INVESTMENT ADVISORY
POLICY
AND
PROCEDURES MANUAL
November 1, 1997
HODGES CAPITAL MANAGEMENT
INVESTMENT ADVISORY POLICY AND PROCEDURES MANUAL
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TABLE OF CONTENTS
I. CONFLICTS OF INTEREST - PERSONAL INVESTMENTS........................ 4
II. GENERAL STANDARDS................................................... 5
III. OTHER LAWS, RULES, AND STATEMENT POLICY............................. 10
IV. EXAMPLES OF BENEFICIAL OWNERSHIP.................................... 11
V. POLICY AND PROCEDURES TO DETECT AND PREVENT INSIDER TRADING......... 11
VI. PROCEDURES TO IMPLEMENT THE POLICY AGAINST INSIDER TRADING.......... 14
VII. SUPERVISORY PROCEDURES.............................................. 16
HODGES CAPITAL MANAGEMENT
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INVESTMENT ADVISORY
POLICIES AND PROCEDURES MANUAL
HODGES CAPITAL MANAGEMENT
Hodges Capital Management ("HCM") is an investment advisor registered with the
Securities & Exchange Commission under the Investment Advisers Act of 1940. It's
client base is comprised of individuals and one investment company reporting
under the Investment Company Act of 1940. Because HCM is the advisor for a
registered mutual fund, it adopted and adheres to Rule 17j-1 under the
Investment Act. All revenue is calculated based on a percentage of assets under
management.
As an investment adviser, HCM is a fiduciary and owes its clients the highest
duty of diligence and loyalty. It is crucial to HCM that each employee avoid
conduct that is or may be detrimental to these duties of diligence and loyalty.
It is also important for Employees to avoid actions that may have the appearance
of impropriety.
Although our fiduciary duties require more than simply avoiding illegal and
inappropriate behavior, at a minimum, all Employees should be aware that, as a
matter of policy and the terms of their employment with HCM, the following types
of activities are strictly prohibited:
The use or employment of any device, scheme or artifice to defraud any
client or prospective client of HCM or any part to any securities
transaction in which HCM or any of its clients is a participant;
Making to any person, particularly a client or prospective client, any
untrue statement of a material fact or omitting to state to any person a
material fact necessary in order to make the statements HCM has made to
such person, in light of the circumstances under which they are made, not
misleading;
Engaging in any act, practice or course of conduct that operates or would
operate as a fraud or deceit upon any client or prospective client or upon
any person in connection with any transactions in securities;
Causing HCM, acting as principal for its own account or for any account in
which HCM or any person associated with HCM (within the meaning of the
Investment Advisers Act) to sell any security to or purchase any security
from a client in violation of any applicable law, rule or regulation of a
governmental agency. . Since there are numerous activities that might
breach these prohibitions, it is beyond the scope of this Code of Ethics
and Conduct to attempt to identify and specifically prohibit each of them.
Common sense and an awareness of HCM's fiduciary duties should prevent
inappropriate activities. Any one who has questions about a particular
transaction, act or practice should consult the Compliance Officer.
The following material describes certain requirements and reports with
respect to specific areas in which issues regarding HCM's duty to its
clients most often arise. Employees of HCM should consult with HCM's
Compliance Officer regarding any questions about these items and other
issues relating to HCM's fiduciary obligations.
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I. CONFLICTS OF INTEREST - PERSONAL INVESTMENTS
A. GENERAL. HCM is eager to give every Employee reasonable freedom with
respect to the Employee's investment activities and those of his/her
family. Furthermore, HCM believes it will be stronger and its productivity
better if its employees have the courage of their convictions with respect
to investment decisions. At the same time, conflicts of interest could
arise between HCM's clients and the personal investment activities of HCM
or its Employee's, thereby abusing the trust that has been placed in HCM as
a registered adviser.
HCM's general policy is to avoid conflicts of interest wherever possible
and, where they unavoidably occur, to resolve them in favor of the client.
