Trading is the heartbeat of most advisory firms – and an area compliance must monitor.
Pitfalls exist aplenty. Insider trading. Trading ahead. Unfair trade allocations. Expensive executions. And many more.
Advisers Act rule 204A-1
(codes of ethics) expressly mentions the “chief compliance officer” in relationship to obtaining access persons’ quarterly personal trading reports, a key duty under federal law.
The overriding principle commandeering this topic is an adviser’s fiduciary duty. While the Advisers Act doesn’t mention fiduciary duty, it is a well-established principle dating to a 1963 U.S. Supreme Court ruling in the SEC v. Capital Gains
Decades later, regulators continue to struggle with how to define what fiduciary duty means. It’s generally taken to translate that an adviser is to operate with the client’s best interest at heart.
Applying this standard to trading and you can see that favoring one client over another in multiple allocations over time could be seen as tarnishing that standard. Or maybe it’s directing trade executions to an affiliated broker-dealer even though it charges higher transaction costs.
Disclosure, recordkeeping and best execution are hot topics in this area. Other relevant Advisers Act rules include books and records
, rule 206(3)-2
(agency cross transactions), Rule 206(3)-3T
(principal trades) and rule 206(4)-2