Expanding Your Compliance Program – Code of Ethics Management

Expanding Your Compliance Program – Code of Ethics Management

Are you tired of spending hours opening envelopes, stapling statements together, logging the receipt of statements in a spreadsheet, and then beginning the manual process of comparing transactions on the statement to pre-clearance records and a restricted list? Not to mention the unavoidable papercuts, overflowing file cabinets, and boxes and boxes of 3+ year old statements that need to be retained, but can be moved offsite (when you have time)? A Code of Ethics technology solution gets rid of those things!!!

Code of Ethics technology platforms (“COE Solutions”) enable firms to streamline the management of Code of Ethics reporting and monitoring through an online solution. The systems provide a rules-based interface that automates the requirements of your Code of Ethics, with separate credentialed permissions for users and compliance personnel. While the specific functionality varies, they all have core features that can help save time for compliance personnel and the business. They also enable improved oversight and surveillance of compliance with the requirements of your Code.

A COE Solution enables automated feeds of personal securities transactions and holdings from the broker-dealers where Access Persons maintain accounts. All the relevant data is transmitted to the platform on a daily basis, so you have pretty near real-time information. No more waiting until 30 days after quarter-end to identify violations that may have occurred on the first day of the quarter!

There is workflow to support pre-clearance of IPOs and limited offerings, as well as any additional pre-clearance requirements that may be applicable to your firm, and automated oversight of a restricted list. Investing in ETFs is prohibited without pre-clearance? You can set up a rule in the system to flag any transactions in ETFs where there is not a corresponding pre-clearance request and approval. COE Solutions also enable you to build rules around how long the pre-clearance approval lasts—so if your rule is that the pre-clearance is valid until close of business on the day of approval, but the corresponding transaction occurs on the next day, the system will flag it. Basically, you build the rules, and the system notifies you when a possible violation occurs.

The workflow functionality also enables automation of other Code-related pre-clearance and reporting. Most Codes also require some sort of reporting, and pre-clearance for Gifts & Entertainment at a certain dollar threshold, Political Contributions, as well as outside business activities and other conflicts. The platform can be customized to support pre-clearance requests and approvals of such activities, as well as enabling tracking of cumulative thresholds.

COE Solutions also enable Supervised Persons to fulfil the firm’s requirements to complete attestations and certifications in an online environment. Typically, a standard library of template attestations is provided for those related specifically to Rule 204A-1, such as initial and annual acknowledgements to the Code. You’ll also typically find a “build-your-own” option that lets you create firm-specific questionnaires and certifications that are fully customizable. This means the IT department can disseminate attestations relating to the safeguarding of the firm’s data and compliance with cybersecurity protocols, or HR can use the system to facilitate new hire and other employment-related certifications that are unique to the firm.

COE Solutions provide a central repository of Code-related books and records and WORM-compliant tracking of workflow. Let’s face it. The Code of Ethics rule requires that we collect and monitor extremely personal information about employees–account numbers, holdings, assets, and related data needs to be secure! COE Solutions are set up with all the encryption levels necessary, locked down to a “need to know” basis. It’s not living on a server somewhere in a folder that others have access to.

COE Solutions can also be specifically set up to share information with specific members of the Compliance department. Gone are the days of printing off all your sensitive information and having it sit on someone’s desk. Employees don’t have to worry about unopened statements sitting somewhere in the firm just waiting on someone (and hopefully the right someone) to open.

There are other advantages for employees. Code of Ethics reporting is frequently top of mind for most people when they think about Compliance. With disclosure initially (and sometimes before) hiring, then quarterly and annual at the least, most would point to personal securities transactions and the disclosure of outside business activities as what “compliance” means to them. Code Solutions helps employees save time.

– Customized Questionnaires Based on Responses: Instead of having every possible question on a Word document or piece of paper, COE Solutions can be built out to have decision-trees. If someone marks yes to a particular question, it can then prompt them for more information. If they mark no, then there’s no need to continue the questioning…they can just move on.

– Secure, Personalized Records: COE Solutions do a great job of remembering previously submitted information. So when someone discloses an outside business activity initially, the system can just ask if it’s still applicable, rather than starting with a blank slate. Without this feature, employees inevitably have to come back and say, “I can’t remember if I told you about…” or “What did I say last time?”

-Confirmation of Completion: Employees are able to see they’ve completed the task, and the system provides them a readily-accessible copy of everything they’ve done. There’s also something gratifying about getting a screen that says “Thanks for completing the task” and checking it off your list!

Does all this really matter? Well, in our experience, Code of Ethics discussions are often the first communication with a new employee, and then becomes the most frequent topic of conversation. These can be sensitive subjects, with Compliance needing to demonstrate just how these items are handled at the firm. Having a well thought-out, polished system is a good way to “show off” in the sense that compliance matters to the firm, enough to dedicate some resources. It’s quick, it’s efficient, it’s secure- what’s not to like?

On another note, I find very few things in life to be as annoying as nagging. Whether I’m the one doing it, or I’m the one being nagged, it’s just plain unpleasant. Since this is one of the most frequent touch bases for employees, that means it’s one of the most common reviews/tasks for compliance professionals. With these tasks being pushed out electronically, you can set up reminders to automatically e-mail (nag) people when they don’t complete. It’s amazing how annoying these reminders can be, which also points to how effective they can be. Don’t like getting the e-mails? COMPLETE THE TASK!

Employees – including you – don’t even need to be in the office anymore! Since the Code of Ethics platform is online, it’s available anywhere there’s an internet connection. As we move into a post-Covid world, the workplace looks a lot different than it did 15 months ago. Many firms are moving to a hybrid schedule, some have accommodated a work-from-home arrangement on an ongoing basis for certain employees, and some are even electing to stay fully remote. A Code Solution enables effective management of the Code of Ethics requirements from wherever you and members of team can log in.

Are COE Solutions effective, though? I can resoundingly say YES.

We live in a data-driven society. The quicker information is available, the better and more efficiently we can make decisions. One of those data points these systems can generate is status updates – where everyone is in terms of completing certain tasks. In a few clicks, you can know immediately who’s still outstanding. You can even take it to another level and measure how quickly people are completing the tasks, which would be an important measure of success for implementation.

Like I said, data seemingly runs the world. And with the constant evolving of technology, there’s more and more data available than ever before. Sifting through all this data can be tedious, looking for that “needle in a haystack.” A COE Solution automates rules and allows for ready identification of potential red flags. You can create rules to flag certain specific securities, types of securities, or activities (like price movement). With this set up, you can save time by ignoring the “non-reportable securities” and focus on the real areas of risk.

Inevitably, red flags will lead to a number of false positives, and no matter the extent of your efforts, real issues. These systems give you built-in ways to document reviews/responses, so when you review something and take action, you can document what you did right there. If something popped up and it wasn’t an issue, you can also say why it was flagged but no action was required. It saves time from having to hand-write on a physical statement, comment with a note on a .PDF, or have some completely separate documentation somewhere else.

A COE Solution offers you the opportunity to enjoy, on an ongoing basis, one of those truly rare “win-win” experiences. And by the way, regulators like it, too!