It has been widely reported that retail investing has been booming, fueled by a combination of “Reddit meme stocks” and the use of stimulus money by first-time investors. There have been well-documented cases of employees at broker-dealer and investment advisory firms being distracted by the gamification of the stock market and the use of apps that have made access to markets easier than ever. Recent extreme market volatility has been responsible for a number of spectacular trading losses and behavior showcased on social media. Account openings by first-time investors have surged, with more individuals opening accounts online and trading for the first time on trading apps or online investment firms. This increase in account activity has led to a spike in employee trading. With most employees continuing to work remotely, the monitoring of employee trading activities has only become even more important. As many employees are privy to a confidential investor and investment strategies and some even insider, material non-public information (or MNPI), there is no better time to ensure you have robust and unambiguous procedures and policies in place to ensure there will be no breach of your firms Code of Ethics.
- RIAs are monitoring their employees to make sure their employees are following the code of ethics and their own firm’s personal trading policies: Know where your employees are opening accounts and ensure that the channels for the delivery of confirms and statements are up to date and functional.
- For FINRA-regulated firms, under FINRA Rule 3210, financial institutions must be aware of all accounts and the trading and positions of their employees at all times.
- Consistently remind employees of their obligations under your firm’s Code of Ethics and explain why.
- Where possible, avoid the burden of manually reviewing statements and confirms. Look to technology platforms to help with surveillance by ensuring that all your employee trading data is not in hard copy or PDF but in a format that can be read or analyzed by software.
- Ensure that each employee knows that these policies and rules are not only designed for them but also extend to spouses, children and family members.
- Emphasize that these rules remain in full force even though they are working remotely.
- Step up the frequency of surveillance from monthly to at least weekly or, preferably, daily.
- If your firm requires pre-clearance of all trades, be aware of pre-cleared limit or GTC orders and step-up surveillance for swing trading and short-term holding violations.
Written by Martin Orbach
VP, Regulatory & Analytic Solutions, Head of Product - RCI