Compliance Solutions for Investment Advisers

FAQs — Personal Trading

 

What are the personal securities transaction reporting requirements for SEC-registered investment advisers?

Each investment adviser’s code of ethics must require the advisory firm’s access persons to periodically report their personal securities holdings and transactions to the investment adviser’s chief compliance officer or other designated person.

What are the reporting deadlines for holdings reports?

All access persons must submit a personal securities holdings report (i) no later than ten (10) days after an individual becomes an access person and (i) at least once each twelve-month period thereafter. The information contained in the holdings report must be current as of a date not more than (a) forty-five (45) days prior to the date the individual becomes an access person or (b) forty-five (45) days prior to the date the access person submits the twelve-month report.

What are the reporting deadlines for transaction reports?

All access persons must submit personal securities transaction reports no later than thirty (30) days after the end of each calendar quarter. The information contained in the transactions report must cover all transactions made by the access person during that quarter.

Who is considered an “access person” of an SEC-registered investment adviser?

An SEC-registered investment adviser’s “access persons” are any of the firm’s supervised persons who have access to nonpublic information regarding any clients’ purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any reportable fund or who is involved in making securities recommendations to clients, or who have access to such recommendations that are nonpublic. If providing investment advice is your firm’s primary business, all of your directors, officers and partners are presumed to be access persons.

What information must be included in the holdings report?

Holdings reports must contain the following for each reportable security that the access person of the investment adviser has any direct or indirect beneficial ownership:

  • The title and type of security;
  • The exchange ticker symbol or CUSIP number;
  • The number of shares;
  • The principal amount;
  • The name of any broker, dealer or bank in which the access person maintains an account in which any securities are held for the access person’s direct or indirect benefit; and
  • The date the access person submits the report.

What information must be included in the quarterly transaction report?

The following information must be included in the quarterly transaction report for each reportable security:

  • The date of the transaction;
  • The title of the security;
  • The exchange ticker symbol or CUSIP number (as applicable);
  • The interest rate and maturity date (if applicable);
  • The number of shares and principal amount;
  • The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
  • The price of the security at which the transaction was effected;
  • The name of the broker, dealer or bank with or through which the transaction was effected; and
  • The date the access person submits the report.

Are there exceptions to the personal securities reporting requirements?

Rule 204A-1 permits three exceptions to personal securities reporting. No reports are required:

  1. With respect to transactions effected pursuant to an automatic investment plan.
  2. With respect to securities held in accounts over which the access person had no direct or indirect influence or control.
  3. In the case of an advisory firm that has only one access person, so long as the firm maintains records of the holdings and transactions that Advisers Act Rule 204A-1 would otherwise require be reported.

What is a reportable security?

Access persons must submit holdings and transaction reports for “reportable securities” in which the access person has, or acquires, any direct or indirect beneficial ownership. Rule 204A-1 treats all securities as reportable securities, with five exceptions designed to exclude securities that appear to present little opportunity for the type of improper trading that the access person reports are designed to uncover:

  1. Transactions and holdings in direct obligations of the Government of the United States.
  2. Money market instruments — bankers’ acceptances, bank certificates of deposit, commercial paper, repurchase agreements and other high quality short-term debt instruments.
  3. Shares of money market funds.
  4. 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.
  5. Transactions in units of a unit investment trust if the unit investment trust is invested exclusively in unaffiliated mutual funds.

Are Exchange Traded Funds (ETFs) considered reportable securities?

Yes.

What is considered beneficial ownership of a security?

An access person is presumed to be a beneficial owner of securities that are held by his or her immediate family members sharing the access person’s household.

Can access persons submit trade confirmations and brokerage account statements in lieu of transaction reports?

Yes. An investment adviser’s code of ethics may excuse access persons from submitting transaction reports that would duplicate information contained in trade confirmations or account statements that the adviser holds in its records, provided the adviser has received those confirmations or statements not later than 30 days after the close of the calendar quarter in which the transaction takes place.

Is there anything an access person may submit in lieu of holdings reports?

Yes. An access person may submit year-end brokerage account statements in lieu of a holdings report.

Are there any personal trading pre-approval requirements that must be included in an SEC-registered investment adviser’s code of ethics?

