Written by Tracey Straub Tracey Straub is the Vice President of Strategy for Compliance11. Prior to joining Compliance11, Tracey served as a

Transcription

1 White Paper PERSONAL TRADING POLICY BEST PRACTICES Written by Tracey Straub Tracey Straub is the Vice President of Strategy for Compliance11. Prior to joining Compliance11, Tracey served as a Compliance Officer for various large and medium-sized brokerage firms and investment advisers. He was responsible for compliance policies and procedures, compliance training, managing compliance personal trading programs, and developing related technology solutions. Tracey may be reached at tstraub@compliance11.com or

2 Overview Regulations require SEC Registered Investment Advisors (RIAs) and Broker Dealers (BDs) to have a Personal Trading Policy as part of their Code of Ethics or Compliance program. Although the requirements differ between the Investment Advisers Act of 1940, Rule 204A-1 (Code of Ethics) and FINRA Rule 3050 (Transactions for or by Associated Persons) and Rule 407 (Transactions Employees of Members, Member Organizations and the Exchange), the spirit of the rules is consistent. Firms must demonstrate adequate supervision through policies and procedures to ensure that employees are not trading on material, nonpublic information (inside information). In an effort to better understand industry best practices, Compliance11 produced and distributed a Personal Trading Survey ( Survey ) to Compliance Officers of BDs, RIAs and Hedge Funds. The Survey was distributed nationally, and 184 responses were collected. The remainder of this document discusses the key components of a Personal Trading Policy and uses the results of the Survey to confirm industry best practices. Appendix A includes a draft Personal Trading Policy that can be customized to meet the needs of a particular firm. Below is an outline of the components: 1. Scope 1.1 Covered Persons 1.2 Covered Accounts 1.3 Managed Accounts 2. Designated Brokerages 3. Pre-Clearance Procedures 4. Holding Period 5. Prohibited Transactions 5.1 Restricted List 5.2 Front Running 5.3 IPOs 5.4 Asset Class 5.5 Sector 5.6 Market News 5.7 De Minimis 5.8 Market Cap 6. Reporting Procedures 6.1 Account Reporting 6.2 Transaction Reporting 6.3 Holdings Reporting 6.4 Policy Affirmation 2 of 15

3 1. Scope 1.1 COVERED PERSONS Covered Persons are the people in the organization that the policy applies to. To define Covered Persons, the following questions must be answered: Should the policy apply to all employees or only a subset of employees? Some firms only subject registered associates and/or access persons to their policy. While this approach is acceptable, it leaves the firm bearing more risk. Based on the Survey results, 84% of the respondents applied their policy to all employees. Should the policy apply to any non-employees? The policy may need to be broader than just the firm s full and part-time employees and include other persons associated with the firm ( non-employees ), e.g. interns, consultants, temporary employees or board members. An assessment should be made to determine if any groups of non-employees working for or affiliated with the firm potentially have access to material, nonpublic information. For example, care should be taken to monitor summer interns working in the investment banking department or research department whereas other groups of interns may pose less risk. Based on Survey results, 5% of the respondents included interns, consultants, temporary employees and board members in their policy scope, if their duration with the firm was anticipated to be greater than 90 days. 1.2 COVERED ACCOUNTS Covered Accounts are the securities accounts associated with Covered Persons. To define Covered Accounts, the following questions must be answered: What types of accounts are considered securities accounts? Securities accounts should include all accounts that have the capability to hold or trade individual securities (stocks, bonds, options, etc.). The following types of accounts are not considered securities accounts: Bank accounts (checking, savings, mortgage, etc.). Treasury direct accounts. In addition, BDs typically do not consider the following as securities accounts if they do not have the ability to trade individual securities: Mutual fund only accounts that do not have brokerage capabilities, which includes 529 Accounts. 401(k) accounts that are held by a previous employer of the Covered Person. Which accounts, in addition to the Covered Person s personal accounts, should the policy apply to? Covered Accounts should include all securities accounts where the Covered Person has a financial interest or the power to make or influence investment decisions. In addition to a Covered Person s personal accounts, Covered Accounts include: Accounts in which the Covered Person is named as a joint party, either as the primary or secondary party. Accounts in which the Covered Person has control, e.g. trust accounts, corporate accounts, Power of Attorney ( POA ) on any accounts, etc. Accounts of the Covered Person s spouse or domestic partner. Accounts of the Covered Person s minor children, regardless of whether or not the Covered Person is the named custodian on the account. Accounts for any Covered Person s family member whose principal residence is the same as the Covered Person s residence. Any other accounts the Covered Person has a beneficial ownership in or can influence trades in. 3 of 15

