Pre-Clearance of Personal Trading Guidance

WHAT IS THE CURRENT POLICY?

Our current policy states that advisors must pre-clear any personal reportable securities transactions if the same security is being traded by clients on the same day, it is not able to be blocked with those client trades AND it does not meet our de minimis standards. Our de minimis standards are defined as a transaction meeting all of the following three criteria: 1) trade is less than $10,000, 2) security being traded has an average daily trading volume over 100,000 shares AND 3) the security is traded on one of the domestic exchanges, such as the NYSE/AMEX/NASDAQ.

Examples

Scenario 1: Advisor A is purchasing XYZ security for 3 clients and wishes to purchase the shares for their own personal account. The client accounts are held at Charles Schwab, but Advisor A’s account is held at TD Ameritrade. Therefore, the trades cannot be blocked together for an average price. The advisor wants to purchase $5,000 worth of XYZ, which has an average daily trading volume of 255,000 shares. The stock is listed on the NASDAQ.

Outcome: Advisor A does not need to pre-clear their trade even though they were not able to block the trade with clients, because the trade met our de minimis standards.

Scenario 2: Advisor A is purchasing XYZ security for 3 clients and wishes to purchase the shares for their own personal account. The client accounts are held at Charles Schwab, but Advisor A’s account is held at TD Ameritrade. Therefore, the trades cannot be blocked together for an average price. The advisor wants to purchase $15,000 worth of XYZ, which has an average daily trading volume of 255,000 shares. The stock is listed on the NASDAQ.

Outcome: Advisor A must pre-clear their trade because they were not able to block the trade with clients and they did not meet all three of the de minimis standards

ADDITIONAL INFORMATION

Many have heard of “front-running” prohibitions, which state that reps must not trade before clients. That is a FINRA regulation. Under SEC regulations and the fiduciary standard, it is not about when an advisor trades during the day relative to their clients but what price an advisor receives relative to their clients. Even if an advisor trades after a client, if they received a better price, their trade is subject to be cancelled or corrected to be averaged with the client trade(s).

NOTE: If an advisor consistently trades the day before or the day after their clients’ trades take place in order to avoid having to request pre-clearance or blocking trades, then their trade may still be subject to corrective action if they receive a better price than their clients.  Even trades that are pre-cleared will be subject to corrective action if a client gets a worse price on a like trade on the same day.  The best practice is to just block your trades with clients and pre-clear when you cannot. The best practice is to just block your trades with clients and pre-clear when you cannot. For more guidance on block trading, please reference our Block Trading FAQs and Block Trading Guidance found in the Power Portal Knowledge Base.

Any of the trade pre-clearance requests can be submitted by creating a case via the Power Portal for Compliance (Service Category: General Compliance, Case Topic: Personal Trading Pre-Clearance, A Little More Specific: New Request).

If you have questions about this guidance or any particular trade/scenario, please reach out to Compliance and schedule time with us.

Thank you,

The Mutual Compliance Team