Even when there is an identity of specific interest among HCM's client and
HCM or its employees, an Employee must recognize that the client has prior
right to the benefits of judgment over the Employee or any non-client
members of the Employee's family whom he or she may advise.
This condition inevitably places some restriction on freedom of investment
for Employees and their families. This Code does not attempt to spell out
all possible cases of conflicts of interest, but rather is designed to
highlight possible problem areas. Employees should be conscious that areas
other than personal securities transactions may involve conflicts of
interest. For example, one such area would be accepting favors from
brokers. The rules set forth below are not intended to cover all situations
that may involve a possible conflict of interest. If there is any doubt
about a transaction for a reportable account or for an Employee's personal
account, the supervisory person designated from time to time as HCM's
Compliance Officer should be consulted BEFORE the transaction is executed.
B. SPECIFIC EMPLOYEE INVESTMENT RULES. The following rules govern investment
activities in "Covered Accounts."
A "Covered Account" generally consists of any account in HCM's or an
Employee's name or in which HCM or an Employee has any direct or indirect
"beneficial ownership" interest.
The concept of "beneficial ownership" is very broad. Employees should
carefully review the definition below.
1. No transaction in a security may be made for an officer, director,
employee or other affiliated account ("affiliated account") before all
contemplated orders have been completed for client accounts, unless
client and affiliated accounts are purchasing or selling the same
security together at the same price per share (before giving effect to
any transaction commission, mark up, or mark down) as part of a
grouped transaction.
2. If transactions for both client accounts and affiliated accounts are
completed on the same day, client accounts shall receive an execution
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price (before giving effect to any transaction commission, mark up or
mark down) equal to or better than the affiliated accounts.
3. New publicly offered issues of common stock or convertible securities
purchased for clients accounts may not be purchased or recommended for
Covered Accounts until after the cooling off period, and then only at
the prevailing market price.
II. GENERAL STANDARDS
A. BEST EXECUTION. It is HCM's policy of selecting brokers to
transactions to seek "best execution" and that provide meaningful
research. This means prompt and efficient execution of the transaction
at the best obtainable price. When an Employee believes that more than
one broker can satisfy the objective of best execution, preference may
be given to brokers who provide services to HCM that qualify as
"research" services under applicable law. In any event, the broker's
commissions or other trans-action compensation must be reasonable in
relation to the value of the brokerage and "research" services
provided. Clients other than ERISA plans and mutual funds may agree to
certain brokerage practices that involve consideration of factors
other than price, execution, and "research" services.
B. "INSIDER TRADING." It is the policy of HCM that no Employee may engage
in what is commonly known as "insider trading": (i) trading, either in
a Covered Account or on behalf of any other person (including client
accounts) on the basis of material nonpublic information; or (ii)
communicating material nonpublic information to others in violation of
the law. HCM has adopted a "Statement of Policy and Procedures to
Detect and Prevent Insider Trading" that describes more fully what
constitutes "insider trading" and the legal penalties for engaging in
it. It also contains procedures intended to help HCM prevent, detect
and, if necessary, punish violative conduct. Employees should refer to
the Statement (as well as this Code of Ethics) whenever any question
arises regarding what to do if an Employee believes he or she may be
in possession of material, nonpublic information about a security.
C. FAIR DEALING VS. SELF DEALING. Each Employee shall act in a manner
consistent with the obligation to deal fairly with all clients when
taking investment action. Self dealing for personal benefit or benefit
of HCM, at the expense of clients, will not be tolerated.
D. FRONT RUNNING. "Frontrunning" and "scalping" refer to the buying or
selling of securities in a Covered Account, prior to HCM's clients, in
order to benefit from any price movement that may be caused by client
transactions or HCM's recommendations regarding the security. It also
includes buying or selling options, rights, warrants, futures
contracts, convertible securities or other securities that are
"related" to a security in which HCM's clients may effect
transactions. These practices are flatly prohibited by HCM.
E. DUTIES OF CONFIDENTIALITY. All "Recommendation Information" and all
information relating to clients' portfolios and activities is strictly
confidential. Consideration of a particular purchase or sale for a
client account shall not be disclosed except to authorized persons.