4 1.3 MANAGED ACCOUNTS An account is considered a Managed Accounts if it meets the following three criteria: It is managed by a third party. The Covered Person has no power to affect or ability to control or influence investment decisions in the account. The Covered person does not communicate (directly or indirectly) with the person(s) with investment discretion regarding the trading activity in the account. Do Covered Persons need to report Managed Accounts? Although the Covered Person is not directing orders in a Managed Account (which by definition eliminates the risk of trading on insider information), the rules require that Managed Accounts be disclosed. Should Managed Accounts be verified that they are indeed managed? If Managed Accounts are exempt from parts of the policy, then steps should be taken to verify that the accounts are indeed managed. The easiest method to verify that an account is managed is to require that the Covered Person provide a copy of their Investment Advisory ( IA ) Agreement or Contact at the time of disclosure. The IA Agreement/Contract is a document that captures the arrangement whereby a third-party agrees to act as investment adviser or to manage any investment or trading account of another person. Is the same level of supervision necessary for Managed Accounts? Even though Managed Accounts must be disclosed, many firms do not monitor the trading activity in these accounts in the same manner as they do their non-managed accounts, again because the trading activity is directed by a third party and not the Covered Person. In theory no surveillance is necessary on Managed Accounts and some firms take this approach; however, it is a good practice to review transactions in Managed Accounts against the firm s restricted list for suspicious patterns. In addition, Covered Persons should be asked to reconfirm and acknowledge on a regular basis, no less than annually, that the account remains a managed account, as defined above. 2. Designated Brokerages In order to simplify and streamline supervision, some firms specify where Covered Persons must hold their brokerage accounts. Brokerages where Covered Persons must hold their accounts are referred to as Designated Brokerages. When considering whether or not to use Designated Brokerages, the following questions should be considered: What is management s appetite for Designated Brokerages? Based on the Survey results, 25% of respondents require their employees to maintain their personal accounts at a Designated Brokerage. The remaining 75% do not have Designated Brokerages, significantly increasing the firm s risk exposure as well as increasing the time and resources needed to administer an effective personal trading program. The larger the firm, the more likely it is that management will require Designated Brokerages to reduce risk and cost. Part of the reason for this correlation is that the cost savings are greater at large firms. The other reason is that the sheer volume of outside accounts, often times in the thousands, demands a streamlined approach, otherwise the process becomes unmanageable. What is disadvantage of not having Designated Brokerages? If a firm does not use Designated Brokerages, it will most likely have to process a much higher percentage of paper confirms and statements because all brokerages do not support electronic feeds for Compliance purposes. What is the risk associated with processing paper confirms and statements? Processing paper confirms and statements create the following risks: The firm may not know of suspicious trading activity until weeks, or in some cases months, after the trade was made due to untimely receipt of the mail. The firm s personal trading rules must be simple so they can be checked by hand. If the data were electronic, much more advanced rules could be used to identify suspicious trading activity. 4 of 15

