In August 2004, the U.S. Securities and Exchange Commission (“SEC”) adopted Rule 204A-1 under the Investment Advisers Act of 1940 (“Investment Advisers Act”) that required registered investment advisers to adopt codes of ethics. Under SEC Rule 204A-1, an investment advisory firm must adopt and implement a code of ethics, establishing rules and conduct all supervised persons must adhere to as a fiduciary. SEC Rule 204A-1 was adopted in attempt to create a standard of conduct that would “prevent fraud by reinforcing fiduciary principles that must govern the conduct of advisory firms and their personnel.” Section 206 of the Investment Advisers Act imposes a fiduciary duty on investment advisers by making it unlawful for an investment adviser to engage in fraudulent, deceptive or manipulative conduct. In its role as a fiduciary, an investment adviser has a duty to serve the best interest of its clients; a duty to have a reasonable, independent basis for investment advice; a duty to ensure that its investment advice is suitable to the client’s objectives, needs and circumstances; and a duty to be loyal to client.
An investment adviser’s code of ethics must establish standard of business conduct that the investment adviser requires of all its supervised persons. SEC Rule 204A-1 does not require an investment adviser to adopt a particular standard, but the standard chosen must reflect the fiduciary obligations of the investment adviser and its supervised persons and must require compliance with the federal securities laws. The SEC contends that while each investment adviser firm’s code of ethics must meet certain minimum provisions, the adopted rule allows for flexibility for investment advisers to adopt individualized codes that best suit the “structure, size and nature of [investment advisers] advisory businesses.”
An investment adviser’s code of ethics must meet the needs of its individual organization while achieving a proper balance of operational and aspirational elements. In the adopting release, the SEC stated:
“We urge advisers to take great care and thought in preparing their codes of ethics, which should be more than a compliance manual. Rather, 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 employees the value the advisory firm places on ethical conduct, and should challenge employees to live up not only to the letter of the law, but also to the ideals of the organization.”
Although SEC Rule 204A-1 does not require investment advisers to provide specific training regarding the firms code of ethics, the adopting release states, “An investment adviser’s procedures for informing its employees about its code of ethics are critical to obtaining good compliance and avoiding inadvertent violations of the code.” The adopting release also indicates that the following are among best practices for investment advisers:
- Holding periodic orientation or training sessions with new and existing employees to remind them of their obligations under the code of ethics;
- Requiring employees to certify that they have read and understand the code of ethics; and
- Requiring annual recertification that the employee has re-read, understands and has complied with the code.
RIA Compliance Consultants is hosting a webinar, Thursday, February 9, 2012, at 12:00pm CST, “Professional Ethics for Investment Adviser Representatives,” that will discuss the fiduciary duties of investment advisers as it relates to Section 206 of the Investment Advisers Act, including details on what it means to be a fiduciary, with supplemental examples of unethical behavior. The webinar will discuss the summary of requirements under SEC Rule 204A-1 and will expand on the reporting requirements of the rule. This webinar is intended to serve as an education 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.