information security issues as statements may contain sensitive personal information
- Expensive to retain, store, and archive large amounts of paper
Have employees complete and submit paper or electronic templates
Some RIA firms have designed standard paper or electronic templates (e.g. spreadsheets) in order to help streamline the submission process. Some challenges related to this approach include:
- Time consuming for access persons to gather and organize this information into the proper submission format
- Difficult for the Chief Compliance Officer to verify if the submitted information is complete and accurate
- Highly labor intensive to aggregate all the reports together to create a master report of all access person securities trading information
- Still often requires the use of paper which is expensive to retain, store, and archive
Utilize a legacy employee trade monitoring software platform primarily designed for large institutions
Employee trade monitoring software has existed for quite some time. However, most RIA firms have not adopted such software for a number of reasons including:
- For most RIA firms, it is too expensive financially to implement
- Most systems were designed many years ago utilizing legacy technology and thus the user experience is generally poor at best
- Many systems do not have the ability to easily access data from more than only the most commonly utilized brokerage institutions and thus many access person brokerage accounts cannot be automatically accessed
- Most systems have been designed for large institutions and thus the features may not be relevant to traditional RIA firms
- The implementation process can take months if not longer to gain access to access person securities data
- The systems exclusively focus on employee trade monitoring and thus require employees to “use yet another technology system” often leading to poor user adoption across the firm
Another reality is that a number of investment advisory firms simply aren’t meeting this Code of Ethics Rule requirement today. As highlighted by the SEC National Exam Program Risk Alert, this is likely an area that will received increased regulatory scrutiny in the coming years due the volume of compliance deficiencies which have been discovered during recent regulatory audits.
Why We Built the MyRIACompliance Automated Employee Trade Monitoring Tool
Given increased regulatory scrutiny and recent advancements in technology, we saw there was a clear opportunity to build a much better employee trade monitoring tool designed exclusively for RIA firms. With electronic data feeds to over 15,000 financial institutions, the MyRIACompliance® employee trade monitoring tool automates the submission and tracking of personal securities holdings and transactions. In addition, the tool eliminates the need to review and store paper brokerage statements by consolidating employees’ personal securities transactions into a single online compliance reporting system.
The automated employee trade monitoring tool’s features include:
- Instant electronic access to over 15,000 financial institutions
- Robust Chief Compliance Officer supervision, administration, and reporting capabilities
- Ability to view all access person transactions and holdings in a consolidated online system
- Digitization of employee trade submission, pre-clearance, review, and monitoring
- Simple interface for access persons to electronically link applicable personal brokerage accounts
Historically, this type of technology has been too cumbersome and expensive for the vast majority of RIA firms to consider. Now, many more firms have the ability to automate a key compliance requirement. Furthermore, the employee trade monitoring tool is fully integrated into the broader MyRIACompliance® software platform which helps RIA firms to manage all of the firm’s regulatory requirements within a single system with one login.
COMPLYTM is not a law firm, investment advisory firm, or CPA firm. COMPLY does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.