Automating Employee Personal Trading Surveillance

By Author: Jai Prakash Srivastava
Total Articles: 304
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Currently many compliance departments are under a lot of pressure to gather together the information required to meet the basic requirements of SEC rules 204A-1 and 17j-1. Keeping track of pre clearance requests, restricted lists, employee accounts, employee trading activity and employee holdings takes up so much of many compliance departments time that having time to analyze this data is a challenge for many. The following diagram outlines the different types of data that the typical compliance department needs to pull together in order to manage their employee personal trading compliance requirements.
Besides the difficulty of gathering all of the above data compliance departments have to deal with the resistance of staff to the adoption of these processes, and the difficulty of analyzing spreadsheet, paper and email based data.

Automation of the personal trading compliance process can save firms a lot of time as well as providing them with the ability to more easily analyze the data and check for trends in the data. Any automated personal trading solution needs to incorporate the following elements.
...
... Incorporate all main Personal trading data points needed.
Flexible rules engine
Flexible reporting.
Ease of use to facilitate easy adoption by employees.
Streamlined processing to save employees time.
Integration with overall compliance program

PERSONAL TRADING COMPLIANCE DATA
The main data required to meet the minimum requirements are:
Trade pre-clearance
Pre-Clearance requests.
Automated broker feeds of trading activity and holdings.
Employee account data.
Firm's portfolio trades.
Holdings and trades attestation data.

PERSONAL TRADING COMPLIANCE RULES
Ability to set up rules which can be run against this employee personal trading data and which can be applied to different subsets of individuals within the Investment adviser firm is extremely important. Any compliance management system needs to be able to cover the following rule types at a minimum.
1. Security rules:
Restricted lists
Watch lists
Blackout periods
Approved lists
Transaction rules (Di Minimis rules, short sells)
2. Security type rules
Approved security type rules
Restricted security type rules.
3. Pre clearance checks
Validation that pre clearance requests were made for an employee trade.
4. Employee Trade activity checks
Excessive trading
Holding periods
5. Checks against firms trade data
Front Running
Tailgating

PERSONAL TRADING COMPLIANCE REPORTING
Any automated personal trading solution needs to allow the users to easily retrieve the data they require and should allow easy filtering and sorting of the data so that it can be extracted exactly as the user requires for trend analysis. Adoption and buy-in by employees of any compliance system is extremely important therefore any system will need to be easy to use and intuitive. Centralization of all compliance tasks for employees also causes less confusion and only requires employees to learn how to use one system.

Find more information relating to compliance management NASD Compliance, and FINRA Compliance,SEC Compliance here.