Frequently Asked Questions
Code of Ethics

SEC Rule 204A-1 issued under the Investment Advisers Act of 1940 requires all SEC registered investment advisers to adopt a code of ethics.

In addition, an investment adviser registered with the SEC must maintain written compliance policies and procedures pursuant to Rule 206(4)-7.  For additional guidance about the SEC rquirements under Rule 206(4)-7, please visit Frequently Asked Questions: RIA Compliance Manual.

This will vary among state securities regulators depending on the state securities regulator’s investment advisor rules and regulations. It is important for a state registered investment adviser to remember that the regulations of many state securities regulators follow the SEC’s rules for SEC registered investment advisers. Therefore, many state registered investment advisers may also be required to adopt a code of ethics similar to the SEC requirements. A state registered investment adviser will need to consult the investment adviser rules and regulations of its state securities regulator(s) to determine if this is required.

SEC Rule 204A-1 requires a SEC registered investment adviser’s code of ethics to set forth the standards of business conduct expected of the investment adviser’s “supervised persons” and it must address personal securities trading (“PST”) by such individuals. A SEC registered investment adviser is not required to adopt a particular standard of business ethics. Rather, the standard that an investment adviser selects should reflect the investment adviser’s fiduciary obligations to its investment advisory clients and the fiduciary obligations of the individuals it supervises and require compliance with the federal securities laws. A code of ethics should set out ideals for ethical conduct premised on fundamental principals of openness, integrity, honesty and trust. A good code of ethics should effectively convey to investment adviser representatives and employees the value that the investment adviser places on ethical conduct, and the code of ethics should challenge the investment adviser representatives and employees to meet not only the letter of the law, but also the ideals of the investment adviser. An investment adviser may set higher ethical standards than the requirements set under federal securities laws.

In order to prevent unlawful trading and promote ethical conduct by investment adviser representatives and investment advisory employees, an investment adviser’s code of ethics should include certain provisions relating to personal securities trading by investment advisory personnel. At a minimum, an investment advisor’s code of ethics must include the following requirements:

• A standard (or standards) of business conduct that the investment adviser requires of its supervised persons reflecting the investment adviser’s fiduciary obligations;
• Provisions requiring the investment adviser’s supervised persons to comply with applicable federal securities laws;
• Provisions that require all of the investment adviser’s “access persons” to report their personal securities transactions and holdings periodically and the review of such personal securities transactions by the investment adviser;
• Provisions requiring supervised persons to report any violations of the investment adviser’s code of ethics promptly to the chief compliance officer; and
• Provisions requiring the investment adviser to provide each of its supervised persons with a copy of the investment adviser’s code of ethics and any amendments, and requiring its supervised persons to provide the investment adviser with a written acknowledgement of their receipt of the code of ethics and any amendments.

Additionally, state and SEC registered investment advisers are required to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the misuse of material non-public (“insider”) information. Investment Advisers often include this prohibition on insider trading in their code of ethics.

Lastly, a registered investment adviser must describe its code of ethics in the registered investment adviser’s Form ADV Part 2A, Item 11 and must offer to provide, upon request, a complete copy of its code of ethics to an investment advisory client.

A SEC registered investment adviser’s supervised persons includes any employees, partners, officers, directors (or other persons occupying a similar status or performing similar functions) as well as any other persons that provide advice on the investment adviser’s behalf and are subject to the investment adviser’s supervision and control.

A SEC registered investment adviser’s “access persons” are any of the investment adviser’s supervised persons who have access to non-public information regarding any investment advisory client’s purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any reportable fund or any person who is involved in making securities recommendations to investment advisory clients, or who has access to such recommendations that are nonpublic. If providing investment advice is an investment adviser’s primary business, all of its directors, officers and partners are presumed to be access persons.