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F. GOVERNING PURCHASE AND SALE OF SECURITIES BY EACH OFFICER, DIRECTOR,
TRUSTEE AND EMPLOYEE
1. LEGAL REQUIREMENT. Because HCM advises a mutual fund registered
under the Investment Company Act of 1940, it has adopted Rule
17j-1 as a means of procedure governing purchases and sales of
securities by its employees, officers and directors. Rule 17j-1
under the Investment Company Act of 1940 makes it unlawful for
any director, trustee, officer or employee of a registered
investment company ("Fund") or of its investment adviser or
principal underwriter (as well as other persons), in connection
with the purchase and sale by such person of a security "held or
to be acquired" by the Fund:
(a) to employ and device, scheme or artifice to defraud the
Fund;
(b) to make to the Fund any untrue statement of a material fact
or omit to state to the Fund a material fact necessary in
order to make the statements made, in light of the
circumstances under which they are made, not misleading;
(c) to engage in any act, practice, or course of business which
operates or could operate as a fraud or deceit upon the
Fund; or (d) to engage in any manipulative practice with
respect to the Fund.
To assume compliance with these restrictions, HCM adopts and
agrees to be governed by the provisions contained in this Code of
Ethics.
2. GENERAL PRINCIPLES. HCM shall be governed by the following
principles and shall apply them to its directors, trustees,
officers, employees and "Access Persons," as applicable.
(a) No Access Person shall engage in any act, practice or course
of conduct that would violate the provisions of Rule 17j-1
set forth above.
(b) The interests of the Fund and its shareholders are paramount
and come before the interests of any Access Person,
director, trustee, officer or employee.
(c) Personal investing activities of all Access Persons,
directors, trustees, officers and employees shall be
conducted in a manner that shall avoid actual or potential
conflicts of interest with the Fund and its shareholders.
(d) Access Persons shall not use such positions, or any
investment opportunities presented by virtue of such
positions, to the detriment of the Fund and its
shareholders.
3. SUBSTANTIVE RESTRICTIONS
(a) The price paid or received by the Fund for any security
should not be affected by a buying or selling interest on
the part of an Access Person, or otherwise result in an
inappropriate advantage to the Access Person. To that end:
(a) no Access Person shall enter an order for the purchase
or sale of a security which the Fund is purchasing or
selling until the day after the Fund's transactions in that
security have been completed unless it is determined that it
is clear that, in view of the nature of the security and the
market for such security, the order of the Access Person
will not affect the price paid or received by the Fund.
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(b) No "Investment Person may acquire any securities issued as
part of an initial public offering of the issuer.
(c) Each Investment Person must seek prior approval from the
Compliance Officer for private placement transactions. Such
approval shall take into account, among other factors,
whether the investment opportunity should be reserved for
the Fund and whether the opportunity is being offered to
such person because of his or her position with the Fund,
the Adviser or Distributor. Any such Investment Person who
has been authorized to acquire securities in a private
placement must disclose his or her interest if he or she is
involved in the Fund's consideration of an investment in
such issuer. Any decisions to acquire such issuer's
securities on behalf of the Fund shall be subject to review
by Investment Persons with no personal interest in the
issuer.
(d) An Investment Person must not accept gifts in excess of
limits contained in NASD Conduct Rule 2830 of the National
Association of Securities Dealers from any entity doing
business with or on behalf of the Fund, the Adviser or the
Distributor.
(e) An Investment Person shall not serve on the boards of
directors of publicly traded companies, or in any similar
capacity, absent the prior approval of such service by the
Compliance Officer following the receipt of a written
request for such approval. In the event such a request is
approved, procedures shall be developed to avoid potential
conflicts of interest.
(f) Any profits derived from securities transactions in
violation of paragraphs a, b, c, or d, above, shall be
forfeited and paid to the appropriate Fund or Funds for the
benefit of its or their shareholders. Gifts accepted in
violation of paragraph "e" shall be forfeited, if
practicable, and/or dealt with in any manner determined
appropriate and in the best interests of any affected Fund
and its shareholders.
