Investment Advisers Must Develop Strong Insider Trading Policies and Procedures

April 10, 2013

According to the U.S. Securities and Exchange Commission’s (“SEC”) website, “Insider trading continues to be a high priority area for the SEC’s enforcement program. The SEC brought 58 insider trading actions in FY 2012 against 131 individuals and entities.  Over the last three years, the SEC has filed more insider trading actions (168 total) than in any three-year period in the agency’s history.”  Improper use of inside information when conducting any securities transaction is a serious violation of securities law. Section 204A under the Investment Advisers Act of 1940 (“Investment Advisers Act”)  requires SEC registered investment advisers to “…establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of such investment adviser’s business, to prevent the misuse…of material, nonpublic information by such investment adviser or person associated with such investment adviser.”  Most state securities regulators have the same requirements.  Investment advisers should note that this requirement is much broader than the SEC’s personal securities transaction reporting and supervision requirement under Rule 204A-1 (“Code of Ethics Rule”) of the Investment Advisers Act.

An investment adviser must develop strong internal policies and procedures in order to protect the investment adviser from possible insider trading violations.  As with any internal policies and procedures, an investment adviser must customize its insider trading policies and procedures to the investment adviser’s business model and circumstances.  The SEC has taken actions against investment advisers for not having adequate insider trading policies and procedures, even when there were no apparent signs of wrongdoing or misuse of material, non-public information.  Typically, these actions were taken because the SEC appeared to believe that the investment adviser did not have adequate policies and procedures in place for the investment adviser’s business model or the policies and procedures that were in place were not being properly implemented.  Although the insider trading policies and procedures must cover more than just the reporting and supervision of personal securities transactions, these are some important steps involved in helping to monitor for potential insider trading violations.  The following are some other policies and procedures investment advisers should consider when developing their insider trading policies and procedures:

  • Obtain a signed acknowledgement initially and on an annual basis from all supervised persons acknowledging that they have read, understand and agree to comply with the investment adviser’s written policies and procedures or insider trading policies and procedures (may be included in the investment adviser’s written supervisory policies and procedures manual or be a separate document);
  • Provide ongoing, at least annually, training specifically related to the regulations related to insider trading violations and the investment adviser’s insider trading policies and procedures;
  • Implement policies and procedures to limit access regarding material, non-public information obtained by the investment adviser to those supervised persons with a need to know such information (commonly referred to as a “Chinese Wall”);
  • Conduct an annual survey of the investment adviser’s supervised persons to request information regarding any public company affiliations;
  • Implement restricted lists, watch lists and/or blackout periods;
  • Monitor email of supervised persons for references to public companies on the investment adviser’s restricted or watch lists; and
  • Utilize software that compares certain trades in personal or client accounts against market news or significant price changes for potential insider trading.

There is no one-size-fits-all approach when an investment adviser is developing its internal policies and procedures.  When an investment adviser is developing its insider trading and personal securities transactions policies and procedures, the investment adviser needs to take into consideration a number of factors including the investment adviser’s ability to obtain insider information from outside sources such as business partners, vendors, or clients.

RIA Compliance Consultants has developed several sample forms to assist investment advisers with the recordkeeping requirements and supervision related to personal securities transactions.  Forms that may assist your investment adviser concerning supervision of personal securities transactions include, brokerage account disclosures forms, annual/initial personal securities holding report, quarterly personal securities transaction report or personal securities trading request form.  Simply click on the form name to purchase a copy of the sample form through our online store.

RIA Compliance Consultants is hosting a webinar, “Learning from Other’s Mistakes,” On April 18, 2013, at 12:00 CDT. The cost of this webinar is $69.95. During this webinar RIA Compliance Consultants will provide a summary and analysis of some recent SEC enforcement actions. Our consultants will discuss the lessons that can be learned from these enforcement actions and will provide guidance regarding policies and procedures an investment adviser could implement to help it avoid ending up with a similar problem. For more information or to register for this event, click here.

Posted by Bryan Hill
Labels: Compliance Forms, Insider Trading, PST, Written Policies and Procedures