Today, all financial services firms share a strong desire to demonstrate good conduct, integrity and no conflict of interest with their clients. As fiduciaries, the industry is mandated by regulation (like REG BI) to place the interests of clients ahead of its own. Having a robust and enforceable Code of Ethics that encompasses monitoring of employee personal trading results in risk reduction and ultimately prevents any reputation-damaging actions by employees.
When canvasing Chiefs of Compliance at hedge funds, investment advisors and asset managers, we found that many lacked any systematic way to comprehensively monitor the trading activity as well as positions held by their employees in accounts at other financial institutions. Many were also concerned about their inability to detect front running or shadowing of investors’, accounts as well as to prevent employees from trading in portfolio rebalancing periods.
In these conversations, some themes emerged:
Difficulty in obtaining the employee trade and position data in machine-readable formats (as opposed to paper confirms and statements)
The inability to evaluate or test that data against restricted lists, internal investment policies and black-out periods
No easy way to allow employees to request pre-trade clearances (as mandated by regulations)