The code of ethics must require that access persons obtain approval before investing in an initial public offering or private placement.

What are some personal trading provisions that investment advisers typically include in their code of ethics?

Advisory firms commonly include many of the following elements, or address the following issues, in their personal securities trading procedures:

  • Prior written approval before access persons can place a personal securities transaction.
  • Maintenance of lists of issuers of securities that the advisory firm is analyzing or recommending for client transactions, and prohibitions on personal trading in securities of those issuers.
  • Maintenance of “restricted lists” of issuers about which the advisory firm has inside information, and prohibitions on any trading (personal or for clients) in securities of those issuers.
  • “Blackout periods” when client securities trades are being placed or recommendations are being made and access persons are not permitted to place personal securities transactions.
  • Reminders that investment opportunities must be offered first to clients before the adviser or its employees may act on them, and procedures to implement this principle.
  • Prohibitions or restrictions on “short-swing” trading and market timing.
  • Requirements to trade only through certain brokers, or limitations on the number of brokerage accounts permitted.
  • Requirements to provide the adviser with duplicate trade confirmations and account statements.
  • Procedures for assigning new securities analyses to employees whose personal holdings do not present apparent conflicts of interest.

What are some personal trading compliance practices that SEC examiners have found to be effective?

In addition to advisory firms establishing procedures to ensure compliance with specific regulatory requirements, SEC examiners observed that the following internal compliance controls appeared to be effective in assisting in preventing violations of the Advisers Act:

  • Written policies and procedures that were designed to address conflicts of interest with respect to trading in personal and proprietary accounts.
  • Restricted lists and watch lists that were accurate and maintained on a current basis.
  • The use of time-stamped order tickets.
  • Having all personal securities transactions effected through the adviser’s trading desk to enable centralized monitoring of all trading.
  • Consistently bundling personal or proprietary trades with trades in client accounts.
  • Executing trades in client accounts prior to trades in personal or proprietary accounts.
  • The use of black-out” periods, during which access persons are not permitted to execute personal securities transactions.
  • Prohibiting access persons from engaging in short-term trading (i.e., the purchase and sale of a security within 60 days).
  • Only granting policy exceptions that were reasonable and documented.
  • Requiring access persons to direct their broker-dealers to provide duplicate trade confirmations and copies of monthly brokerage statements to the adviser.

What are some personal trading review and reporting practices that SEC examiners have found to be effective?

SEC examiners observed that the following personal trading review and reporting practices appeared to be effective in preventing violations of the Advisers Act:

  • Trade allocations were determined prior to or soon after the trade was executed.
  • Documentation of pre-approval of personal securities transactions was created at the time of the approval and was maintained.
  • Pre-clearance forms prepared by access persons were subsequently compared to the actual trading in those persons’ accounts.
  • Procedures were in place to ensure that trading does not occur in client accounts, employee personal accounts, or the adviser’s proprietary accounts while the adviser or its employees are in possession of material, non-public information pertaining to that security. Information barriers are in place to prohibit the flow of such information. These conflicts of interest were addressed in the adviser’s written policies and procedures. Examiners especially focus on these procedures when a related person of the adviser also serves on the board of directors for an issuer and, therefore, may have access to non-public information.
  • Performance of client accounts was compared to the performance of personal and firm proprietary accounts employing similar investment strategies for any indications of preferential treatment.
  • Personal and proprietary securities transaction records were maintained electronically so that analyses could be more efficiently performed and outlier issues researched. Examples of analyses included, identifying when a high percentage of personal trades for an access person were profitable (in absolute terms and in relation to clients) or identifying when a personal trade resulted in exceptional returns.
  • Prices were adjusted if, on the same day, trades in related accounts were executed at a better price than client accounts.
  • The reviewer of personal securities transactions had his or her own personal securities transactions reviewed by another officer or control person of the adviser.
  • Supervised persons who violated or continued to violate the adviser’s policies and procedures with respect to trading in personal or proprietary accounts were reprimanded.

 

Important Information

The information contained in this Frequently Asked Questions is only a summary and is not intended to be a comprehensive analysis of the rules and regulations applicable to registered investment advisers. It is not intended to constitute legal or compliance consulting advice or apply to any one investment adviser’s particular situation. For more information, please see our Terms of Use.

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