Monday, November 06, 2006

Corporate ethics

Compliance can be pretty mundane, but along with Internal Audit, we're the oversight for the rest of the firm. There are some interesting circumstances once in a while, though nothing I can really discuss -- a big reason I rarely talk about my job. Tonight I wanted to take a minute and talk about how my employer (who I don't even name, for various reasons) really makes every effort to maintain the highest ethical standards possible.

Recently, one of our employees wanted to do a trade, specifically a large sale of an individual security. Compliance could finally approve it because there were no more sale orders from our clients. That part is very important: we can't have one of our employees helping to drive down the price by selling when our clients are trying to sell, or driving up the price by buying when our clients are trying to buy. Our own employees' orders come after our clients', and that's an inviolate rule. Actually, there are a couple of exceptions I won't detail here, but even those are themselves based in hard rules.

My boss is one of our legal counsel, and part of his job is to ensure that every request for a personal trade is properly reviewed. He saw that, for a reason I also won't detail, the person's preclearance request would not have gone to her department manager for approval as it should have. We knew that her reviewer and backup reviewer had both given verbal approval for the trade, just not through our formal tracking system. Still, my boss ensured that they had to do the latter, and it's part of his job to make sure every request is properly reviewed. He did that knowing it would delay the trade until the next day, because we knew both of her reviewers were in meetings and couldn't give the required approval before the daily cutoff time.

Now, we could have let this one trade go by, then set things properly thereafter. Her reviewers would have had no problem with it, but even so, it's our duty to uphold the highest ethical standards possible, and to comply with the letter and spirit of our own rules. This is very important to the SEC when they audit us, but more so to our clients. We want our clients to know that they come first, and that we're extra rigorous about approving and surveilling our own people's trades.

Around the same time, I was talking with someone who wanted to sell his shares of a commonly held security (a very big, well-known firm). The only problem is that our clients are always buying and trading this particulary security, thus it's hard for our employees to get a "window" for their own transactions. I told the fellow that it's ok for him to keep contacting me to see if he can do the trade, so he started e-mailing me every morning. Once, he called me fairly early, just after he could submit a trade request. It looked like the security wasn't on our clients' order list for that day, but I knew it had to be. There's never a day when our clients don't trade that security (often both directions), so I concluded that it must not have been put on the order list just yet. Sure enough, it appeared about 10 minutes later. We could have approved the trade, and we'd have technically been compliant with all our policies and procedures, but it would not have been fair to our clients. Upholding your fiduciary duty to your clients goes beyond stated rules and procedures.

My boss and I have been talking about our firm's very restrictive policies regarding employee trades. We're far tougher than most firms, let alone what the SEC requires, and I think I think our Chief Compliance Officer has the correct philosophy. It was summed up in a newsletter my boss gave me a copy of: "Personal trading is a privilege, not a right." You don't have the right to demand that your employer let you smoke in the office, give you a minimum amount of vacation time, or let you make personal investments according to what you think is proper. If you don't like the conditions, don't work there.


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