4. PROCEDURES
(a) To enable the Fund to determine with reasonable assurance
whether the provisions of Rule 17j-1(a) and this Code of
Ethics are being observed by its Access Persons:
(1) Each Access Person shall notify the Compliance Officer
of all brokerage accounts in which he or she has any
beneficial interest (a) within two weeks of receipt of
this Code or (b) promptly after the later opening of
any such account.
(2) Each Access Person, with respect to each brokerage
account in which such Access Person has any beneficial
interest shall arrange that the broker shall mail
monthly to the Compliance Officer at the same time that
they are mailed or furnished to such Access Person
copies of periodic statements with respect to the
account.
(3) The provisions of this Section 4.a shall not apply to
any director or trustee of the Fund who is not an
"interested person" of the Fund (as defined in Section
2(a)(19) of the Investment Company Act of 1940) except
with respect to reporting of securities transactions
where such director or trustee knew or, in the ordinary
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course of fulfilling his or her official duties as a
director or trustee of the Fund, should have known
that, during the 15-day period immediately preceding or
after the date of transaction in a security by the
director or trustee, such security was purchased or
sold by the Fund or a purchase or sale of such security
was considered by the Fund or the Adviser.
(b) The Compliance Officer shall notify each Access Person that
he or she is subject to this reporting requirement, and
shall deliver a copy of this policy to each Access Person.
The Compliance Officer shall annually obtain written
assurances from each Access Person that he or she is aware
of his or her obligations under this Code of Ethics and has
complied with the Code and with its reporting requirements).
(c) The Compliance Officer shall cause a system of monitoring
personal investment activity by Access Persons to be
designed that would identify abusive or inappropriate
trading patterns or other practices of Access Persons. The
Compliance Officer shall report on such system to the Board
of Directors or Trustees of the Funds at the next Board
meeting following its design and thereafter in connection
with the annual review of this Code referred to in paragraph
4.g below.
(1) Apparent violations of this reporting requirement.
(2) Other material violations of this Code of Ethics of
which the Compliance Officer has become aware since the
previous report.
(3) The results of monitoring of personal investment
activities of Access Persons in accordance with the
procedures referred to in paragraph 4.c hereof.
5. The Compliance Officer shall have discretion not to make a report to
the Board of Directors or Trustees under paragraph 4.d if he or she
finds that by reason of the size of the transaction, the circumstances
or otherwise, no fraud or deceit or manipulative practice could
reasonably be found to have been practiced on the Fund in connection
with its holding or acquisition of the security or that no other
material violation of this policy has occurred. A written memorandum
of any such finding shall be filed with reports made pursuant to this
policy.
6. The Board of Directors or Trustees shall consider reports made to
hereunder and upon discovering that a violation of this Code has
occurred, the Board of Directors or Trustees may impose such
sanctions, in addition to any forfeitures imposed pursuant to Section
3.g. hereof, as it deems appropriate, including, among other things, a
letter of sanction or suspension or termination of the employment of
the violator.
7. The Compliance Officer shall report to the Board of Directors or
Trustees on an annual basis concerning existing personal investing
procedures, violations during the prior year and any recommended
changes in existing restrictions or procedures.
8. The Board of Directors or Trustees Shall review the Code and the
operation of these policies at least once a year.
9. This policy and any related procedures, a copy of each report by (or
duplicate brokers' advice for the account of) an Access Person, any
written report or memorandum hereunder by the Compliance Officer, and
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lists of all persons required to make reports shall be preserved with
the Fund's records for the period required by Rule 17j-1.
MONTHLY REPORTS OF PERSONAL INVESTMENTS BY EMPLOYEES
A. THE MONTHLY REPORT. Rule 204-2 under the Investment Advisers Act and
Rule 17j-1 under the Investment Company Act require that except for
minor exceptions HCM must maintain a record of every transaction in a
security in which the firm has or certain types of employees have, or
by reason of such transaction acquire, any "direct or indirect
beneficial ownership." The record keeping requirements are met through
monthly securities transaction reports sent to HCM's compliance
Officer, as designated from time to time.