A SEC registered investment adviser must require all access persons to submit to the chief compliance officer or other designated person, a report of all current securities holdings and transaction reports for reportable securities in which the access person has, or acquires, any direct or indirect beneficial ownership. Holdings reports must be submitted no later than 10 days after the person becomes an access person and at least annually thereafter. All information reported must be current as of a date no more than 45 days prior to the date reporting is required.

A registered investment adviser must also require access persons to submit to its chief compliance officer or other designated person, quarterly securities transactions reports no later than 30 days after the end of the calendar quarter.

A SEC registered investment adviser’s codes of ethics must require access persons to obtain approval before they directly or indirectly acquire beneficial ownership in any security in an initial public offering (“IPO”) or in a limited offering (“private placement”).

In addition to receiving these reports, the SEC’s rule requires that the investment adviser’s code of ethics provide that the chief compliance officer or other designated party of the investment adviser review these personal securities transaction reports. Reviewing these PST reports will allow the investment adviser as well as any securities regulator to detect any improper trades or trading patterns by access persons.

For personal securities transaction purposes, an access person of an SEC registered investment adviser is presumed to be a beneficial owner of the securities that are held by his/her immediate family members sharing the access person’s household.

At a minimum, the personal securities holdings reports must contain the following for each reportable security that the access person of the investment adviser has any direct or indirect beneficial ownership:

• The title and type of security;
• The exchange ticker symbol or CUSIP number;
• The number of shares;
• The principal amount;
• The name of any broker, dealer or bank in which the access person maintains an account in which any securities are held for the access person’s direct or indirect benefit; and
• The date the access person submits the report.

All personal securities transaction reports must, at a minimum, cover all personal securities transactions during the calendar quarter for which the report is being completed. The following information is the minimum information that must be included in the personal securities transaction report for each reportable security:

• The date of the transaction;
• The title of the security;
• The exchange ticker symbol or CUSIP number (as applicable);
• The interest rate and maturity date (if applicable);
• The number of shares and principal amount;
• The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
• The price of the security at which the transaction was effected;
• The name of the broker, dealer or bank with or through which the transaction was effected; and
• The date the access person submits the report.

A reportable security is any security defined in Section 202(a)(18) of the Securities Act of 1933. The Rule considers all securities reportable with the exception of the following:

• Direct obligations of the Government of the United States;
• Bankers’ acceptances, bank certificates of deposit, commercial paper and high quality short-term debit instruments, including repurchase agreements;
• Shares issued by money market funds;
• Shares issued by open-end funds other than reportable funds; and
• Shares issued by unit investment trusts that are invested exclusively in one or more open-end funds.

A reportable fund is any fund for which the registered investment adviser serves as an investment adviser or any fund whose investment adviser or principal underwriter controls the investment adviser, is controlled by the investment adviser, or is under common control with the investment adviser.

The SEC rule does not require an investment adviser to obtain reports indicating that access person does not have any transactions or holdings to report. However, many investment advisers choose to require this type of reporting to ensure that all access persons are consistently aware of the personal securities holding and transaction reporting requirements.

An access person of a SEC registered investment adviser is not required to report any personal securities held in accounts over which the access person has not direct or indirect influence or control and any transactions effected pursuant to an automatic investment plan.

Confirmations and statements may be accepted in lieu of transaction and holdings reports so long as the confirmations and statements contain all required information and as long as the information is current within 45 days of reporting for holdings reports and so long as they are received within 30 days of the end of each calendar quarter for personal securities transactions.

If a SEC registered investment adviser has only one access person, the access person is not required to submit personal securities transaction and holding reports to this same access person for approval; however, this investment adviser must maintain copies of all personal securities transaction and holding reports as required by the SEC’s rule.

