6 Hot Topics in Employee Compliance for the Dog Days of Summer

August 5, 2019 by Jordan Schwartz


It’s August, which means the dog days of summer – and the oppressive heat that comes with them – are upon us. If you’re reading this by the pool with a piña colada in hand, the responsibilities of the workplace may be far from your mind. But there’s no summer slowdown when it comes to making sure everything back at the ranch is running smoothly – and according to your firm’s hard-won compliance program.

Compliance officers today are faced with an ever-evolving series of complexities and nuances they need to keep top of mind when managing their firm’s compliance program. Not only do they need to be concerned with keeping an eye on their firm’s business dealings, but they also need to make sure their employees’ personal dealings aren’t generating conflicts of interest that put the firm at risk.

From new tech-based investment offerings hitting the market to changing regulations, to the upcoming U.S. presidential election, there are a lot of hot topics that compliance officers need to take into account as part of designing an effective code of ethics and employee personal trade surveillance program. But fortunately, there are technology solutions available that can help.

A high percentage of financial services firms already use regulatory technology (RegTech) to support these programs – for example, 86% use tech for managing code of ethics compliance, according to the 2018 IAA/ACA Compliance Group Investment Management Compliance Testing survey.

I recently discussed the use of this technology in an ACA webcast, RegTech Solutions for Compliance Challenges: Code of Ethics Monitoring and Personal Trade Surveillance. Together with Michelle Canela, Director of Compliance, Intech Investments, Chas Spiros, Associate, Strategic Investment Group, and Jay Petraitis, Principal Consultant, ACA Technology, we discussed the hot topics in code of ethics and personal trade surveillance today, including the challenges facing compliance teams and best practices for addressing these challenges. Here’s a recap of the hot topics we covered. You can listen to the full webcast, which includes a Q&A with the audience, here.

Top-down code of ethics leadership

Support and buy-in from senior management can make a world of difference when it comes to building an effective culture of compliance around code of ethics and personal trading. Employees will follow the example of senior managers – not just in what they say, but also in what they do.

For example, active leadership support can encourage employees to disclose potentially sensitive activities they engage in outside of work to their firm’s code of ethics program. In addition, senior leadership buy-in can help to secure the funding needed for investment in essential technology infrastructure and human resources.

Senior leaders need to consider the message they are sending to their employees with their words and actions when it comes to code of ethics and personal trading compliance, and the ability of their firm to meet supervisory expectations.

Cryptocurrency

This relatively new asset class is causing confusion for code of ethics and personal trade surveillance programs. While up until now some firms have ignored cryptocurrency trading among employees – their designation as “securities” was ambiguous –  this may need to change.

On April 3, the U.S. Securities and Exchange Commission (SEC) issued its Framework for ‘Investment Contract’ Analysis of Digital Assets, which clarifies the circumstances under which a digital asset is considered a security. In light of this, firms that are offering or thinking about offering crypto assets should also consider adding cryptocurrencies to their code of ethics and personal trade surveillance programs. Crypto assets can be more challenging to monitor than other, more traditional assets because of where they are traded – it is important to think through how the compliance team will manage the monitoring of crypto assets, and what technology resources can be used to automate monitoring of this emerging asset class.

Robo-Advisors

There is also confusion about what is, and what is not, a robo-advisor. Compliance teams need to have a clear understanding of which platforms on the market are considered robo-advisors and which are simply trading accounts on mobile devices that employees could use to influence investments.

Firms need to decide what kinds of information they will collect on robo-advisor accounts as part of their code of ethics and personal trade surveillance program. Some firms are taking a conservative approach to monitoring robo-advisors, because even though robo-advisor relationships are meant to be “hands off” for the client, many firms feel there is still the potential for conflicts of interest. These firms still collect all transaction information that they would on a traditional account. Sometimes this is made more difficult because of a lack of electronic feeds and managing this information manually can be a significant burden for compliance teams. For some of these new breeds of investment technology, transaction data is available through aggregation “pull” technology feeds into code of ethics and personal trade surveillance platforms.

Managed accounts

Compliance policies and processes regarding managed accounts can vary widely among firms, from a hands-off approach to complete monitoring.

The nature of products called “managed accounts” can be unclear, with some permitting trading discretion by the client in the fine print – the way they are marketed is at fault here.

It’s important that all accounts are verified as “managed accounts.” Best practices include having the employee obtain a managed account letter from the third-party manager, which attests annually that the account is still managed and that the employee does not have any trading discretion. Even with such assurances in place, some firms still choose to collect transaction data and monitor these accounts because the employee is the beneficial owner and it’s theoretically possible that an employee could share sensitive information with the investment manager, who could then trade.

It is also important to train employees to recognize the difference between a managed account and an account over which they could still have some trading discretion – they need to be able to decipher the marketing jargon.

Whistleblower policies and procedures

Whistleblowing has frequently been in the news thanks to the SEC’s whistleblower program, which has awarded around $385 million to 65 individuals for whistleblowing since 2012. Most recently, the SEC awarded $500k to an overseas whistleblower.

Your firm’s whistleblower policies and procedures should be designed to help employees feel safe to whistle blow internally, rather than to a regulator (which could generate public reprimands, fines, and reputational damage). Compliance teams should encourage all employees to escalate issues within the firm that they are uncomfortable with to their manager, another manager, human resources, or another individual.