5 Reviewing activity by hand makes it virtually impossible to monitor against future market news and events. If the data were electronic, much more advanced insider trading rules could be used to identify suspicious trading activity. If Pre-Clearance requirements exist in the policy, each transaction will need to be manually reviewed and reconciled against the receipt of a pre-clearance trade request. Reviewing statements by hand is error prone. Receiving paper confirms and statements require additional physical storage needs for record retention purposes. Some of these risks can be mitigated by manually entering confirms and paper statements into a system, but other risks remain. How many Designated Brokerages should be supported? Firms that have Designated Brokerages typically have between 3 10 Designated Brokerages. It is difficult to support more because only a handful of brokerages are willing to provide electronic feeds for Compliance purposes. Are there other alternatives to Designated Brokerages? In 2010, Compliance11 introduced new technology that gives electronic access to thousands of brokerages. Firms with fewer than 50 employees typically use the new technology exclusively. Firms with more than 50 employees use the technology to obtain electronic feeds for any brokerages where it is not feasible to create a direct link. While the technology is revolutionary, mandating Designated Brokerages is still the current industry best practice, but very challenging for a Compliance Program to accomplish. 3. Pre-Clearance Procedures Pre-clearance requires Covered Persons to obtain approval prior to initiating a transaction in their personal accounts. When designing Pre-clearance Procedures, the following questions should be considered: Is pre-clearance necessary? Incorporating a pre-clearance process into the policy is a proactive approach to minimizing potential insider trading. A pre-clearance process creates tighter supervisory control by allowing Compliance to question the nature of and triggering event that prompted the trade prior to placing the order. Based on the Survey results, 83% of respondents incorporate pre-clearance requirements as part of their policy. What parts of the Personal Trading Policy should be reiterated as part of the Pre-clearance Process? Pre-clearance provides Compliance with the opportunity to reinforce principles in the Personal Trading Policy. Some common questions on the pre-clearance form include: Do you have knowledge of any material, nonpublic information regarding this transaction? Are you currently involved in or aware of any firm activity related to this transaction? Does this transaction fall within the parameters of the Personal Securities Trading Policy? Should all accounts be subject to pre-clearance? Where possible, Covered Accounts should be subject to pre-clearance. However, pre-clearance may not be feasible for all Covered Accounts. For example, pre-clearance may not be realistic for spousal accounts where the Covered Person does not have the ability or permission to direct transactions in the accounts (e.g. a spouse s IRA account). Regardless, transaction review needs to be performed on these accounts and problems addressed at that time. Who should approve pre-clearance requests? The Survey results showed that 73% of respondents have Compliance approve pre-clearance requests with the remainder performed in conjunction with the Covered Person s supervisor. While most firms currently have Compliance approve these requests, many firms are moving towards incorporating supervisor approval into the 5 of 15

6 process before forwarding to Compliance for final review. It is worth noting that personal trading automation solutions can approve most requests automatically based on meeting certain criteria as established by the firm, e.g. de minimis trades. How long should pre-clearance requests be good for? Pre-clearance approval is generally valid for the day it was received. Firms may, based on their business model, consider extending the pre-clearance approval duration beyond the date of approval, but typically the approval is not extended beyond two days. Should certain securities be exempt from pre-clearance requests? Firms may decide to exempt certain types of transactions based on their business model as the potential risk of trading on inside information is significantly minimized. Based on the Survey results, the following are types of transactions that may be exempt from pre-clearance: Money-market funds Mutual Funds Index-based securities (ETFs) and option on these securities Commercial Paper Unit Investment Trusts Direct Investment Plans (DRIPs) Brokerage Certificates of Deposit U.S. Treasury obligations Debt securities issued by state and municipal governments and government agencies of the United States Transactions made through the use of an Automatic Investment Plan Actions that occurred without the input of the Covered Person, e.g. option expiration, called bond, converted security, etc. 4. Holding Period A holding period requires Covered Persons to hold their positions for a specified period of time. When considering whether or not to incorporate a holding period, the following questions should be considered: What are the benefits of a holding period? A holding period eliminates day-trading and further reinforces that employees are expected to trade for investment or long-term purposes. The use of a holding period minimizes the risk of Covered Persons capitalizing on inside information. A review of the Survey results shows that 43% of respondents include a holding period in their policy. How long should the holding period be? The holding period should be long enough to prevent speculative short-term trading. Based on the Survey results, most firms that have a holding period requirement have a holding period of 30 calendar days. A small number of respondents extended that period up to 60 days. Should a FIFO or LIFO method be used when calculating the holding period? A first-in-first-out (FIFO) method assumes the oldest shares are being used. A last-in-first-out (LIFO) method assumes the newest shares are being used. In the example below (assuming a 30-day holding period), the FIFO method would allow the trade on October 15. The LIFO method would not. Date B/S Shares Symbol 1 September 1 Buy 150 IBM 2 October 1 Buy 200 IBM 3 October 15 Sell 100 IBM 6 of 15