In addition to these transaction reports, each Reporting Employee
should instruct each bank, or broker-dealer that executes transactions
for any Covered Account to send copies of monthly (or other) account
statements directly to the Compliance Officer.
B. 1/2 OF 1% HOLDINGS. HCM may limit its investment of client assets in
securities if Employees have interests in the issuers of those
securities that exceed levels the Chief Investment Officer considered
appropriate. While such an excess seems unlikely, HCM seeks to be sure
it is promptly aware of large holdings by Employees. The name of any
publicly owned company (or any company anticipating a public offering
of an equity security) should be entered only if such total ownership
is more than 1/2 of 1% of the company's outstanding shares. For
purposes of the Monthly Report the Reporting Employee's holdings and
those of others deemed to be owned by him/her beneficially" (e.g.,
spouse, minor children, the Reporting Employee as trustee for members
of his/her immediate family, etc.) should be added together. The
Monthly Report is the only item that requires information regarding
holdings; otherwise, the Report pertains only to the disclosure of
transactions (purchases, sales, etc.).
C. EXAMPLES OF BENEFICIAL OWNERSHIP. The definition of "beneficial
ownership" of securities under Rue 204-2 has been dealt with in a
number of SEC releases and has grown to encompass many diverse
situations. These include not only securities held by a Reporting
Employee or others for the Employee's own benefit, but also (i)
securities held by a Reporting Employee or others for the Employee's
spouse, minor children and relatives who live full time in the
Employee's home, and (ii) securities held by another person if by
reason of any contract, understanding, relationship, agreement or
other arrangement the Employee obtains benefits substantially
equivalent to ownership.
D. DISCLAIMER OF BENEFICIAL OWNERSHIP. The broad definition of
"beneficial ownership" is for purposes of this Code only; it does not
necessarily cover other securities law or tax areas. Rule 204-2 states
that in reporting a securities transaction to HCM, the reporting
person can include in his/her Report "a statement declaring that the
reporting or recording of any securities transaction shall not be
construed as an admission that the reporting person has any direct or
indirect beneficial ownership in the Security." For example, if a
parent or custodian sold securities owned by a minor child under the
Uniform Gifts to Minors Act, the other parent would report such
transaction, but could disclaim beneficial ownership by checking the
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appropriate box on the Report. Whether or not an Employee's Report
carries such a disclaimer is a personal decision on which HCM will
make no recommendation. A disclaimer may be important not only for the
other securities law purposes, but also because it might be some
evidence of ownership for other purposes, such as estate taxes.
Accordingly, an Employee may wish to consult his/her own attorney on
this issue .
E. NO INFLUENCE OR CONTROL. Rule 204-2 states that an employee need not
report securities transactions effected in any account over which the
Employee does not have "any direct or indirect influence or control."
This exception is, in the opinion of HCM's counsel, limited to a few
situations. The principal situation arises where securities are held
in a trust in which an Employee has a beneficial interest, but is not
the trustee and has no control or influence over the trustee.
Specific questions regarding the "no influence or control" exemption
or general questions concerning beneficial ownership or reporting
responsibility should be directed to the Compliance Officer.
III. OTHER LAWS, RULES, AND STATEMENT POLICY
Nothing contained in this Code shall be interpreted as relieving any
Employee from acting in accordance with all applicable laws, rules,
regulations, statements of policy and other terms of that person's
employment.
