In an earlier blog posting, we discussed the fact that investment advisor firms must determine their access persons and ensure appropriate procedures are implemented to review all access persons’ household accounts. In their efforts to meet this requirement, many advisor firms have been asking exactly which types of securities holdings and transactions need to be reviewed.
In their final rule release, the SEC provided specific requirements under the Codes of Ethics rule. While an advisor firm may require access persons to report all securities, the SEC did provide an exception for five types of securities. According to the rule, the following types of securities are not required to be reported by access persons:
a. Transactions and holdings in direct obligations of the Government of the United States.
b. Money market instruments – bankers’ acceptances, bank certificates of deposit, commercial paper, repurchase agreements and other high quality short-term debt instruments.
c. Shares of money market funds.
d. Transactions and holdings in shares of other types of mutual funds, unless the adviser or a control affiliate acts as the investment adviser or principal underwriter for the fund. This exception includes
e. Transactions in units of a unit investment trust if the unit investment trust is invested exclusively in unaffiliated mutual funds. (This exception is designed to also cover the sub-accounts organized as unit investment trusts of a seperate account of a variable insurance contract.)
It is important to note that the rule does requires access persons to report shares of mutual funds advised by the advisor firm or one of its affiliates. The SEC obviously believes that this is necessary so advisor firms and the SEC, during routine examinations, can detect abusive trading by employees who have access to information about the mutual fund’s portfolio.
Does your firm have sufficient procedures in place to identify improper trades or patterns of trading by access persons? Is your CCO reviewing the personal securities transaction reports or have you designated another person to conduct the review? RIA Compliance Consultants is available to answer your questions on the review and supervision of personal accounts.