7 Most firms use the LIFO method since the FIFO method is essentially a loophole to the holding period rule. Also, calculating the holding period with the FIFO method can be very challenging. Should the Holding Period apply across accounts? Some firms wave the holding period requirement if an employee buys securities in one account and sells them from another account. Most firms disallow this because, like the FIFO method, it is a loophole to the holding period rule. Should sell/buy transactions be allowed? Selling a security and buying that same security back poses the same risks as a buy/sell transaction and should also be subject to the holding period. Should there be exceptions to the Holding Period? Including a holding period requirement is an effective method to minimize speculative and short-term trading; however, it can also be detrimental to employees experiencing an unexpected financial hardship or during a declining market. In an effort to provide relief, the policy may waive the holding period or allow a reduced holding period for the following situations: After x calendar days from the last transaction, a security drops greater than y% of its market value. For unexpected financial hardship, the employee may initiate a request to their direct supervisor and/or Compliance for a reduced holding period exception. Upon further review, approval may be granted if the circumstances warrant as such. All exceptions to policy should be documented, evidence the appropriate approvals, and be readily accessible for further review and discovery purposes. The use of a database tool is ideal and allows for additional trending analysis and reporting. Should certain securities be exempt from the Holding Period? Many firms will exempt certain short-term investments from the Holding Period. Examples of exempt short-term investments include: Money-market funds Commercial paper Treasury bills 5. Prohibited Transactions 5.1 RESTRICTED LIST A Restricted List is a list of securities that Covered Persons are not permitted to solicit and/or trade in their Covered Accounts. Firms that maintain a Restricted List should include in their policy the additional requirements concerning the list. Should there be a Restricted List? The maintenance of a Restricted List of securities is commonly established by firms to prevent internal conflicts of interest, as employees are deemed to potentially possess material, nonpublic information regarding these specific securities. A Restricted List is typically maintained if any of the following conditions exist: The firm is a public company. The firm s business includes investment banking and/or research. Certain Covered Persons possess insider information relating to the firm s investments or the firm s clients. The Survey results indicated that 70% of all respondents incorporate a Restricted List in their Compliance Program. 7 of 15

