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What must be included in a SEC registered investment adviser’s code of ethics?


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What must be included in a SEC registered investment adviser’s code of ethics?

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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.

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