Early Compliance Issues for 2010

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Recently I got hold of an examination letter requesting information from a firm that can help predict what the SEC might be looking for in 2010. For a copy, please email me (ash@riaico.com) and I will be happy to forward it to you.

One item that the SEC has been criticized for is poor maintenance of employee trading activity and its monitoring. So this year they put in considerable effort to ensure that this issue was corrected. This is one area that will surely get some attention, that was clear from the examination letter.

Your Code of Ethics should define who are the access people, any policy and procedures related to personal trading. The interesting point in the letter was that the procedures should also include how a firm manages contract employees and temporary employees. The normal assumption in the past was that these personnel would be non-access personnel and therefore the rule would not apply. The regulators are looking for a more definite procedure instead of an assumption. 

The letter continues by asking for the process used by a firm to monitor personal trading.  Many firms I worked with simply get duplicate statements. But a compliance person should actually crosscheck the trades with approvals. For all the single person advisory firms, you should be doing a crosscheck between your blotter and your personal account. The regulators will want to see some type of process even as a single person firm. Personal trading is where a lot of advisers make mistakes; it is easy to understand why it is one of the top five violations. 

One method NOT to manage personal trading is to have all the employees of a firm trade with the client. I have seen advisers do this by managing employee accounts for free and just trade employee assets with the client assets with average pricing. The other way is for an adviser to utilize mutual funds and separate accounts only. 

For all the advisers who are registered on a state level, the SEC is looking to increase the asset size for SEC registration. So some advisers may fall back to the state once the change happens. The expectation will be that the states will be responsible for compliance, which I am certain each will take seriously. 

Ash Bhatnagar, CFP®
RIA Independence Co.
Princeton, N.J.

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