As a UK-based financial firm, you likely follow regulations in accordance with the Financial Conduct Authority (FCA). However, for those firms looking to dually register with both the FCA and the Securities and Exchange Commission (SEC), it is essential to have a clear understanding of the difference in requirements and obligations placed on your compliance department by the regulatory bodies. In this blog, we will explore the difference in how the SEC and FCA handle personal account dealings and what your firm can do to set yourself up for success when submitting for SEC registration from the UK.
FCA personal account dealing requirements
While you are likely familiar with requirements set by the FCA for personal account dealings, let’s take a moment to review. According to the FCA, “A firm that conducts designated investment business must establish, implement and maintain adequate arrangements aimed at preventing the following activities in the case of any relevant person who is involved in activities that may give rise to a conflict of interest, or who has access to inside information as defined in the Market Abuse Regulation or to other confidential information relating to clients or transactions with or for clients by virtue of an activity carried out by him or her on behalf of the firm:
(1) Entering into a personal transaction which meets at least one of the following criteria:
(a) That person is prohibited from entering into it under the Market Abuse Regulation.
(b) It involves the misuse or improper disclosure of that confidential information.
(c) It conflicts or is likely to conflict with an obligation of the firm to a customer under the regulatory system or any other obligation of the firm under MiFID or the UCITS Directive.
(2) Advising or procuring, other than in the proper course of his employment or contract for services, any other person to enter into a transaction in designated investments which, if a personal transaction of the relevant person, would be covered by (1) or a relevant provision.
(3) Disclosing, other than in the normal course of his or her employment or contract for services, any information or opinion to any other person if the relevant person knows, or reasonably ought to know, that as a result of that disclosure that other person will or would be likely to take either of the following steps:
(a) To enter into a transaction in designated investments which, if a personal transaction of the relevant person, would be covered by (1) or a relevant provision.
(b) To advise or procure another person to enter into such a transaction.”
SEC personal account dealing requirements
The SEC, on the other hand, states, “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.13 The code of ethics must also require the adviser to review those reports.14 Reviewing these reports will allow advisers as well as the Commission’s examination staff to identify improper trades or patterns of trading by access persons. The reports are modeled largely on those required by rule 17j-1 under the Company Act.”
Although similar, it is critical for UK-based financial firms to have a clear understanding of how the requirements under the SEC differ from those of the FCA. When registered with the SEC, the regulatory body will look to ensure your firm functions in accordance with the regulations as stated by their ruling.
Specifically, the SEC requires:
- 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.
- “Blackout periods” when client securities trades are being placed or recommendations are being made and access persons are not permitted to place personal securities transactions.
- 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.
Additionally, the SEC requires specific reporting in conjunction with access persons, initial and annual holdings and quarterly transactions.
SEC registration for UK firms: Integrating technology to help streamline your compliance globally
Firms dually registered with both the FCA and SEC face increased risk of noncompliance, due in large part, to the fact that those firms must comply with both regulatory bodies’ rules and regulations. As a regulatory compliance partner serving both the UK and U.S. markets, ComplySci understands the complexities which can often arise from dual registration.
With over 200 direct broker feeds, the ComplySci platform enables 360-degree monitoring of all employee personal trading activity, enabling compliance departments to mitigate risk and face the heightened scrutiny of not one, but two regulatory bodies.
Ready to see how we can help you achieve compliance across the pond and back? Let’s talk.