Investment Advisers Should Review Insider Trading Policies & Procedures
Although the recent report concerning possible insider trading by a public pension plan administrator conducted by the Division of Enforcement of the U.S. Securities and Exchange Commission ("SEC") involves an essentially unregulated money manager which is not subject to the Investment Advisers Act of 1940, it still offers an excellent opportunity for each registered investment adviser to review its policies and procedures regarding trading activity based upon material, non-public ("insider") information.
The Retirement Systems of Alabama ("RSA") administers approximately 20 public pension funds for various state and local government employees in Alabama. It utilized an in-house investment staff to manage approximately $30 billion of assets under management, and during the period in question, RSA had no policies, procedures or training to ensure compliance with federal securities laws including prohibitions against trading based upon insider information.
According to the SEC's report, during June 2005 through August 2005, RSA acquired non-public information of a prospective acquisition of Liberty Corporation by Raycom Media, Inc. for a substantial premium over Liberty's current market price. RSA obtained this insider information in connection with the possibility of RSA arranging to serve as a source of funding to Raycom for the acquisition. After acquiring this insider information and before it was known to the public, RSA purchased shares of Liberty, which resulted in a profit of approximately $700,000 to pension funds administered by RSA. While the SEC investigated this matter, RSA determined the identity of these sellers of Liberty shares and offered these sellers rescission, which included lost interest.
The SEC noted that most of RSA's personnel and officials did not understand their duties and responsibilities under federal securities laws including the prohibition against trading based upon insider information and failed to consult with its outside legal counsel who had federal securities law expertise. The SEC concluded that RSA could have prevented this trading activity if it had adequate policies, procedures and training to assure compliance with federal securities laws and the prohibitions against insider trading.
The SEC's reminder to investment managers of public and private pension plans should not go unheeded by registered investment advisers. Under Section 204A of the Investment Advisers Act of 1940, a registered investment adviser "... shall establish, maintain and enforce written policies and procedures reasonably designed ... to prevent the misuse ... of material, nonpublic information by such investment adviser or any person associated with such investment adviser." Has your registered investment adviser established and implemented such written policies and procedures?
Here are some issues that should be considered by your registered investment adviser:
The Retirement Systems of Alabama ("RSA") administers approximately 20 public pension funds for various state and local government employees in Alabama. It utilized an in-house investment staff to manage approximately $30 billion of assets under management, and during the period in question, RSA had no policies, procedures or training to ensure compliance with federal securities laws including prohibitions against trading based upon insider information.
According to the SEC's report, during June 2005 through August 2005, RSA acquired non-public information of a prospective acquisition of Liberty Corporation by Raycom Media, Inc. for a substantial premium over Liberty's current market price. RSA obtained this insider information in connection with the possibility of RSA arranging to serve as a source of funding to Raycom for the acquisition. After acquiring this insider information and before it was known to the public, RSA purchased shares of Liberty, which resulted in a profit of approximately $700,000 to pension funds administered by RSA. While the SEC investigated this matter, RSA determined the identity of these sellers of Liberty shares and offered these sellers rescission, which included lost interest.
The SEC noted that most of RSA's personnel and officials did not understand their duties and responsibilities under federal securities laws including the prohibition against trading based upon insider information and failed to consult with its outside legal counsel who had federal securities law expertise. The SEC concluded that RSA could have prevented this trading activity if it had adequate policies, procedures and training to assure compliance with federal securities laws and the prohibitions against insider trading.
The SEC's reminder to investment managers of public and private pension plans should not go unheeded by registered investment advisers. Under Section 204A of the Investment Advisers Act of 1940, a registered investment adviser "... shall establish, maintain and enforce written policies and procedures reasonably designed ... to prevent the misuse ... of material, nonpublic information by such investment adviser or any person associated with such investment adviser." Has your registered investment adviser established and implemented such written policies and procedures?
Here are some issues that should be considered by your registered investment adviser:
- Has your registered investment adviser designated in writing a staff person, such as the chief compliance officer ("CCO"), to be responsible for establishing, implementing and enforcing written insider trading policies and procedures?
