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News March 7, 2005 Issue

OCIE Expects Larger Firms to Automate Personal Trading Surveillance

Mid-to-large size advisers that have not automated their personal trading surveillance should expect to draw comments from SEC examiners.

While the SECís final code of ethics rule does not explicitly require firms to collect access personsí personal trading information in electronic form, at last weekís ICAA/IA Week conference OCIE associate director Gene Gohlke indicated that examiners clearly expect larger firms to have automated this process.

"If itís a five-person shop," said Gohlke, "weíre probably not going to make any comment if you arenít getting access person reports electronically, because itís pretty easy to compare personal trading of five people against your client trading." On the other hand, he added, if examiners walk into a shop where there are 100 access persons, with 50 or so being fairly active traders for their own accounts, "then the staff gets to the point where it doesnít think a firm can practically and effectively monitor personal trading of access persons in comparison to client trading, if that personal trading isnít in an electronic format at some point."

What about testing personal trading on a sample basis? "It may be good enough," said Gohlke. But, he added, "maybe itís not good enough." That, he said, is when firms get the comment from the staff saying "We think your procedures are weak and could be strengthened."

Gohlkeís co-panelist Peter Mafteiu reported that in a exam conducted last December, "we were a little bit chastised for not having an electronic surveillance system for personal trading." Mafteiu said he walked away from the exchange thinking that advisers "might get dinged" for not having a personal trading surveillance system.