8 Should the Restricted List be direction specific? A restricted list may be basic and incorporate the same standards on all securities within the list or may be more complex and include varying restriction levels, e.g. restrictions to buy and not to sell. In this example, the firm may allow Covered Persons to liquidate existing positions, while at the same time not allow them to establish a new position or add to an existing position. Should the Restricted List contain all related securities? The Restricted List should include all securities related to a particular company including: all exchanges the stock is listed on, options and bonds. Personal trading automation solutions can simplify checking for related securities given a base symbol. 5.2 FRONT RUNNING Front Running is the illegal practice of a firm or one of its employees executing orders on a security for its own account while taking advantage of advance knowledge of pending customer orders, thereby trading in front of the customer. Technically Front Running is effective if it is done minutes prior to customer orders; however, many firms restrict employees from trading in the same securities that the firm is trading in to ensure no conflicts. How many days before/after a firm trade should employee trading be restricted? Most IAs restrict employees from trading in the same securities as the firm on the same day. Some firms extend that period up to 7 days before and 7 days after a firm trade. 5.3 IPOS Initial Public Offerings, as they relate to Covered Persons and the policy, are handled differently for BDs and IAs. Broker Dealers Officers, directors, general partners, associated persons or employees of a BD are considered restricted persons, as defined by FINRA Rule 5130, Restrictions on the Purchase and Sale of Initial Public Offerings. As restricted persons, Covered Persons are not eligible to purchase a new issue in any account in which they have a beneficial interest. The brokerage firm that holds the Covered Person s account would require them to complete an IPO Registration form, which would then identify them as a restricted person. Investment Advisers Under Rule 204A-1 of the 1940 Advisers Act, access persons are required to obtain pre-approval before investing in an IPO or private placement. At a minimum, the policy for IAs should require that all IPO transactions be pre-cleared prior to the Covered Person giving an indication of interest to their brokerage firm. 5.4 ASSET CLASS An Asset Class restriction restricts which asset classes can be traded. Should there be an Asset Class Restriction? If a firm only transacts in a particular asset class, it may be easier to restrict the entire asset class instead of maintaining a Restricted List and/or doing a Front Running check. This simplifies the work for Compliance while still allowing the employee to participate directly in managing their investments. 5.5 SECTOR A Sector restriction prohibits trading in securities in a particular sector. Should there be a Sector Class Restriction? If a firm only transacts in a particular sector, it may be easier to restrict the entire sector instead of maintaining a Restricted List and/or doing a Front Running check. This simplifies the work for Compliance while still allowing the employee to participate directly in managing their investments. 8 of 15

9 5.6 MARKET NEWS Market news and events can be compared with personal trades to identify potential insider trading. One benefit of this method is that it can identify potential insider trading even if the material nonpublic information was not generated from within the firm. Should personal trades be compared with market news? Comparing personal trades with market news is an excellent check. It strikes directly at the problem of insider trading while other rules address it from the side. However, a match with market news does not necessarily mean there is a problem. Repeated matches and further investigation may be necessary to identify a problem. The biggest reason not to do a market news check is that it may not be feasible. It is difficult to obtain and analyze the data by hand. However, some of the new personal trading software makes this check effortless. The Survey indicated that 30% of respondents do a market news check. What types of market news should be monitored? The more types of public announcement information that can be monitored the better. This typically includes news releases, press releases and SEC filings. What constitutes a market moving event? Even with an automated tool, there will be many matches with market news. In order to focus on the important matches, some firms only monitor matches where the market news moved the market. Most firms only monitor market news when the price changed by 10-20% or more in any one day. How many days in advance of the public announcement should be monitored? Firms that incorporate a market news review in their program typically check personal trades seven days in advance of the market news. 5.7 DE MINIMIS De Minimis rules restrict the size of trades in dollars and/or shares. To be effective, a timeframe must be specified so Covered Persons cannot go around the rule by executing several small trades instead. In addition, De Minimis rules may restrict transactions in low-priced securities. Should there be a De Minimis limit? The theory behind having De Minimis limits is that the larger the trade or low-priced securities (e.g. penny stocks), the higher the risk that the trade will be scrutinized. In addition, many low-priced securities are thinly traded and are targets for price manipulation. This theory is open to some controversy. Instead of having a hard rule that prohibits trades over a certain limit or low-priced securities, another option is to allow these trades but flag them for manual review. What should the De Minimis limit be? For firms that have a De Minimis limit, it is usually $50,000 for the day or $100,000 for the month as well as securities trading for less than $1.00 per share. 5.8 MARKET CAP A Market Cap rule restricts the purchase of securities for companies with a market cap below a certain level. Should there be a Market Cap limit? The theory behind having a Market Cap limit is that it is harder to make unethical trades with a widely traded security. This theory is open to some controversy. Instead of having a hard rule that prohibits trades under a certain limit, another option is to allow these trades but flag them for manual review. What should the Market Cap limit be? For firms that have a Market Cap limit, the limit is usually $2B $5B. 9 of 15