The following are areas that should be considered when preparing a code of ethics for a registered investment adviser:

• Pre-clearance of personal securities transactions by access persons;
• Maintenance of lists of issuers of securities that the advisory firm is analyzing or recommending for client transactions and prohibitions on personal trading in securities of those issuers during certain periods (“black out periods”);
• Maintenance of restricted lists of securities for personal trading or holding;
• Reminders that investment opportunities must be offered first to clients before the adviser or its employees may act on them and procedures to implement this principle;
• Prohibitions or restrictions on short-swing trading and market timing;
• Requirements to trade only through certain brokers, or limitations on the number of brokerage accounts permitted;
• Requirements to provide the adviser with duplicate trade confirmations and account statements; and
• Procedures for assigning new securities analyses to employees whose personal holdings do not present apparent conflicts of interest;

Pursuant to SEC Rule 204A-1, a SEC registered investment adviser’s code of ethics must require prompt internal reporting of any violations to the investment adviser’s code of ethics. Violations must be reported to the investment adviser’s chief compliance officer. However, an investment adviser’s code of ethics may require that violations be reported to another designated party if the designated party is then required to report it to the chief compliance officer. In order to promote the prompt reporting of code of ethics violations, an investment adviser must create an environment that encourages and protects any supervised persons that report a violation. An investment adviser must make sure that a supervised person feels safe and free to report violations without fear of retaliation. While SEC Rule 204A-1 does not require that the investment adviser impose certain fines or penalties, it is important that supervised persons of the investment adviser understand the emphasis that the investment adviser places on acting in an ethical manner and, therefore, many investment advisers choose to include some form of reference to disciplinary actions that may be taken if a violation occurs. An investment adviser must maintain a record of all violations of the code of ethics and the actions taken as a result of the violation.

With respect to the code of ethics, the SEC requires a SEC registered investment adviser to maintain the following documents:

• copies of the investment adviser’s codes of ethics;
• copies of the code of ethics acknowledgements signed by supervised persons of the investment adviser;
• records of violations of the code of ethics and actions taken as a result of the violations;
• a list of all access persons of the investment adviser;
• personal securities transaction reports of the access persons;
• personal holding records of the access persons; and
• records relating to decisions relating to the prior approval of access persons’ acquisitions of securities in initial public offerings (IPOs) or limited offerings (private placements).

In general, these records related to an investment adviser’s code of ethics must be maintained for the standard retention period of 5 years with the first 2 years in an appropriate office of the investment adviser and the remaining records in an easily accessible location. Codes of ethics must be maintained for a period of 5 years from when they were last effective. Acknowledgements must be maintained for 5 years after the individual ceases to be a supervised person of the firm. The list of access persons of the investment adviser must include every person that has been an access person at any time within the past 5 years. Records recording the approval of initial public offerings (IPOs) or limited offerings (private placements) must be maintained for 5 years from after the end of the fiscal year in which the approval was made.

Yes, RIA Compliance Consultants has an online software tool, RIA Express – Compliance Manual Drafter, which allows an investment adviser firm to self-customize a Code of Ethics and Compliance Manual.  For additional details, please visit our Code of Ethics & Written Supervisory Procedures Drafting Services webpage and RIA Express webpage.

The following are sample checklists and forms that RIA Compliance Consultants has available to assist an investment adviser firm’s chief compliance officer (“CCO”) with supervising personal securities transactions (“PST”) of its access persons:

• Personal Securities Transactions – Checklist for Reviewing PSTs
• Insider Trading – Annual Questionnaire of Firm’s Supervised Person’s Affiliation with Public Company
• Insider Trading – Identifying and Mitigating Risk Checklist
• Personal Securities Transactions – Annual/Initial Personal Securities Holding Report
• Personal Securities Transactions – Brokerage Account Disclosure Form
• Personal Securities Transactions – Letter to Request Duplicate Confirmations & Statements
• Personal Securities Transactions – Personal Securities Trading Request Form
• Personal Securities Transactions – Pre-Clearance Form
• Personal Securities Transactions – Quarterly Personal Securities Transaction Report
• Personal Securities Transactions – Supervising for Insider Trading Checklist
• Personal Securities Transactions Form – Non-Access Person Acknowledgment