IV. EXAMPLES OF BENEFICIAL OWNERSHIP
(1) A Reporting Employee for his/her own benefit, whether bearer,
registered in his/her own name, or otherwise;
(2) For Reporting Employee's benefit (regardless of whether or how
registered), such as securities held for the Reporting Employee by
custodians, brokers, relatives executors or administrators;
(3) For a Reporting Employee's account by a pledge;
(4) By a trust in which a Reporting Employee has an income or remainder
interest unless the Reporting Employee's only interest is to receive
principal if (a) some other remainderman dies before distribution or
(b) if some other person can direct by will a distribution of trust
property or income to the Reporting Employee;
(5) By a Reporting Employee as trustee or co-trustee, where either the
Reporting Employee or any member of his/her immediate family (i.e.,
spouse, children and their descendants, stepchildren, parents and
their ancestors, and stepparents, in each case treating a legal
adoption as blood relationship) has an income or remainder interest in
the trust;
(6) By a trust of which the Reporting Employee is the settlor, if the
Reporting Employee has the power to revoke the trust without obtaining
the consent of the beneficiaries;
(7) Non-public partnership in which the Reporting Employee is a partner;
(8) A personal holding company controlled by the Reporting Employee alone
or jointly with others;
(9) In the name of the Reporting Employee's spouse unless legally
separated;
(10) In the name of the minor children of the Reporting Employee or in the
name of any relative of the Reporting Employee or of his/her spouse
(including an adult child) who is presently sharing the Reporting
Employee's home. This applies even if the securities were not received
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from the Reporting Employee and the dividends are not actually used
for the maintenance of the Reporting Employee's home;
(11) In the name of any person other than the Reporting Employee and those
listed in (9) and (10) above, if by reason of any contract,
understanding, relationship, agreement, or other arrangement the
Reporting Employee obtains benefit substantially equivalent to those
of ownership;
(12) In the name of any person other than the Reporting Employee, even
though the Reporting Employee does not obtain benefits substantially
equivalent to those of ownership (as described in (11) above) if the
Reporting Employee can vest or request title in himself/herself.
V. POLICY AND PROCEDURES TO DETECT AND PREVENT INSIDER TRADING
It is the policy of HCM ("the Firm") that no officer or employee may (i)
trade, either personally or on the behalf of others (including investment
companies, collective investment funds, common trust funds and trust
accounts managed or advised by the Firm), on the basis of material
nonpublic information or (ii) communicate material nonpublic information to
others in violation of the law- conduct that is commonly called "insider
trading." This policy applies to every employee and every officer,
director, and employee of the Firm's parent company, and extends to
activities both within and outside of their duties at the Firm. Each such
employee, officer or director must read this policy statement and
acknowledge his or her understanding of it.
The term "insider trading" is not defined in the federal securities laws,
but generally is used to refer to the use of material nonpublic information
to trade in securities (whether or not one is an "insider") and to the
communication of material nonpublic information to others. The law
concerning insider trading is generally understood to prohibit. trading by
an "insider" while he or she is in possession of material nonpublic
information., if the information either was disclosed to the non-insider in
violation of an insider's duty to keep it confidential or was
misappropriated; and communicating material nonpublic information to others
in violation of one's duty to keep such information confidential.
The elements of insider trading and the penalties for it are discussed
below. If, after reviewing this policy statement, you have any questions
you should consult the Compliance Officer (as defined below).
WHO IS AN INSIDER?
The concept of an "insider" is broad. It includes officers, directors and
employees of a company. In addition, a person can be a "temporary insider"
if he or she enters into a special confidential relationship in the conduct
of a company's affairs and as a result is given access to information
solely for the company's purposes. A temporary insider can include certain
"outsiders" such as, among others, a company's attorneys accountants,
consultants, bank lending officers, and the employees of such
organizations. According to the United States Supreme Court, before such an
"outsider" may be considered a "temporary insider", the company's
relationship with the outsider must be such that the company reasonably
expects him or her to keep the disclosed nonpublic information
confidential.
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WHAT IS MATERIAL INFORMATION?
Trading on inside information is not a basis for liability unless the
information is "material". Information generally is material if there is a
substantial likelihood that a reasonable investor would consider it
important in making his or her investment decision, or if public
dissemination of it is reasonably certain to have a substantial effect on
the price of a company's securities. Information that should be presumed to
be material includes, but is not limited to: dividend changes; earnings
estimates; changes in previously released earnings estimates; significant
merger or acquisition proposals or agreements; commencement of or
developments in major litigation; liquidation problems; and extraordinary
management developments. Material information does NOT have to relate to a
company's business. For example, in one case, the Supreme Court considered
as material certain information about the contents of a forthcoming
newspaper column that was expected to affect the market price of the
security.(1) In that case, a WALL STREET JOURNAL reporter was found
criminally liable for disclosing to others the dates that reports on
various companies would appear in the JOURNAL and whether those reports
would be favorable or not. Perhaps more importantly, knowledge of a
decision, or impending decision, by the Firm to buy or sell a security for
its clients or to recommend a security can constitute "material"
information.