- Does your registered investment adviser's insider trading policy require a supervised person to report acquisition of insider information or suspected insider information to the CCO and likewise require the CCO to determine and communicate the appropriate course of action for the supervised person?
- Does your registered investment adviser's insider trading policy require the CCO to confidentially document such disclosure of the acquisition of insider information and the communicated course of action?
- To the extent that the supervised person needs to communicate such insider information to other supervised person, doe your registered investment adviser have procedures to limit such disclosures and document such disclosures.
- Has your registered investment adviser held training concerning its insider policy and procedures with its supervised persons? Can your supervised persons correctly identify what constitutes potentially insider information and how such situations should be handled?
- Does your registered investment adviser have any clients that are a publicly traded company, a board director of publicly traded company, or a high level executives of a publicly traded company with significant concentrated positions within the company? If so, are the personal securities transaction by your supervised persons within such companies subject to an exception report, restricted securities list, pre-clearance procedure, or black-out period? Likewise, does the investment committee of your registered investment adviser use similar supervisory tools with respect to making investment recommendations or decisions for client accounts or proprietary funds or accounts?
RIA Compliance Consultants can help your registered investment adviser develop written insider trading policies and procedures so as to minimize the risk of its supervised person's misusing material, non-public information. Please contact us at 877-345-4034 if you're interested in discussing such services.
Labels: Insider Trading, Pensions, SEC
posted by bhill at 3:57 PM
SEC & DOL Provide Plan Fiduciaries with Questions for Pension Consultants
If your firm serves as a pension plan consultant, then you should be prepared to answer the questions recently offered by the SEC and Dept. of Labor (DOL) to plan fiduciaries.
As explained by the SEC, investment advisors that provide consulting services to pension plans have a fiduciary duty to offer "disinterested" advice and fully disclose any material conflicts. Last month the SEC released a report noting that based on the results of a sweep of pension consultants, there are serious concerns that some investment advisors are not appropriately disclosing potential conflicts, which may effect their objectivity.
With this in mind, the SEC and DOL are encouraging better disclosure of the conflicts within the pension consulting business. As we mentioned earlier, every investment advisor working with pensions should engage in a thorough review of its practices and disclosures in order to ensure that they are in compliance with the Investment Adviser Act of 1940 and Employee Retirement Income Security Act (ERISA).
As explained by the SEC, investment advisors that provide consulting services to pension plans have a fiduciary duty to offer "disinterested" advice and fully disclose any material conflicts. Last month the SEC released a report noting that based on the results of a sweep of pension consultants, there are serious concerns that some investment advisors are not appropriately disclosing potential conflicts, which may effect their objectivity.
With this in mind, the SEC and DOL are encouraging better disclosure of the conflicts within the pension consulting business. As we mentioned earlier, every investment advisor working with pensions should engage in a thorough review of its practices and disclosures in order to ensure that they are in compliance with the Investment Adviser Act of 1940 and Employee Retirement Income Security Act (ERISA).
Labels: Pensions
posted by bhill at 7:03 PM
Pension Consulting - Follow the Money!
With the SEC's recent focus upon pension consulting, it's incumbent upon the chief compliance officers of investment advisors to review again whether their firms are properly disclosing the conflicts of interest that may exist with their pension consulting services and then supervising, mitigating and/or eliminating such conflicts.
Since the relationships and apparent methods for compensation aren't always obvious, this may be a challenge for those compliance officers that aren't experts in this business line.
Our advice is to start this process by following the money. In other words, look at how your firm is being compensated. Is your firm receiving compensation directly from the pension client, or is the money manager paying indirect compensation to the pension consultant?
For purposes of those disclosures required by the SEC rules, here are a few items that most likely should be disclosed.
1) Conferences - Does your firm host a conference for its pension clients? Are money managers charged a sponsorship or exhibit fee? Does your firm provide training to money managers and trustees, but only charges money manager staff? Does your firm tend to recommend these money managers more often than other money managers?
2) Software - Does your firm sell software to money managers, which analyzes clients' performance? Similarly, Are these money managers recommended more often than others?
3) Marketing Services - Does your firm sell marketing services to money managers?
4) Affiliated B/D - Does your firm direct its pension clients to pay pension consulting fee through directing transactions/commissions to an affiliated B/D? Is this disclosed? Is best execution taking place? If so, how is this documented?
