Investment Adviser Compliance Tip – Supervising Personal Securities Transactions

July 25, 2011

When establishing a compliance program, an investment adviser is required to review and monitor the personal securities transactions by “access persons” in order to prevent inappropriate trading.

In order to supervise personal securities transactions, the first question is determining which individuals are access persons.  The U.S. Securities and Exchange Commission (“SEC”) defines an “access person” as any supervised person:

(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.

In essence, these individuals are considered access persons by the SEC because they are in the position to inappropriately utilize client information.  This typically includes all of the investment adviser’s employees in addition to its directors, officers, investment adviser representatives (IARs) and any employees of the IARs (if IARs are independent contractors).

Once an investment adviser has determined its access persons, the next step is to establish a procedure for supervising the personal securities transactions of those identified as access persons. An access person is required to report his or her personal securities holdings (existing securities positions) to the investment adviser upon becoming an access person and on an annual basis thereafter. In addition, each access person needs to report his or her personal securities transactions (direct and indirect beneficial ownership) within 30 days of the end of each calendar quarter. All private placements and initial public offering of the access person must be pre-approved by your investment adviser.

RIA Compliance Consultants recommends that these personal securities transactions and holdings be placed in a database so that each access person’s records may be cross-referenced easily against the transactions of the investment advisory clients. An investment adviser should review these personal securities transactions for inappropriate conduct like front-running, scalping, insider trading or other misuses of confidential client information.  Also, depending on the investment adviser’s specific procedures, the investment adviser’s review should focus upon whether there are violations of any restricted lists, black-out periods, or other conditions placed on access person’s personal trading activities or holdings.

Finally, the investment adviser must maintain the following records for the last five years: lists of its access persons; each quarterly personal securities transactions report and initial and annual personal securities holdings report made by an access person; the review and approval of each personal securities transactions or holdings report; any violation and corrective action; and any decision and supporting reasons to approve any initial public offering or private placement for an access person.

If you would like to purchase a sample policy and procedure for supervising personal securities transactions, please contact us at your convenience.

Posted by Bryan Hill
Labels: Compliance Program, Compliance Training, PST, Record Keeping