Citigroup Global Markets Inc. was recently censured and fined $350,000.00 ([PDF] FINRA Case #2019064316401) for failing to have a supervisory system to ensure statements were reviewed timely, as well as not ensuring they were receiving paper statements for accounts at custodians for which they did not have a direct feed. Although this particular incident was a BD fine, this information should be helpful for RIAs as well. An RIA should be conducting personal trade reviews as a part of their Code of Ethics.

Considerations

The review and supervision of outside brokerage accounts isn’t news; however, it’s important to take a look at the system that you are using to review personal trading. More and more, we are seeing firms utilize software that receives a direct feed from an account custodian, and then the software will automatically run trades through a set of “rules” to identify specific violations. Take the following into consideration:

  • If you are using a system for the reviews, are there any accounts that have to be reviewed manually because you don’t have a feed? How are those statements being reviewed and by whom? How do you ensure they are being reviewed in a timely fashion?
  • What does the system review and flag?
  • Does it identify stocks on your Firm’s restricted or watch list?
  • If your Firm requires preapproval of certain trades, does it flag those trades?
  • Do you feed your Firm’s trades through the system to look for frontrunning?
  • When possible violations are identified, what is the process to ensure an internal investigation is thorough and complete?
  • Where is your Firm storing its books and records?

FINRA Rule 3210

FINRA Rule 3110(d)(1) requires that a firm has a process and procedure to review the securities transactions in employees’ brokerage accounts to identify trades that may violate the Exchange Act or FINRA rules prohibiting insider trading and manipulative and deceptive devices. Rule 3110(d)(2) further specifies that a firm “must conduct promptly an internal investigation into any such trade to determine whether a violation . . . has occurred.” Additionally, FINRA Rule 3210 requires associated persons to obtain the prior written consent of their employer firm before opening or establishing an account at another member.

For more of our blogs, check out:

If you would like to have further discussions regarding your Firm’s process and procedures for personal trade reviews of associated persons, please contact us. MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting for your firm’s compliance responsibilities.