10 6. Reporting Procedures 6.1 ACCOUNT REPORTING Account Reporting is the process for disclosing newly established accounts as well as a regular review and affirmation that all personal and covered accounts have been disclosed to the firm. Is Account Reporting necessary? Account Reporting is essential to proper personal trading supervision. How often should accounts be reported? In theory, accounts could be reported once at hire and then only changes would need to be tracked. The reality is that the tracking of changes is easily forgotten. In order to show proper supervision, Account Reporting should be done at a minimum upon hire and annually thereafter. Based on the Survey results, 57% of firms report annually and 30% of firms report quarterly. 6.2 TRANSACTION REPORTING Transaction Reporting, pertinent to IAs, is the process for disclosing all transactions in reportable securities, as required in the 1940 Advisers Act, Rule 204A-1. Is Transaction Reporting necessary? Transaction Reporting is a carryover from times past. If duplicate statements or electronic feeds are being received for all Covered Accounts, Transaction Reporting is redundant. Rule 204A-1 excuses access persons from submitting transaction reports that would duplicate information contained in trade confirmations or account statements, provided that the adviser has received those confirmations or statements no later than 30 days after the close of the calendar quarter in which the transaction takes place. In lieu of quarterly transaction reporting, many IAs instead require a quarterly account affirmation as noted above in section 6.1, Account Reporting. What are Reportable Securities? For IAs, the 1940 Advisers Act, Rule 204A-1 treats all securities as reportable securities, with five exceptions that are as follows: Transactions and holdings in direct obligations of the U.S. Government Money market instruments bankers acceptances, bank certificates of deposit, commercial paper, repurchase agreements, and other high-quality short-term debt instruments Shares of money market instruments Transactions and holdings in shares of other types of mutual funds, unless the adviser or control affiliate acts as the IA or principal underwriter for the fund Transactions in units of a unit investment trust if the trust is invested exclusively in unaffiliated mutual funds 6.3 HOLDINGS REPORTING Holdings Reporting, pertinent to IAs, is the process for disclosing all holdings in reportable securities, as required in the 1940 Advisers Act, Rule 204A-1. Is Holdings Reporting necessary? Holdings Reporting is required for IAs on an annual basis and no later than 10 business days after the person becomes an access person. However, if duplicate statements or electronic feeds are being received for all Covered Accounts, Holdings Reporting is redundant. 10 of 15

11 6.4 POLICY AFFIRMATION Policy Affirmation is the process of distributing the appropriate policies to employees and obtaining their positive acknowledgement that they have read the policies and understand their responsibilities. Is Policy Affirmation necessary? Policy Affirmations for the Personal Trading Policy, the Code of Ethics and other policies (e.g. use of electronic communications) should be done at least annually. This process includes distribution of policies and the positive acknowledgement of the Covered Person that they have read, understand and will abide by the policy requirements. Automation Personal trading automation solutions allow Compliance officers to better achieve the goals of personal trading surveillance and require less effort. They allow Compliance officers to focus on managing risk areas instead of managing mass amounts of paper. They do this by: Electronic Feeds: Facilitate receiving transactions and holdings electronically, saving hours of opening envelopes and filing paper statements. Automatic Pre-clearance: Automatically approves trades based on pre-defined rules. Automatic Transaction Review: Automatically reviews transactions based on pre-defined rules and reconciles with pre-clearances. Reporting: Automates the distribution and collection on Account Disclosure, Transaction Reporting, Holdings Reporting and Policy Affirmations. Conclusion Supervising employee trading activity is critical to adhering to regulatory requirements. A well thought out Compliance program includes a Personal Trading Policy that protects the firm while allowing employees to still manage their personal finances. An effective policy includes more than just requiring employees to disclose their accounts. There is no full-proof, failsafe process or technology solution to prevent employees from trading on material, nonpublic information. However, adding pre-clearance requirements for certain transactions and holding periods may substantially reduce the risk. Integrating these requirements as well as receiving transactions data electronically, incorporating insider trading policy logic, regular employee reminder notices, policy affirmations and employee Compliance training further protects the firm and supports a Compliance program that is reasonably designed to prevent violations. An appropriate allocation of resources is also essential to ensure that a Compliance program has the ability to adequately monitor the procedures. In addition to people capital, the right investment in technology can significantly streamline the procedures and reduce the time needed to administer the process. The right technology incorporates electronic transaction and holding feeds, which strengthens a program s effectiveness through the use of automated business rules and exception logic, allowing Compliance officers to use their time to manage risk, not paper. 11 of 15

