1 personal trading policy & implementing an automated platform public pension financial forum...
TRANSCRIPT
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PERSONAL TRADING POLICY & IMPLEMENTING AN AUTOMATED PLATFORM
Public Pension Financial Forum (P2F2) 6th Annual ConferenceSacramento, California
Nancy Ross
VP, Compliance
October 20, 2009
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Presentation Outline
1. Background – compliance function and the approach to new initiatives.
2. Legal requirements – insider trading, tipping and fiduciary duties
3. Benchmarking – best practices and recommendations4. Case study of OMERS personal trading controls:
– The way we were – identifying weaknesses
– Where we are – improvements to date
– Where we plan to be – next steps
– How it went – automation hurdles
October 20, 2009
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OMERS Quick Facts – The Plan
• Ontario Municipal Employees Retirement System• Defined benefit pension plan • Managed by OMERS Administration Corporation, a
statutory non-share corporation• Over 920 employers (municipal governments & agencies
including police, fire, ambulance, library, children’s aid, etc.)
• Over 390,000 members and over 106,000 receiving pensions and benefits
October 20, 2009
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OMERS Quick Facts – Investments
AuM > $44 billion, current asset mix approximately:• < 60% public – managed internally, except some non-
Canadian equities with external managers– Canadian equities < 14%– Foreign equities < 21%– Fixed income < 25%
• > 40% private – managed by wholly owned investment entities– Real estate >15% – Infrastructure <17% – Private equity < 9%
October 20, 2009
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OMERS Compliance Function
• Central Compliance function created in June 2006
• Now team of 6 reporting to Chief Legal Officer
• Areas of responsibility:
1. Legislative Compliance Program – monitor and report quarterly to Board Audit Committee
2. Regulatory Filings – substantial shareholder reporting, AML/Anti-terrorism monitoring and reporting
3. Policy Co-ordination – draft and review policies, manage online library (Slide 13), communicate changes (Slide 14)
4. Code of Conduct – policy, training (Slide 15 & 16)
5. Personal & Insider Trading – policy, training, Restricted List management, personal trading monitoring (policy is available at http://www.omers.com/Assets/investments/Personal+$!26+Insider+Trading+Policy.pdf )
October 20, 2009
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Implementing Compliance Initiatives
Steps:
• Research legal requirements and industry practices• Establish policy• Develop processes for monitoring • Communicate to and train employees• Implement and monitor• Review results • Update policy and processes as needed
October 20, 2009
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Legal Requirements
US Federal Sentencing Guidelines: Effective Compliance and Ethics Program Minimum Requirements: (http://www.ussc.gov/2007guid/8b2_1.html)
1. Standards and procedures to prevent and detect criminal conduct
2. Knowledgeable Board that exercises reasonable oversight, and specific individuals assigned responsibility
3. Reasonable efforts to exclude unsavoury individuals
4. Periodically conduct ethics training and disseminate information to employees on standards and procedures
5. Ensure program is followed, monitored, audited and evaluated, and has a whistle-blowing system
6. Promote and enforce with incentives and discipline
7. Remediation to prevent similar violations
October 20, 2009
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Personal Trading - Legal Principles
• Fiduciary Duty – employees may not use non-public information or their position for personal benefit (i.e. front running, conflict of interest, broker preferences)
• Insider Trading and Tipping – trading in securities of a public company on the basis of material non-public information about the company, or disclosing the information, except in the necessary course of business, is prohibited (US 1934 Act Rule 10b5-1: considered fraud to trade, or tip if in breach of a duty of confidence)
• “material” – if known would reasonably be expected to significantly move the market (US caselaw – viewed by a reasonable investor as having significantly altered the total mix of information made available)
October 20, 2009
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Personal Trading Policy
Benchmarking of Internal Controls:
• Policy and acknowledgements
• Disclosure and monitoring of trades and holdings
• Pre-clearance of trades
• Blackout periods
• IPO and private placement limits
• Institutional trades where held personally by PM
• Short term trading limits
October 20, 2009
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Personal Trading Policy
Purpose:
• Protects individuals and the Fund by helping to prevent inadvertent violations
• Minimizes appearance of individuals profiting from knowledge gained through their position
• Demonstrates reasonable controls required to defend legal action if violation occurs
October 20, 2009
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Personal Trading Policy – Application
“ACCESS PERSON”
Director/employee/consultant with:• Ability to influence investment decisions or
• Access to investment information:
– Direct through systems, premises
– Proximity to those with access
“COVERED ACCOUNT” • Access Person has ability to influence trades
• May include accounts of family, associates, trusts
• Excludes managed accounts, exempt trade accounts
October 20, 2009
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• Periodic newsletter (every 2-3 months)
• Summarizes policy changes and new compliance initiatives
• Red titles link to Policies and Procedures Library
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OMERS – The Way We Were
Pre-2007 program:
• Investment compliance assigned to one individual within the investment group
Written policy requiring:
• Reporting of trades as transacted
• Annual holdings disclosure and acknowledgement
• Trade pre-clearance through an online system
• Monitored by external agent
October 20, 2009
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OMERS – The Way We Were (cont’d)
Problems:
• Online system:
– Security (not issuer) matched
– Securities set up by users
– Manual institutional data entry
– No verification processes
• Control List widely accessible
• Reporting of trades irregular
• Monitoring limited, not timely
October 20, 2009
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OMERS – Where We Are
Initial Improvements:
• Policy rewritten – more guidance, stronger controls
• Compliance responsibility for:
– Maintaining Restricted List, processes
– Data entry with daily verification
• Account statements directly from brokers
• Automated solutions for institutional pre-clearance and monitoring to limit Restricted List access
• Monitoring follow up
October 20, 2009
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OMERS – Where We Are
Recent Implementation:
• Online trade pre-clearance system with security master feed operating at the issuer level
• Online certification of accounts held
• Restricted List populated from trading system in real time plus manual capability for private deals, isolated instances
• Rules for pre-clearance configurable for different employee groups (permits firewalls)
October 20, 2009
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OMERS – Where We Plan to Be
Next Steps:
• Daily feed of trade confirmations from brokers
• Daily reports of previous day’s trade violations– Failure to pre-clear, trade after pre-clearance expired or denied,
short term trade, etc.
• Periodic reports analyzing data for other trends– Front-running, high closing, unusual trading patterns, excessive
pre-clearing, etc.
• Other certifications – Outside activities, gift & entertainment
October 20, 2009
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OMERS – How it Went
Automation Hurdles:
• Accurate issuer/security data essential
– Single point of entry, up-to-date
• Product choice – externally hosted– Concern is security of trading information
• Product choice – integrated with trading system– Concern is security of internal systems
• RFP process – limits to big players
• Brokerage feeds require cooperation– 13 in US, none in Canada yet
October 20, 2009