Some best practices in this area are:

  • Having a website and a telephone line that enables employees to voice their concerns confidentially
  • Including whistleblower information in all employee training material
  • Communicating back to all individuals who whistle blow that their information has been investigated and steps have been taken (or other appropriate language)
  • Thanking the employee for making the contribution

Pay-to-play

In the U.S., the upcoming presidential election cycle is about to begin, so now is a good time to review and refresh your firm’s policies and procedures regarding political contributions.

There are several steps your firm should take to update your approach, including:

  • Making sure the political contributions policy is discussed, with emphasis, during employee onboarding
  • Reviewing the past year of political activity for employees as they are being onboarded – political activity from the recent past by new employees could impact the ability of the firm to do some kinds of business in the present
  • Refreshing employee training in this area – updating the content and then providing training to all employees in advance of the current election season
  • Taking a random sampling of employee activity by checking a group of names each month in U.S. nationwide databases such as opensecrets.org and followthemoney.org, or in specific state-level databases

Employee compliance technology is here to help

Given the volume of employee data that firms are required to process for code of ethics and personal trade surveillance compliance, having the right tools in place is essential. Monitoring employee trading transactions based on employee submission of paper statements is a time-consuming manual task that is subject to human error. RegTech solutions can help offload this onerous task by automating data processing, trade rules, reporting, and attestations. RegTech helps compliance teams keep up with evolving and emerging regulatory challenges, allowing them to do their jobs more effectively and efficiently.

As challenges arise for compliance teams around code of ethics and personal trading surveillance, fresh approaches and new technology solutions are developing too.

Watch the Webcast Replay

Want to hear the full webcast, which includes more detail on these hot topics as well as questions from attendees? Listen to the on-demand webcast replay here.

Additional Resources

  • Code of Ethics/Personal Trading Technology - Understanding the Three Key Benefits (Blog post) – The adoption of RegTech is rapidly becoming business as usual for an increasing number of compliance teams, with personal trading/code of ethics compliance being one of the most significant areas of RegTech adoption. ACA's Jordan Schwartz details the major benefits of adopting a code of ethics/personal trading technology solution.
  • Addressing the Rising Cost of Non-Compliance with RegTech (Blog post) - ACA's Burt Esrig illustrates how regulators' advances in tech are supporting their ever-broadening scope of responsibility, resulting in increased enforcement actions and fines. In this landscape, RegTech is no longer a "nice to have" for investment firms, but an imperative.
  • 6 Ways to Stay Ahead of Financial Regulators with RegTech (Blog post) - Regulators globally continue to invest in developing their technological capabilities to quickly and efficiently manage data, and they expect investment firms to do the same. In this blog post, ACA's Burt Esrig and Michael Lehman discuss what you need to know and how regulatory technology solutions can help.
  • Personal Trading - Rule vs. Best Practice (On-demand webcast) - Rule 204A-1 under Investment Advisers Act of 1940 is a cornerstone of every registered investment adviser’s compliance program. In this webcast, we discuss the Code of Ethics Rule and the industry’s best practices in dealing with the personal trading requirements under the rule.
  • How RegTech Helps Firms Increase Efficiency and Reduce Risk (blog post) - Although regulatory compliance will always be a function led and directed by people, technology can support those efforts and make processes more efficient and effective. Here are five ways it can be of benefit to your firm to make RegTech an everyday part of your compliance program.
  • How RegTech Can Enhance Your Firm's GRC Program: A 4-Step Approach (blog post) - Chief compliance officers (CCOs) and risk and compliance teams know they need regulatory technology to meet ever-increasing regulatory obligations as well as establish best practices for their firm’s governance, risk, and compliance (GRC) program that reduce operational risk and increase operational efficiencies. While the value added by a RegTech solution is clear, understanding the full scope of a GRC technology implementation can be a significant challenge. This blog post explains four steps for enhancing the effectiveness of your firm’s GRC capabilities using technology.

How We Help

ACA's Compliance ELF (Employee Level Filing) provides an integrated solution for managing your firm’s code of ethics compliance activities related to employee personal securities trading monitoring, attestations, reporting on gifts, political contributions, outside activities, and more. Compliance ELF is available as part of ACA’s ComplianceAlpha®platform or as a standalone solution. Key features include:

  • Pre-trade, post-trade, IPO, and private placements
  • Outside business activities
  • Gifts, entertainment, and political contributions
  • Certifications, attestations, items of interest
  • Links to over 5,000 brokerage institutions
  • Support from ACA's experienced Customer Success and Technical Support teams

Request a Demo

About the Author

Jordan Schwartz is a Partner with ACA Technology. He focuses on ACA’s GRC Platform and Code of Ethics tools and oversees the ComplianceAlpha Customer Success Team. Jordan came to ACA through its acquisition of Cordium, which he joined in 2003. At Cordium, Jordan was responsible for the advancement, growth, and marketing of the firm's global software offerings and overseeing the operation of the development and client support teams. Jordan actively participates in ACA’s sales and marketing efforts, often spearheads internal projects, and is a frequent guest author and speaker for industry publications and conferences.

Jordan holds a B.S. in Applied Economics Management from Cornell University.