12 APPENDIX SAMPLE PERSONAL TRADING POLICY [COMPANY NAME s] Personal Trading Policy ensures that all Covered Person s personal investment activities are conducted in compliance with regulatory requirements. Covered Persons are expected to manage their accounts prudently for long-term investment purposes. 1. Policy Scope 1.1 COVERED PERSON This policy applies to all Covered Persons, which is defined as: Full-time employees Part-time employees Consultants and/or Interns associated with the firm for a period greater than 90 days [OPTIONAL] Board Members 1.2 COVERED ACCOUNT This policy applies to all Covered Accounts, which is defined as an account with the capability of trading securities where a Covered Person has any direct or indirect beneficial ownership interest or possesses trading authority. In addition to a Covered Person s personal accounts, Covered Accounts include: Accounts in which the Covered Person is named as a joint party, either as the primary or secondary party. Accounts in which the Covered Person has control over, e.g. trust accounts, corporate accounts, Power of Attorney ( POA ) on any accounts, etc. Accounts of the Covered Person s spouse or domestic partner. Accounts of the Covered Person s minor children, regardless of whether or not the Covered Person is the named custodian on the account. Accounts for any Covered Person s family member whose principal residence is the same as the Covered Person s residence. Any other accounts the Covered Person has a beneficial ownership in or can influence trades. * Note: The following account types are not considered Covered if they do not have the capability to purchase individual securities: Bank accounts (checking, savings, mortgage, etc.) Treasury direct accounts [BDs] Mutual fund only accounts that do not have brokerage capabilities, which includes 529 Plans [BDs] 401(k) accounts that are held by a previous employer of the Covered Person Employees are responsible for correctly identifying their Covered Accounts. If an Employee is not certain as to whether an account is a Covered Account, it is their responsibility to seek, and comply with, guidance from the Compliance Department. 1.3 MANAGED ACCOUNT Managed Accounts are accounts that meet the following criteria: The account is managed by a third party. The Covered Person has no power to affect or ability to control or influence investment decisions in the account. The Covered person does not communicate (directly or indirectly) with the person(s) with investment discretion regarding the trading activity in the account. Managed Accounts are considered Covered Accounts and must be disclosed. At the time of disclosure, the Covered Person is required to indicate that the account is managed and provide a copy of the Investment Advisory 12 of 15

13 ( IA ) Agreement to the Compliance Department. The IA Agreement/Contract is a document that captures the arrangement whereby a third-party agrees to act as investment adviser or to manage any investment or trading account of another person. 2. Designated Brokerages [Optional] Employees are permitted to maintain Covered Accounts only at one of the following Designated Brokerages: [firm name] [firm name] [firm name] [firm name] [firm name] Covered Persons have 60 days after their start date to move their accounts to a Designated Brokerage. If it is not possible to move a particular account to a Designated Brokerage, the Employee is responsible for obtaining approval from the Compliance Department. 3. Pre-Clearance Requirements Covered Persons are required to obtain pre-clearance approval from [Manager and/or Compliance Department] before any transaction is executed in a Covered Account. [OPTIONAL] Trade pre-clearance is not required for transactions in Covered Accounts of a spouse or domestic partner who: has an independent source of income or assets, and the employee has no financial interest (e.g. is not a joint owner) and no ability to control or influence investments decisions (e.g. spouse s IRA account), and provided that no communication between the persons with investment discretion and the employee with regard to the transaction is permitted to occur prior to execution. The following types of transactions are exempt from trade pre-clearance requirements: Money-market funds Mutual Funds Index-based securities (ETFs) and option on these securities Commercial Paper Unit Investment Trusts Direct Investment Plans (DRIPs) Brokerage Certificates of Deposit U.S. Treasury obligations Debt securities issued by state and municipal governments and government agencies of the United States Transactions made through the use of an Automatic Investment Plan Actions that occurred without the input of the Covered Person, e.g. option expiration, called bond, converted security, etc. 4. Holding Period Requirements [COMPANY NAME] strongly discourages short-term trading activity and therefore requires a minimum [#]-day holding period from the time of the most recent transaction in the security. Covered Persons are prohibited from disposing of investments within [#] calendar days of last acquisition or from re-acquiring shares within [#] calendar days of the last sales date (last-in first-out basis). Money-market fund transactions are exempt from the holding period. 13 of 15

