Trading Ahead Of Investment Policies and Procedures

In response to a request by a reporter, I examined some public documents relating to what appears to be unauthorized trading. As is the situation when only some information is available, it’s hard to tell whether said trades can be characterized as rogue, mistaken or deemed to fall within a broader, albeit ill-communicated, mandate. Should this matter proceed further, obviously the forensic investigator would need access to complete records.

Generally speaking, investment fiduciaries are wise to examine their guidelines against activity records for purposes of identifying any trades that fall outside of allowable limits or are prohibited. More ideally, an institutional investor would have built in safeguards to detect unsanctioned transactions ahead of time, before they take place. Otherwise, an institution (and its beneficiaries) could end up paying fees and incurring losses as part of reversing unauthorized buys or sells.

Absent an Investment Policy Statement (“IPS”) or other type of guiding document, how does someone accurately detect bootleg activity? One could infer intentions based on facts and circumstances although conventional wisdom favors having an IPS. However, the reality is that many institutional investors are not required to craft this kind of roadmap. In some cases, they rely on general instructions that materialize after hopefully careful deliberations among investment fiduciaries and their advisors.

For “seat of the pants” investors, uncovering out of bounds activity is going to be tough if there are no stated boundaries that define appropriate strategies, products and trade size. Moreover, it will be difficult to gauge performance on a risk-adjusted basis if there are no pre-defined dictates as to what the investor needs to achieve and its related constraints.

Given the litigious nature of today’s environment for institutional investment fiduciaries, it seems like a no-brainer to establish an IPS (or something similar), review it as often as needed and abide by its instructions until, and if, modifications are needed. Like the giraffes shown here, investment decision-makers should look over the “financial” trees and figure out how to navigate a fitting path forward. Otherwise, they’re stuck in one place or could end up lost.

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