A Personal Account Dealing (PAD) policy is a set of rules that investment firms must put in place to regulate employee transactions made via personal accounts. These guidelines ensure that employees do not exploit their position to violate market regulations and make unlawful profits. They also help manage and prevent conflicts of interest to safeguard the interests of financial firm clients.
Key components of a Personal Account Dealing policy
Here are the essential elements of a robust PAD policy:
Pre-clearance procedures
Pre-clearance policies require employees to seek approval before making any personal transactions with the firm’s financial securities or other instruments.
Reporting obligations
Employees must report all their brokerage accounts and holdings over which they have beneficial ownership. This informs companies of their employees’ interests and helps them designate client accounts to help avoid a conflict of interest.
Restrictions and prohibitions
Restrictions on personal account dealing might be imposed for any of the following reasons:
- The transaction constitutes a conflict of interest with a client or the company
- It falls between the decision of the client to make the transaction and the time of completing the deal. This is called a closed period.
- The employee possesses material inside information associated with an entity involved in the trade
- The transaction could harm the reputation of the company and the employer
Monitoring and auditing processes
Regular assessments and continuous monitoring are vital to ensure the proper management of PAD policies and their compliance with the latest laws. The use of technology can automate many monitoring tasks, such as logging all employee dealing activities for audit trails and using AI analytics to detect patterns and flag suspicious trades.
How is a PAD policy enforced?
The Financial Conduct Authority (FCA) requires firms to have robust PAD policies to counter market abuse and conflicts of interest. The penalties for a breach include:
- For legal or natural persons — fines, cancellation of licence, suspension and, in severe cases, a prison sentence.
- For firms — hefty fines, public disclosure of non-compliance and consequent reputational damage, scrutiny from regulatory authorities and class action lawsuits in cases where clients were adversely affected.