Under Rule 204A-1 (“Code of Ethics Rule”) of the Investment Advisers Act of 1940 (“Investment Advisers Act”), each investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”) is required to adopt and implement a code of ethics that sets forth required standards of conduct for all supervised persons of the registered investment adviser and addresses conflicts that arise from personal trading by advisory personnel. Most state securities regulators have similar requirements.
The Code of Ethics Rule does not require investment advisers to adopt a particular standard of conduct, but does necessitate that each investment adviser adopt a code that reflects the fiduciary obligations of the investment adviser and its supervised persons as applicable to the investment adviser’s business model. The Code of Ethics Rule sets forth minimum requirements but investment advisers are free to set higher standards for their supervised persons.
At a minimum, an investment adviser’s codes of ethics must include the following items:
1. A standard of business conduct that the investment adviser requires of its supervised persons which reflects the fiduciary obligations of the adviser and its supervised persons;
2. Provisions requiring supervised persons of the investment adviser to comply with applicable federal securities laws;
3. Provisions that require all access persons of the investment adviser to report, and the investment adviser to review, their personal securities transactions and holdings periodically;
4. Provisions requiring supervised persons of the investment adviser to report any violations of the investment adviser’s code of ethics promptly; and
5. Provisions requiring the investment adviser to provide each of its supervised persons with a copy of its code of ethics and any amendments, and requiring its supervised persons to provide the investment adviser with a written acknowledgment of their receipt of the code and any amendments.
Additionally, each investment adviser must describe its code of ethics in its Form ADV Part 2 and provide a copy of its code of ethics to any prospective or current clients, upon request. Any amendments made to the investment adviser’s code of ethics must be provided to all supervised persons of the investment adviser and should be updated in Form ADV Part 2 accordingly.
An investment adviser’s code of ethics is an important element to any investment adviser’s compliance program. An investment adviser should review its code of ethics at least yearly as part of its annual compliance review process and make revisions as appropriate. While the investment adviser’s first obligation is to develop the code of ethics and ensure that it is meeting the minimum requirements of the Code of Ethics Rule, it is equally important that an investment adviser’s supervised persons are familiar with, understand the requirements of, and comply with the investment adviser’s Code of Ethics. At a minimum investment advisers have to obtain and maintain a signed acknowledgement of receipt of the investment adviser’s code of ethics and any amendments. Although not a requirement of the Code of Ethics Rule, developing procedures and on-going training for informing supervised persons about the investment adviser’s code of ethics is critical to creating a strong culture of compliance and avoiding inadvertent violations of the code.
RIA Compliance Consultants is hosting a webinar, Thursday, February 9, 2012, at 12:00 pm CST, “Professional Ethics for Investment Adviser Representatives.” During this webinar, one of our consultants will provide an overview of the Code of Ethics Rule. The primary focus of this webinar is to provide investment adviser representatives and supervised persons of the investment adviser with an understanding of why this rule exists and how it affects them. This webinar is intended to serve as an educational tool designed to assist investment advisers in providing on-going ethics training to its investment adviser representatives. This webinar will provide up to one hour of Continuing Education credit to meet the on-going requirements for maintaining the Certified Financial Planner (“CFP”) certification, approved by the CFP Board of Standards, Inc. To register for this webinar, please click here. To speak with one of our consultants for more information on how RIA Compliance Consultants can assist your firm in implementing or reviewing your firm’s code of ethics, click here.