14 Exceptions to the holding period may only be granted with prior consent from the Compliance Department. 5. Prohibited Transactions Covered Accounts are prohibited from executing the following transactions: A transaction would constitute Insider Trading A security is on the Restricted List Initial Public Offerings [BD requirement only] The transaction is executed on a security in the Covered Account while taking advantage of advance knowledge of a pending customer order, thereby trading in front of the customer (front-running). [OPTIONAL] Asset Class [OPTIONAL] Sector [OPTIONAL] Speculative short-selling [OPTIONAL] Over-the-counter derivative trading [OPTIONAL] Option strategies that would create an economic exposure equivalent to a short position (e.g. naked call writing) [OPTIONAL] Futures Trading (except accounts managed by an advisor with full discretion) [OPTIONAL] Foreign Currency Trading (except for trading that is solely for purposes of currency conversion) 6. Reporting Procedures 6.1 ACCOUNT REPORTING Covered Persons are required to disclose all Covered Accounts held internally or away from the firm to the Compliance Department. For newly hired Covered Persons, disclosure must be made within 10 days of their start date. On an ongoing basis, Covered Persons are required to notify the Compliance Department if any additional accounts are opened or if any existing accounts are closed. Furthermore, employees are required to attest annually that all Covered Accounts have been disclosed. 6.2 TRANSACTION REPORTING [IAs] To ensure that all transactions are received and reviewed, access persons are required to complete a quarterly account affirmation within 15 calendar days of each new calendar quarter. 6.3 HOLDINGS REPORTING [IAs] Within 10 calendar days of a new access persons hire date, and within 30 calendar days of every new year (January 30th), access persons must report all holdings of reportable securities * in Covered Accounts. The holdings must be current as of a date no more than 45 days prior to the date of the report. If a Covered Account has no holdings, it must be indicated as such. * Reportable securities are defined as all securities, with five exceptions that are as follows: Transactions and holding in direct obligations of the U.S. Government. Money market instruments bankers acceptances, bank certificates of deposit, commercial paper, repurchase agreements and other high quality short-term debt instruments. Shares of money market instruments. Transactions and holdings in shares of other types of mutual funds, unless the adviser or control affiliate acts as the IA or principal underwriter for the fund. Transactions in units of a unit investment trust if the trust is invested exclusively in unaffiliated mutual funds. 14 of 15

15 6.4 POLICY AFFIRMATION Within 10 calendar days of a new Covered Person s start date, and within 30 calendar days of every new year (January 30th), Covered Persons must review, acknowledge and affirm that they have read and that they understand the Personal Trading Policy. Questions regarding this policy should be discussed with the Compliance Department or directed to the Chief Compliance Officer. DISCLAIMER The purpose of this document is to assist in the development of a personal trading policy. It is the intent of Compliance11 that anyone using this document seeks the advice of an attorney to develop a policy that meets their company s specific needs. Any legal questions should be referred to appropriate legal counsel. Compliance 11 makes no guarantee as to, and assumes no responsibility for, the correctness, sufficiency or completeness of this sample policy. You hereby acknowledge that any reliance upon this sample policy shall be at your sole risk. Compliance11 reserves the right, in our sole discretion and without any obligation, to correct any error or omissions in any portion of this sample policy content at any time, with or without notice to you Compliance11 New York Chicago V of 15