The investment adviser code of ethics

Rule 204A-1 binds every adviser “registered or required to be registered under section 203” of the Advisers Act: in plain terms, an SEC-registered investment adviser, whatever its size. A one-person firm needs a code too. The rule gives a sole access person relief from reporting to themselves, covered below, but not from having the code. This guide covers the SEC rule only. A state-registered adviser should read its own state's rules, which we did not review here.

The code sits beside the compliance program, not inside the same rule. Rule 206(4)-7 asks for written policies, an annual review and a named chief compliance officer; Rule 204A-1 asks for a written code with personal trading reports. A small adviser can keep both in one manual, and our guide to Rule 206(4)-7 covers the other half. The whole adviser program, rule by rule, is mapped in RIA compliance: what a small adviser must run.

Paragraph (a) is a floor, not a template. It names five things the code must include “at a minimum” and leaves the wording to the firm. The verbs above it carry as much weight as the list: the adviser must “establish, maintain and enforce” the code. A code copied from a template is established. Updating it when the firm changes is maintaining it. Enforcing it means the reports come in, someone reads them, and breaches leave a record.

The second provision is wider than it reads. The rule defines “Federal securities laws” as a list: the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the Investment Company Act of 1940, the Investment Advisers Act of 1940, title V of the Gramm-Leach-Bliley Act, the rules the SEC adopted under any of them, and the Bank Secrecy Act as it applies to funds and investment advisers. A code that names that list once, and points each supervised person to the policies that put it into practice, meets the words without restating the statutes.

Every supervised person gets the code and signs for it. Only access persons file the personal trading reports. The sorting starts with the statute's definition of a supervised person: “any partner, officer, director (or other person occupying a similar status or performing similar functions), or employee of an investment adviser, or other person who provides investment advice on behalf of the investment adviser and is subject to the supervision and control of the investment adviser.” Rule 204A-1 then picks out the access persons among them.

A presumption sits on top: “If providing investment advice is your primary business, all of your directors, officers and partners are presumed to be access persons.” In a small advisory firm that usually means everyone with a title. The test is access, not seniority. An operations associate who can see the trading blotter is an access person; a partner of a firm whose main business is something else may not be.

Keep the list of access persons as a record in its own right, with the date each person was added and removed: Rule 204-2 asks for it, and the code of ethics reporting calendar needs each start date to set that person's first reports.

Card 02

The reports go to the chief compliance officer or another person the code names. There are three, and two of them are about holdings: what the person owns on joining, and again every year. The third is about trades, every quarter. Each holdings report must be current as of a date no more than 45 days before the date it is measured from, so a statement from last spring will not do for a report filed in the autumn.

Both reports cover securities in which the person has “any direct or indirect beneficial ownership”. The rule reads that term as it is read under the Exchange Act's section 16 rules (17 CFR 240.16a-1(a)(2)), which can reach accounts beyond the person's own name; ask your counsel which family and entity accounts that brings in for your people. A report may also state that it is not an admission of beneficial ownership.

The code of ethics reporting calendar runs the same arithmetic for your whole list of access persons and your own annual date, and prints the year.

The reports are narrower than they first look. Three carve-outs let the code skip a report, and the definition of a reportable security leaves out several cash-like instruments and most fund shares.

The third carve-out is what a broker feed is for: if confirmations and statements arrive on time, the quarterly form is not needed. Fund shares need a second look. A reportable fund is one the firm advises or one in the same control group, and shares of those stay reportable. The tools that collect feeds and route pre-approvals are compared in personal trading compliance software.

The relief ends the day a second access person joins. A sole adviser who hires an associate with portfolio access starts that associate's initial report within ten days, and by our reading the owner's own reports start too, because the relief covers only a firm with one access person.

The rule singles out two kinds of deal and defines both. An initial public offering, in the rule's definition, is a registered offering by an issuer that was not filing reports under the Exchange Act just before it. A limited offering is one exempt from registration under section 4(a)(2) or 4(a)(5) of the Securities Act or under Rules 504 or 506. Interests in a private fund sold under Rule 506 are a common example.

Approval has to come before the purchase, and the record is specific. Rule 204-2(a)(13)(iii) asks for “A record of any decision, and the reasons supporting the decision, to approve the acquisition of securities by access persons”, kept “for at least five years after the end of the fiscal year in which the approval is granted.” A signature on a request form is the decision; the reasons are a separate line, and the rule asks for both.

The rule asks for a record of approvals. Logging declines as well costs one line and shows the control is working rather than rubber-stamping.

The code has to require supervised persons to report any violation “promptly” to the chief compliance officer. A firm may name other people to receive reports as well, but only if the CCO also receives reports of all violations. In a two-person firm where the owner is the CCO, that means the owner hears about every breach, including the owner's own, and the record has to show what happened next.

Acknowledgments are the other half of paragraph (a). Every supervised person, not only the access persons, receives a copy of the code and of each amendment and gives a written acknowledgment of receipt. The rule ties the acknowledgment to receiving the code and its amendments; a yearly re-signing is a firm choice, by our reading, though it is an easy way to catch anyone who joined between amendments. The new-hire steps are part of our RIA compliance checklist.

The code of ethics has its own two paragraphs in the books-and-records rule. Paragraph (a)(12) covers the code itself, violations and acknowledgments; paragraph (a)(13) covers access persons: their reports, their names and the approvals given to them. Four of the six records carry their own five-year words, so the general period in paragraph (e)(1) governs only the other two.

The lookback records are the ones that get lost. By our reading, a code version retired six years ago can go; one retired last year cannot, and the acknowledgments of a person who left four years ago still sit in the file. Our retention calculator dates each record from the event that starts it, the books and records checklist lists them beside the rest of the adviser's records, and the Rule 204-2 guide covers how they may be stored.

Put the dates in one place and the code is easier to run. Four are fixed by the calendar quarter, one the firm picks, three are set off by events, and the review runs on the cycle the code sets.

The code also shows up in the brochure: Part 2A of Form ADV has an Item 11, “Code of Ethics, Participation or Interest in Client Transactions and Personal Trading”. When the code changes, read that item again; our Form ADV Part 2A and 2B guide walks through it.

This guide explains the rule; it is not legal advice. Check your code against the full text of Rule 204A-1 and Rule 204-2 on the eCFR, and with your compliance counsel.