5) Referral Fees from Unaffiliated B/D - Does your firm direct its pension clients to an unaffiliated B/D that then pays a referral fee?
6) Employees Dual Registered as Reg Reps - Are your investment advisor reps serving pension clients also registered representatives and receiving compensation for trades placed by the pension client.
7) Gifts/Entertainment/Trips - Are your investment advisor reps receiving gifts from money managers? Are you tracking such gifts, entertainment or trips?
8) Change of Money Manager - Does your firm charge a "search fee" or receive additional brokerage commissions when terminating a pension client's money manager?
9) Additional Money Manager Accts. - Do your pension consultants seek or obtain brokerage transactions from other accounts managed by the money manager?
Once you identify these disclosure items, you need to consult with your experts to properly tailor your response. (This blog entry is certainly no substitute for consulting with your compliance expert on the specifics of your situation, and how it should be handled. Our goal is to make sure you're aware of the issue.)
As alluded to in the SEC report, it's likely that the disclosures need to be more than a mere reference stating that services are provided by the pension consultant to the money manager. The best practice is spelling out to the pension client that the same money managers being recommended by the pension consultant are also paying the pension consultant for other services. Depending upon the circumstances, this disclosure may need to include the dollar amounts being paid by such money managers so the client can truly grasp the extent of the conflict.
It's also important to recognize that disclosure isn't enough. The investment advisor serving as a pension consultant is a fiduciary, which means that these practices creating the conflicts will have to be carefully managed/supervised/mitigated or completely eliminated if the potential conflict is too great. Under the new Chief Compliance Officer Rule, the SEC will expect the CCO to formalize policies and procedures to address these conflicts.
Finally, the last wild card to throw into the mix -- some of these pension consulting compensation practices creating a conflict might be considered by the Dept. of Labor (DOL) to constitute "prohibited transactions" under ERISA even with the proper disclosure in your ADV, which will have to be addressed in a seperate blog entry at a later date.
Since the relationships and apparent methods for compensation aren't always obvious, this may be a challenge for those compliance officers that aren't experts in this business line.
Our advice is to start this process by following the money. In other words, look at how your firm is being compensated. Is your firm receiving compensation directly from the pension client, or is the money manager paying indirect compensation to the pension consultant?
For purposes of those disclosures required by the SEC rules, here are a few items that most likely should be disclosed.
1) Conferences - Does your firm host a conference for its pension clients? Are money managers charged a sponsorship or exhibit fee? Does your firm provide training to money managers and trustees, but only charges money manager staff? Does your firm tend to recommend these money managers more often than other money managers?
2) Software - Does your firm sell software to money managers, which analyzes clients' performance? Similarly, Are these money managers recommended more often than others?
3) Marketing Services - Does your firm sell marketing services to money managers?
4) Affiliated B/D - Does your firm direct its pension clients to pay pension consulting fee through directing transactions/commissions to an affiliated B/D? Is this disclosed? Is best execution taking place? If so, how is this documented?
5) Referral Fees from Unaffiliated B/D - Does your firm direct its pension clients to an unaffiliated B/D that then pays a referral fee?
6) Employees Dual Registered as Reg Reps - Are your investment advisor reps serving pension clients also registered representatives and receiving compensation for trades placed by the pension client.
7) Gifts/Entertainment/Trips - Are your investment advisor reps receiving gifts from money managers? Are you tracking such gifts, entertainment or trips?
8) Change of Money Manager - Does your firm charge a "search fee" or receive additional brokerage commissions when terminating a pension client's money manager?
9) Additional Money Manager Accts. - Do your pension consultants seek or obtain brokerage transactions from other accounts managed by the money manager?
Once you identify these disclosure items, you need to consult with your experts to properly tailor your response. (This blog entry is certainly no substitute for consulting with your compliance expert on the specifics of your situation, and how it should be handled. Our goal is to make sure you're aware of the issue.)
As alluded to in the SEC report, it's likely that the disclosures need to be more than a mere reference stating that services are provided by the pension consultant to the money manager. The best practice is spelling out to the pension client that the same money managers being recommended by the pension consultant are also paying the pension consultant for other services. Depending upon the circumstances, this disclosure may need to include the dollar amounts being paid by such money managers so the client can truly grasp the extent of the conflict.
