To meet the employee personal trade monitoring requirements of the Investment Advisers Act of 1940 rule 204a-1 you are collecting your employees’ brokerage statements for review. In fact, you’re a step ahead because you’re collecting this data through direct feeds or using a 3rd party provider – the most reliable methods for doing so. But, what you might not know are all of the hidden issues that are likely lurking under the surface.
Collecting truly accurate, best-in-class employee brokerage data is not nearly as easy or straightforward as some might believe.
Even if you manage to secure full employee account coverage, establish relationships with brokers and have direct feeds constructed to feed an in-house or 3rd party compliance platform, there is:
- Regular maintenance
- Thousands of data anomalies
- Various protocols for electronic sends
- Account reconciliation work
- Numerous other issues
These three areas are where you need to focus:
- Data Sources – how are you collecting your data?
- Data Normalization – what procedures are you or your vendor using to cleanse your data and ensure its accuracy?
- Data Health– how do you know the health of your data? Can you view which accounts are feeding, and which are not? Do you know why?
Your data source(s) are the first place to start when thinking about your employee personal trade monitoring processes. Here is where the foundation for data quality and best process begins, and if this foundation is rocky you can expect the rest of your process to be as well. Let’s start by discussing the different sources for collecting employee trade data:
The most common employee brokerage account data source is physical statement collection. While this option is simple and requires the least overhead investment, it is also a source that lends itself to a myriad of issues – the most common being inaccurate reporting.
With physical statements your process is at the mercy of two highly unreliable variables: the United States Postal Service delivering your brokerage statements on time, if at all (these can be lost causing serious inefficiencies!) and human error – how confident can you be that your review person has perfect precision and accuracy with every single manual statement review? Things get further complicated if your restricted lists are updated often, employees trade with high-frequency or there is staff-turnover.
While physical statement collection and review is a simple process, it is one that works best at smaller firms where the collection, review and tracking can be effectively done manually for a manageable number of employees.
Many 3rd parties and financial institutions have been turning to account aggregators to collect and aggregate employee trading information. This data is either pulled into a 3rd party’s platform, or pulled into your own in-house solution. While this data comes without the headaches of manual collection, entry and review, it has some drawbacks of its own.
The first is control: you do not control, nor understand the status of your data. With account aggregators, you are trusting that the most accurate, up-to-date information is being pulled into your system for review, but you have no real visibility. What if an account was not updated on a given day – do you know that? How does your aggregator receive their information – are you fully aware? And what is their level of confidence / accuracy – do you believe it?
The second is security: with direct feeds you can be sure that there is end-to-end encryption of the sensitive employee brokerage account data you are receiving daily. With account aggregators, this end-to-end encryption often does not exist, or is not guaranteed. Cybersecurity is of critical importance today, especially with the increased scrutiny by FINRA and the SEC.
All in all, while account aggregators often provide a simpler experience with expansive account coverage there is limited control and limited security that comes with it.
Direct feeds are the most reliable, accurate and secure way to collect and review your employees’ brokerage account data. With direct feeds you have complete control over your data, maximum visibility into the health and status of your data, and the greatest levels of security with end-to-end encryption. While direct feeds are without a doubt the best method of employee brokerage account sourcing, the direct feed method is still vulnerable to issues stemming from either your own departmental / IT due diligence or the processes put in place by your 3rd party provider.
Imagine that you’ve established your direct feeds. You are receiving your employees’ accounts’ holdings and transactions nightly and reviewing possible conduct breaches daily. You are confident that you are doing everything you need to in order to identify and report on all possible illicit employee trading behaviors. What you probably do not realize, or do not fully understand is that although you’ve established these direct feeds, your data is still susceptible to thousands of anomalies. Despite your best efforts to source and report on your employees’ behaviors in a timely manner, none of this matters if you are reporting on inaccurate data.
Direct feeds are without a doubt the best way to source your employee account data, and any inherent problems are easily overcome as long as you know what to expect. An experienced 3rd party vendor, or your in-house development team should understand the thousands of data anomalies they are likely to encounter, and have a fully staffed Data Operations team dedicated to addressing anomalies and reconciling data inconsistencies. This is important because while data errors are inevitable, they also provide opportunity to solve known issues – ensuring that any received data in the future is as clean, accurate and complete as possible.
When you speak with a 3rd party vendor or your internal data team, ask about their data normalization process:
- What types of inconsistencies are they looking for?
- How often do they encounter and reconcile?
A well run Data Operations team will encounter various issues with electronic sending protocols, data feed formats, accounts falling off of feeds, numerous security requirements and other issues. These are all completely normal, and as long as they are actively identified and fixed, signs of a healthy data sourcing operation.
Once you have your direct feeds established and know that they are being normalized and reconciled regularly, the most important thing you can do as a compliance professional is actively monitor the health of your data. This means having a real-time view into the status of your feeds from all brokerages, as well as the accounts that are actively feeding. If an account is not feeding, you need to understand why – is it because that account does not have any new trades to report, or is it no longer being processed on the feed? If you have hundreds or thousands of employees, this process becomes increasingly difficult, and increasingly important.
A well-built 3rd party or in-house solution should provide you with the real-time health of your data. This should include:
- Confirm each feed from each brokerage is being received.
- What accounts are being fed with new information, what accounts are being fed with no new information, and which accounts are simply not feeding.
- The ability to drill down on the above to identify any specific problems.
Monitoring your data’s health is critically important to your overall compliance operations.
Ensuring your compliance data is accurate, complete and contextually relevant is no longer an option, it is a must for compliance departments across the globe. As regulators become increasingly sophisticated and double down on their use of technology and big data to conduct and identify illicit behaviors in the market, so must you.
Establishing direct feeds to brokerage houses, ensuring robust and regular data normalization processes and monitoring the health of your data daily is the best way to ensure the highest quality data with the greatest accuracy.
If you are concerned about your employee trade review data processes, ComplySci can help. In 2007, ComplySci pioneered the Employee Personal Trading and Code of Ethics Monitoring technology space with our then flagship product, Personal Trading Control Center™. Working with hundreds of clients over a decade, ComplySci has developed the most comprehensive and sophisticated Risk Data Engine in the industry, processing millions of accounts for hundreds of thousands of employees on a daily basis. With ComplySci, rest assured that you are receiving the highest quality employee brokerage data in the industry, reportable on a T+1 basis.
Learn more about ComplySci’s data processes by downloading our Data Quality White Paper.