Complexities in regulation and firm policies and procedures, including the constantly changing nature of each, are just some of the reasons periodic employee training is beneficial to any firm. See our tips for conducting employee training. Firms should consider, among other things, the following key topics for their next employee training:
- Personal Trading. Educating employees about the firm’s policies and procedures on personal trading is a proactive way to prevent problems that could result in deficiencies during a Securities and Exchange Commission (“SEC”) exam. In 2014, the SEC charged 34 companies and individuals with violating firm policies relating to personal account trading. Training should cover the firm’s pre-approval requirements, if any, annual disclosures of holdings and quarterly transaction reporting. Maintaining an up-to-date restricted list and circulating it to employees will help prevent prohibited trades.
- Insider Trading. In 2014, the SEC brought at least 30 new insider trading cases. Given the prominence of insider trading in the SEC’s enforcement program, firms should have robust policies and procedures that address its particular risks. The training should anticipate employee questions and concerns such as:
- What constitutes insider trading (elements and examples of the classical vs. misappropriation theories);
- Risk areas such as deals or other direct contact with insiders of public companies, use of expert networks or other research providers;
- How the SEC investigates possible insider trading; and
- Possible repercussions (including discipline by the firm, SEC penalties and criminal liability).
In addition to regular annual training, firms with a higher risk of receiving material non-public information should consider enhanced training, whether more frequently or additional sessions for traders, portfolio managers and/or analysts.
- Advertising and Marketing Activities. SEC exams always focus on advertising and marketing activities. It is essential for employees to understand that any materials distributed to more than one person are subject to the SEC’s advertising rules. These include, among others: requirements for balanced content, opinions are clearly indicated, no client or investor testimonials and certain parameters for presenting performance data. All employees should be aware of the firm’s advertising and marketing policies. Targeted training to those in marketing and investor relations should emphasize retention of all research, documentation of factual statements and the basis for any performance calculations (which the SEC will continue to review in exams).
- Cybersecurity. Employees are often the first line of defense, and ironically, the biggest threat to a firm’s cybersecurity. Proper policies and training, such as regularly changing passwords, password complexity, a “clean desk” policy, and prudent use of portable electronics can help the firm avoid cyber-attacks. The training should address the need to keep the firm’s proprietary information secure to prevent misappropriation. Finally, employees should be trained to recognize emails that appear to be from a known source, such as a client or investor, but are actually fraudulent attempts to gain information or commit a financial crime (aka “phishing”). In particular, any requests for withdrawals from client or investor accounts should be evaluated for authenticity and potential issues escalated per the firm’s identity theft policies and procedures.
- Suitability. Private client and retail advisers should make suitability a priority topic. This is especially true for firms investing retirement assets into complex or structured products and higher yield securities. In addition to establishing appropriate policies and procedures, firms should educate employees on key issues such as:
- Collecting information about clients’ investment objectives, sophistication and risk profiles;
- Conducting due diligence on recommended investments;
- Disclosing investment information to clients;
- How the firm determines and monitors suitability for its clients; and
- The firm’s requirements for documenting and reviewing suitability determinations.
- Foreign Corrupt Practices Act (“FCPA”). Firms with international operations should conduct FCPA training to reinforce firm policies. There are a number of pitfalls to complying with the FCPA because the law itself is nuanced and the SEC and Department of Justice interpret it quite broadly. Accordingly all employees doing business abroad should be trained on the specific aspects of firm policies that impact their job and to immediately escalate questions or concerns to the Chief Compliance Officer. Compliance should regularly review any payments, gifts of value, or favors that could be construed as a potential bribe to obtain or keep business.
- Rule 105, Regulation M. Broadly speaking, the rule prohibits short selling of securities in advance of an anticipated secondary offering. This has been a major enforcement area in recent years. Employees involved in portfolio management and trading should be trained on the rule and its very narrow exceptions to avoid violations, however unintentional. Firms that are active in this area should train all employees annually and revisit periodically, especially as secondary offerings occur.