Page 50 - Investment Advisor July/August 2022

COMPLIANCE COACH

By Thomas D. Giachetti

How to Avoid Code of Ethics Infractions and

Misuse of Non-Public Information

The SEC warned advisory firms on potential ethical violations, and how

they can avoid insider trading problems.

n April, the Securities and include securities in which the firm has
Exchange Commission’s Division of inside information, and they should pro-
IExaminations issued a risk alert to hibit trading of these securities.
provide further information on common • Firms must implement procedures
investment advisor examination defi- to ensure that investment opportunities
ciencies relating to Section 204A of the are offered to clients before the advisor
Investment Adviser Act and Rule 204A-1 or its employees may act on them.
under the Investment Adviser Act of The alert also cautioned advisors to
1940. My partner Jeff Lang outlined establish and enforce written policies
some key points on the division’s alert. and procedures designed to prevent the
Jeff explained that the alert included misuse of material non-public infor-
a set of reminders of what must be mation (MNPI) by the advisory firm.
included in any investment advisory According to the division, many advisors
Code of Ethics (CoE) document, includ- OTHER DEFICIENCIES used data from nontraditional sources
ing standards of business conduct that The agency also noted that firms were without implementing policies and pro-
govern how the advisor will operate its deficient in the areas of personal securi- cedures to address the receipt and use of
business and requirements for all super- ties trading, preapproval and disclosure MNPI through alternative data sources.
vised and access persons. requirements, Jeff said. Many deficien- Alternative data is defined as informa-
A key CoE component is the require- cies related to personal securities trans- tion used in financial analysis beyond tra-
ment that access persons report and the actions and holdings, including: ditional financial statements, company
advisor review their personal securi- • Review of holdings and transac- filings and press releases. Although alter-
ties transactions and holdings. Required tion reports. Some firms were not able native data may not contain MNPI, such
provisions must also address supervised to provide evidence of its supervisory information might include data, such as
person compliance with federal securi- review of holdings and transactions geolocation data from consumers’ mobile
ties laws and the duty to report CoE vio- reports (including separate review of phones, that may contain MNPI.
lations to the chief compliance officer or the CCO’s own activity and holdings). Advisors must develop procedures and
their designee. • Submission of holdings and transac- safeguards to determine when staff mem-
Also highlighted were a number of tion reports. Such reports were not sub- bers may be in possession of MNPI, partic-
weaknesses in compliance programs. mitted to the compliance department ularly in relation to pending trades. As the
For example, many firms did not cor- by access persons in a timely manner, alert suggests, any compliance issues stem-
rectly identify or supervise their access or at all (or existing procedures did not ming from inappropriate use of MNPI
persons. In addition, firms did not accu- require such reporting). will be judged in hindsight (i.e., whether
rately define access person terminol- • Content of holdings and transaction the firm adopted adequate procedures to
ogy in their CoE document (which may reports. Some codes were inadequate detect or prevent improper use of MNPI).
erroneously omit certain employees with respect to requesting appropriate Employees should be trained on misuse
from the access person list). information to meet CoE requirements. and sharing of MNPI.
Firms also failed to furnish their The division offered considerations
employees with a copy of the CoE. on how to craft an effective CoE: Thomas D. Giachetti is chairman of the
Further, many firms did not obtain writ- • Develop an updatable restricted list Investment Management and Securities
ten acknowledgments from employees of trading investments that is incorpo- Practice Group of Stark & Stark. He can be Adobe Stock
regarding receipt of the CoE. rated into CoE material. These would reached at [email protected].

48 INVESTMENT ADVISOR JULY/AUGUST 2022 | ThinkAdvisor.com