Investment Advisor Codes of Ethics
Rule 204A-1 of the Securities and Exchange Commission, adopted pursuant to the Investment Advisers Act of 1940, requires implementation of codes of ethics by investment advisers. Each adviser’s code of ethics must include a standard of conduct and must require compliance with federal securities laws. The codes also must require that investment adviser employees must report their personal stock transactions, and copies of the codes must be made available to clients of the investment advisor.
Investment advisers must comply with Rule 204A-1 by January 7, 2005. While the Rule sets up minimum standards that must be contained within an investment adviser’s code of ethics, higher standards may be adopted by investment advisers. Also, the Securities and Exchange Commission has expressed its position that the code of ethics should be more than a compliance manual. According to the Commission, “a code of ethics should set out ideals for ethical conduct premised on fundamental principles of openness, integrity, honesty and trust.”
All “supervised” persons must be required to comply with the investment adviser’s code of ethics. “Supervised persons” include any persons who provide advice on behalf of the investment adviser, including the partners, officers, directors, and employees, and any person under the investment adviser’s supervision and control.
Under the code of ethics, access to material nonpublic information regarding recommendations by the investment adviser and to information about transactions by clients should be restricted to individuals who need to know the information in order to perform their duties. Persons with access to such information must be required to report their personal securities transactions and holdings.
To prevent improper personal securities trading, the Securities and Exchange Commission has suggested that investment advisers should consider adopting the following provisions:
- Requirements for prior written approval before “access persons” may place a personal securities transaction;
- Maintenance of information regarding securities issuers that the investment advisory firm is evaluating and prohibitions on personal trading in securities of those issuers;
- Maintenance of lists of issuers as to which either personal trading or trading for clients is prohibited;
- For securities issuers about which the investment adviser has inside information, “black-out” periods during which recommendations or trades are being made for clients and during which access persons would not be permitted to engage in personal securities transactions;
- Procedures for ensuring that investment opportunities must first be offered to clients;
- Restrictions on “short-swing” and market timing trades;
- Requirements for avoiding a misuse of relationships with brokers; and
- Procedures for avoiding the assignment of securities analyses to employees with personal holdings in the issuer to be analyzed.
The code of ethics must also require from each access person an annual report of personal holdings of securities and quarterly reports of personal securities transactions. Access persons are defined as supervised persons who have access to nonpublic information regarding client purchases or sales of securities and recommendations to such persons.
The code of ethics must require access persons to obtain prior approval before personally investing in an initial public offering or a private placement. Also, each code of ethics must require prompt internal reporting of any violation of the code to the chief compliance officer of the investment adviser.