It’s likely that your firm has recently established an “access persons” list and received its first holding reports in order to comply with the recently effective SEC Rule 204A-1. However, is your firm actually supervising the reported transactions of the access persons and documenting such supervision?
Under Rule 204A-1, SEC registered investment advisory firms are required to establish and enforce standards of conduct expected of employees as part of its Code of Ethics. In particular, the rule focuses upon a firm’s obligation to review and monitor the securities transactions by “access persons” in order to prevent inappropriate trading.
This leads to the first question — how to define a firm’s access persons. We suggest taking the conservative approach and including all of the firm’s employees in addition to the firm’s directors, officers, investment advisor representatives (IARs) and any employees of the IARs (if IARs are independent contractors).
The SEC defines an “access person” as the following:
Any of your supervised persons:
(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.
(ii) If providing investment advice is your primary business, all of your directors, officers and partners are presumed to be access persons.
In essence, these individuals are considered access persons because they are in the position to inappropriately utilize client information.
Once your firm has determined its access persons, the next step is to establish a procedure for supervising the securities transactions of those identified as access persons. Under the rule, all access persons must report their securities holdings to the firm upon becoming an access person and on an annual basis. In addition, all access persons need to report their securities transactions (direct and indirect beneficial ownership) within 30 days of the end of each calendar quarter. All private placements and initial public offering must be pre-approved by the firm.
We’d recommend that these transactions and holdings be placed in a database so that each access person’s records may be cross-referenced easily against clients’ transactions. The firm should review these personal transactions for inappropriate conduct like front-running, scalping, insider trading or other misuses of confidential client information.
Finally, your firm must maintain the following records for last five years: lists of its access persons; each report made by an access person; any violation and corrective action; and any decision and supporting reasons to approve an IPO or private placement for an access person.
For more discussions concerning the SEC’s Code of Ethics Rule, please continue to visit this blog, Navigating the Regulatory Maze, at RIA-Compliance-Consultants.com.
Posted by Bryan Hill
Labels: Code of Ethics