All advisers registered with the SEC must adopt and enforce a written code of ethics reflecting the adviser’s fiduciary duties to its clients. The firm’s code of ethics is required to meet minimum standards to appropriately address conflicts of interest identified by the firm. To ensure compliance with the code of ethics requirements, a written acknowledgement should be obtained from each supervised person confirming receipt of the firm’s code of ethics. Firms with more than one access person are should also ensure transaction reporting is being done by all access persons.
Minimums for RIA’s Code of Ethics
At a minimum, the adviser’s code of ethics must meet the following minimum standards:
- Standards of Conduct. Set forth a minimum standard of conduct for all supervised persons which must reflect the fiduciary obligations of the adviser and its supervised persons.
- Compliance with Federal Securities Laws. Require supervised persons to comply with federal securities laws.
- Personal Securities Transactions. Require each of an adviser’s access persons to report his securities holdings at the time that the person becomes an access person and at least once annually thereafter and to make a report at least once quarterly of all personal securities transactions in reportable securities to the adviser’s CCO or other designated person.
- Pre-approval of Certain Securities Transactions. Require the CCO or other designated persons to pre-approve investments by the access persons in IPOs or limited offerings.
- Reporting Violations. Require all supervised persons to promptly report any violations of the code to the adviser’s CCO or other designated person.
Pre-approval standards listed in your code of ethics should match your firm’s policies and should be appropriate based on the size and scope of your firm. In addition, a summary of your code of ethics along with an offer of the code should be included in your Firm’s Form ADV Brochure.
Distribution and Acknowledgments from “Supervised Persons”
In order to ensure that advisers’ employees are made aware of their firms’ standards, advisers must obtain (and keep) a written acknowledgement from each supervised person confirming that he or she received a copy of the code of ethics and any amendments. This requirement applies to all supervised persons, and not just access persons. ‘‘supervised person’’ means 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.
In addition, the SEC considers independent contractors to be employees for the purposes of this rule. The code of ethics also must be provided to each supervised person (and a written acknowledging receipt must be obtained) upon hire; at least once every 12-months thereafter; and anytime there is an amendment to the code of ethics.
Record Keeping Requirements
Rule 204-2(a)(12) requires advisers to keep copies of their code of ethics, records of violations of the code and actions taken as a result of the violations, and copies of their supervised persons’ written acknowledgment of receipt of the code. A list of access persons must be maintained to include the date they became an access person and the date they were no longer considered an access person. The standard retention period required for books and records is five years, three years in an easily accessible place, two years in an appropriate office of the investment adviser. State rules may vary but are generally modeled after the SEC rule. State advisers should confirm the rules of their specific regulator.
Acknowledgments of the code must be kept for five years after the individual ceases to be a supervised person. Similarly, the list of access persons must include every person who was an access person at any time within the past five years, even if some of them are no longer access persons of the adviser.
If there are any areas where you would like to explore additional assistance or services regarding the code of ethics requirements or other compliance related areas, please contact us. MasterCompliance employees a number of consultants experienced in this area who have helped a multitude of clients develop and implement policies and procedures designed to keep RIAs complaint with the code of ethics requirements. MasterCompliance also provides expert consulting, outsourcing, and implementation tools in planning and budgeting your firm’s compliance responsibilities.