WHAT IS NONPUBLIC INFORMATION?
Information is nonpublic until it has been effectively communicated to the
market place. One must be able to point to some fact to prove that the
information is generally public. For example, information found in a report
filed with the Securities Exchange Commission or appearing in Dow Jones,
REUTERS Economic Services, The Wall Street Journal or other publications of
general circulation would be considered public.
BASES FOR LIABILITY
FIDUCIARY DUTY THEORY
In 1980, the Supreme Court found that there is no GENERAL duty to disclose
before trading on material nonpublic information, but that such a duty
arises only where there is a fiduciary relationship. That is, there must be
a relationship between the parties to the transaction such that one party
has a right to expect that the other party will not disclose any material
non-public information or refrain from trading.(2)
In Dirks vs. SEC,(3) the Supreme Court stated alternate theories under
which non-insiders can acquire the fiduciary duties of insiders: they can
enter into a confidential relationship with the company through which they
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(1) Carpenter v. U.S., 108 U.S.316 (1987)
(2) Chiarella v. U.S., 45 U.S.22 (1980)
(3) U.S.646 (1983)
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gain information (e.g. attorneys, accountants); or they can acquire a
fiduciary duty to the company's shareholders as "tippees" if they are aware
or should have been aware that they have been given confidential
information by an insider who has violated his fiduciary duty to the
company's shareholders. In the "tippee" situation, a breach of duty occurs
only if the insider personally benefits, directly or indirectly, from the
disclosure. However, the benefit does not have to be monetary: it can be a
gift, a reputational benefit that will translate into future earnings, or
even evidence of a relationship that more obscurely suggests a "quid pro
quo."
MISAPPROPRIATION THEORY
Another basis for insider trading liability is the "misappropriation"
theory, where trading occurs on material nonpublic information that was
stolen or misappropriated from any other person. In Carpenter vs. U.S.(4)
the Court found that a columnist defrauded THE WALL STREET JOURNAL when he
stole information from the JOURNAL and used it for trading in the
securities markets. The misappropriation theory can be used to reach a
variety of individuals not previously thought to be encompassed under the
fiduciary duty theory.
PENALTIES FOR INSIDER TRADING
Penalties for trading on or communicating material nonpublic information
are severe, both for the individuals involved in the trading (or tipping)
and their employers. A person can be subject to some or all of the
penalties below even if he or she does not personally benefit from the
violation. Penalties include:
* civil injunctions
* damages in a civil suit as much as three times the amount of
actual damages suffered by other buyers or sellers
* disgorgement of profits
* jail sentences
* fines for the person who committed the violation of up to three
times the profit gained or loss avoided, whether or not the
person actually benefited, and
* prohibition from employment in the securities industry.
In addition, any violation of this policy statement can be expected to
result in serious disciplinary measures to the Firm, including dismissal of
the persons involved.
VI. PROCEDURES TO IMPLEMENT THE FIRM'S POLICY AGAINST INSIDER TRADING
The following procedures have been established to aid the officers,
directors and employees of the Firm in avoiding insider trading. Every
officer and employee of the Firm must follow these procedures or risk
serious sanctions, including dismissal, substantial personal liability and
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(4) 13108U.S. 316 (1987)
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criminal penalties. If you have any questions about these procedures you
should consult the Compliance Officer.