It's also important to recognize that disclosure isn't enough. The investment advisor serving as a pension consultant is a fiduciary, which means that these practices creating the conflicts will have to be carefully managed/supervised/mitigated or completely eliminated if the potential conflict is too great. Under the new Chief Compliance Officer Rule, the SEC will expect the CCO to formalize policies and procedures to address these conflicts.
Finally, the last wild card to throw into the mix -- some of these pension consulting compensation practices creating a conflict might be considered by the Dept. of Labor (DOL) to constitute "prohibited transactions" under ERISA even with the proper disclosure in your ADV, which will have to be addressed in a seperate blog entry at a later date.
Labels: Pensions
posted by bhill at 11:52 AM
SEC Warns Investment Advisors That Conflicts Related to Pension Consultants Need to Disclosed & Mitigated
Does your investment advisory firm serve as a pension consultant? If so, then you need to carefully review the Staff Report Concerning Examinations of Select Pension Consultants released by the SEC on Monday, May 16, 2005.
The SEC advises that many pension consultants/investment advisors examined as part of its sweep have incorrectly concluded that they aren't fiduciaries to their clients and correspondingly aren't adequately disclosing all material conflicts of interest and mitigating/eliminating such conflicts.
The SEC provided the following as examples of policies and procedures that pension consultants should address:
Policies and procedures to ensure that the firm's advisory activities are insulated from its other business activities, to eliminate or mitigate conflicts of interest in its advisory activities. Such policies and procedures would include those governing the process used to identify and/or monitor money managers or mutual funds for an advisory client, to prevent considerations of a money manager's or mutual funds other business relationships with the consultant or its affiliates;
Policies and procedures to ensure that all disclosures required to fulfill fiduciary obligations are provided to prospective and existing advisory clients, particularly regarding material conflicts of interest arising from arrangements between the consultant and its affiliates and the money managers and mutual funds that the consultant recommends to a client during a manager search or for whom the consultant is providing ongoing monitoring services. Policies/procedures should be designed to ensure adequate disclosure concerning the consultant's compensation, including when the pension consultant receives compensation from brokerage transactions from advisory clients or money managers; and
Policies and procedures to prevent conflicts of interest or disclose material conflicts of interest with respect to the use of brokerage commissions, gifts, gratuities, entertainment, contributions, donations and other emoluments provided to clients or received from money managers.
Every investment advisor providing consulting services to pension plans should use this as an opportunity to conduct a thorough review of its practices and disclosures.
The SEC advises that many pension consultants/investment advisors examined as part of its sweep have incorrectly concluded that they aren't fiduciaries to their clients and correspondingly aren't adequately disclosing all material conflicts of interest and mitigating/eliminating such conflicts.
The SEC provided the following as examples of policies and procedures that pension consultants should address:
Policies and procedures to ensure that the firm's advisory activities are insulated from its other business activities, to eliminate or mitigate conflicts of interest in its advisory activities. Such policies and procedures would include those governing the process used to identify and/or monitor money managers or mutual funds for an advisory client, to prevent considerations of a money manager's or mutual funds other business relationships with the consultant or its affiliates;
Policies and procedures to ensure that all disclosures required to fulfill fiduciary obligations are provided to prospective and existing advisory clients, particularly regarding material conflicts of interest arising from arrangements between the consultant and its affiliates and the money managers and mutual funds that the consultant recommends to a client during a manager search or for whom the consultant is providing ongoing monitoring services. Policies/procedures should be designed to ensure adequate disclosure concerning the consultant's compensation, including when the pension consultant receives compensation from brokerage transactions from advisory clients or money managers; and
Policies and procedures to prevent conflicts of interest or disclose material conflicts of interest with respect to the use of brokerage commissions, gifts, gratuities, entertainment, contributions, donations and other emoluments provided to clients or received from money managers.
Every investment advisor providing consulting services to pension plans should use this as an opportunity to conduct a thorough review of its practices and disclosures.
Labels: Pensions
posted by bhill at 10:00 PM
