On February 27, 2012, the SEC released a risk alert providing suggestions for techniques and controls a firm may use to help avoid conducting unauthorized trades. The alert has a large focus on supervisory procedures, but also addresses other ways in which firms can make it harder for employees to engage in unauthorized trading. The alert identifies alternative methods to more readily detect unusual trading activity and stresses the importance of a culture of openness and compliance. Continue reading
On February 27, 2012, the SEC released a risk alert providing suggestions for techniques and controls a firm may use to help avoid conducting unauthorized trades. The alert has a large focus on supervisory procedures, but also addresses other ways in which firms can make it harder for employees to engage in unauthorized trading. The alert identifies alternative methods to more readily detect unusual trading activity and stresses the importance of a culture of openness and compliance.
Suggestions for supervisory procedures include:
-Have more than one chain of control be responsible for monitoring the integrity of the business, i.e. don’t have all your compliance personnel report to the same person.
-Managers and supervisors should understand any complex products and strategies being employed by traders.
-Supervisors should engage in discussions with traders and portfolio managers and address positions that are unusual (given the strategies and/or client objectives involved).
-Make sure the payment structure for traders and supervisors encourages responsible risk-taking.
-Try to avoid having one person or desk fulfill multiple roles.
-Have an “open-door” policy that encourages traders to report unexpected losses promptly.
-Limit trader access to their appropriate portfolios – don’t let them keep access to ones that they are no longer authorized to trade in.
-Consider additional controls (several are listed in the alert).
Other suggestions include:
-When an employee transfers into the trading department, remove any prior system access he or she had.
-Have controls in place to confirm extended settlement trades and rollovers.
-Review delays and discrepancies in the customer trade confirmation process to check for unauthorized trading.
-Require mandatory vacations for traders with no remote access to accounts, then assign their portfolio(s) to a supervisor or experienced trader for the duration. Use this time to check for unusual activity.
-Have the audit and compliance departments review trading strategies, business performance, and risk profile.
-If the firm has multiple recordkeeping systems, try to integrate them.
-Test the controls put in place to discourage unauthorized trading.
-Maintain a corporate culture of honesty, integrity, accountability, and responsible risk-taking.
Source: SEC Release 2012-33
This exam alert applies to the Series 24, Series 26, Series 6, Series 7, Series 62, Series 79, Series 82, and Series 99.