IDENTIFYING INSIDE INFORMATION
Any time you think you may have inside information about a company, before
you can place ANY trade in that company's securities, either for yourself
or for others (including the Firm's clients), and before you advise anyone
(including the Firm's Client's) to trade, in that company's securities, ask
yourself the following questions:
* IS THE INFORMATION MATERIAL? Is this information that an investor
would consider important in making his or her investment
decisions? Is it information that would substantially affect the
market price of the securities if generally disclosed?
* IS THE INFORMATION NON-PUBLIC? To whom has this information been
provided? Has it been effectively communicated to the marketplace
by appearing on the Dow Jones wire or by being published in
REUTERS, THE WALL STREET JOURNAL or publications of general
circulation?
If, after asking these questions, you believe the information is material
and nonpublic, or of you have any questions as to whether the information
is material and nonpublic, you should take the following steps:
* report the matter immediately to the Compliance Officer;
* do not purchase or sell the securities on behalf of yourself or
others including investment companies, collective investment
funds, common trust funds or other accounts managed or advised by
the Firm;
* do not communicate the information inside or outside the Firm,
other than to the Compliance Officer;
* after the Compliance Officer has reviewed the issue, you will be
instructed to continue the prohibitions against trading and
communication, or you will be allowed to trade and communicate
the information;
RESTRICTING ACCESS TO MATERIAL NONPUBLIC INFORMATION
Information in your possession that you identify as material and nonpublic
may not be communicated to anyone, including persons within the Firm,
except as provided in paragraph above. In addition, you should take steps
to keep such information secure. For example, files containing material
nonpublic information should be sealed and access to computer files
containing material nonpublic information should be restricted.
RESOLVING ISSUES CONCERNING INSIDER TRADING
If, after you have considered the factor described in the paragraph
entitled "Identifying Inside Information" above, you are still not sure
whether information you have about a company is material or nonpublic, of
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if you are unsure about whether or how these procedures apply to your
situation, or about the propriety of any action, you must discuss the
situation with the Compliance Officer before trading or communicating the
information to anyone.
VII. SUPERVISORY PROCEDURES
Supervisory Procedures can be divided into two classifications- (A)
prevention of insider trading and (B) detection of insider trading.
PREVENTION OF INSIDER TRADING
To prevent insider trading, the Firm will:
* provide educational materials to familiarize officers, directors
and employees with the Firm's policy and procedures;
* designate a knowledgeable employee (the "Compliance Officer") to
answer questions regarding the Firm's policy and procedures;
* resolve issues of whether information received by an officer,
director or employee of the Firm is material and nonpublic;
* review on a regular basis and update as necessary the Firm's
policy and procedures; and
* when it has been determined that an officer, director or employee
of the Firm has material nonpublic information, implement
measures to prevent dissemination of such information, and if
necessary, restrict officers, directors and employees from
trading the securities.
DETECTION OF INSIDER TRADING
To detect insider trading, the Firm's Compliance Officer will, on an annual
basis:
* review all trading activity reports filed by each officer,
director and employee monthly;
* review the trading activity in the Firm's own account and in
accounts managed or advised by the Firm; and
* coordinate the review of such reports with such other Firm
officials as may be appropriate.
SPECIAL REPORTS MANAGEMENT
Promptly, upon learning of a potential violation of the Firm's Policy and
Procedures to Detect and Prevent Insider Trading, the Compliance Officer
should prepare a written report to such members of the Firm's management as
may be appropriate, providing full details and recommendations for further
action.
ANNUAL REPORTS TO MANAGEMENT
On an annual basis, the Compliance Officer and other Firm officials will:
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* review and evaluate the full details of any investigation, either
internal or by a regulatory agency, of any suspected insider
trading and the result of such investigation;
* evaluate the current procedures and any recommendations for
improvement;
* review and evaluate the Firm's continuing educational program
regarding insider trading.
RECORDKEEPING
The Firm will designate an individual with responsibility for maintaining,
in an accessible place, the following materials:
* a copy of this Policy and Procedures to Detect and Prevent
Insider Trading;
* a record of any violation of these procedures for the most recent
five years and a detailed synopsis of the action taken in
response;
* a copy of monthly statements ; and
* a list of all persons who are or have been required to file
monthly statements.
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