Code of ethics requirements for investment advisers

Rule 204A-1 requires every SEC-registered investment adviser to adopt and enforce a written code of ethics that sets a standard of conduct, requires compliance with the federal securities laws, and makes access persons report their holdings and personal trades for review. Access persons file an initial holdings report within 10 days of becoming one, a holdings report at least once every 12 months, and a transaction report within 30 days after each calendar quarter, and they need the firm's approval before buying into an IPO or a limited offering.

The rule was adopted in July 2004 (Release IA-2256, 69 FR 41696). It took effect on 31 August 2004, with compliance required from 7 January 2005, and was amended in 2011 and 2016 (76 FR 81806 and 81 FR 83554).

Who the rule applies to

Rule 204A-1 applies to an adviser "registered or required to be registered" with the SEC under section 203 of the Advisers Act. A solo adviser is covered; there is a reporting exception for a firm with only one access person, described below.

State-registered advisers are not subject to Rule 204A-1 itself. Many states have their own code of ethics or personal trading requirements, and Form ADV Part 2A Item 11 refers to "SEC rule 204A-1 or similar state rules." Check your state's rule rather than assuming it matches the federal one.

What the code must contain

Rule 204A-1(a) sets five minimum elements:

1. A standard of business conduct for supervised persons that reflects the fiduciary obligations of the firm and its people.
2. A requirement to comply with the federal securities laws, a term the rule defines to include the Advisers Act, the Securities Act, the Exchange Act, the Investment Company Act, Sarbanes-Oxley, Title V of Gramm-Leach-Bliley and the Bank Secrecy Act as it applies to advisers.
3. Personal securities reporting by access persons, and review of those reports by the firm.
4. Prompt reporting of violations to the chief compliance officer, or to other designated people as long as the CCO also receives every report.
5. Delivery and acknowledgment. Every supervised person gets a copy of the code and each amendment, and gives back a written acknowledgment of receipt.

The rule sets a floor, not a template. The adopting release lists other provisions that many advisers include and that the Commission said firms should consider: limits on accepting gifts, limits on when an access person may serve as a director of a public company, a detailed identification of who counts as an access person, and procedures for reviewing the code and the reports made under it. It also describes preclearance of all personal trades and blackout periods around client trading as common practice.

Who is an access person

Under Rule 204A-1(e)(1), an access person is any supervised person who:

• has access to nonpublic information about any client's purchases or sales of securities, or about the portfolio holdings of any reportable fund, or
• is involved in making securities recommendations to clients, or has access to recommendations that are not public.

If providing investment advice is the firm's primary business, all of its directors, officers and partners are presumed to be access persons.

The definition turns on access, not job title. Operations, trading support and technology staff who can see client holdings or orders are often access persons, and leaving them out is one of the most common findings.

Reports cover securities in which the access person has direct or indirect beneficial ownership, interpreted as it is under Exchange Act Section 16. The adopting release says an access person is presumed to be the beneficial owner of securities held by immediate family members sharing the same household. Household accounts belong in the reports.

Reportable securities

Every security is reportable unless it falls into one of five exceptions in Rule 204A-1(e)(10):

• direct obligations of the US government
• bankers' acceptances, bank CDs, commercial paper and high quality short-term debt, including repurchase agreements
• money market fund shares
• shares of open-end funds, other than reportable funds
• shares of unit investment trusts invested only in open-end funds that are not reportable funds

A reportable fund is a registered fund the firm advises, or one whose adviser or principal underwriter controls, is controlled by or is under common control with the firm. So an access person at a firm that manages a mutual fund reports trades in that fund.

Reports and deadlines

Initial holdings report

Due no later than 10 days after the person becomes an access person. The information must be current as of a date no more than 45 days before the person became an access person.

Annual holdings report

Due at least once each 12-month period, on a date the firm selects. The information must be current as of a date no more than 45 days before the report is submitted.

Each holdings report lists the title and type of each reportable security, the ticker or CUSIP where applicable, the number of shares and principal amount, every broker, dealer or bank holding an account for the access person's benefit, and the date the report is submitted.

Quarterly transaction report

Due no later than 30 days after the end of each calendar quarter, covering every transaction in a reportable security during the quarter. For each transaction it gives the date, the security, the ticker or CUSIP, the interest rate and maturity where relevant, the number of shares and principal amount, whether it was a purchase, sale or other acquisition or disposition, the price, the broker, dealer or bank used, and the date the report is submitted.

Exceptions

Under Rule 204A-1(b)(3), a code need not require:

• any report for accounts over which the access person had no direct or indirect influence or control
• transaction reports for trades made through an automatic investment plan, including a dividend reinvestment plan
• a transaction report that would duplicate broker confirmations or account statements the firm already holds, as long as the firm receives them no later than 30 days after the end of the quarter

The no-influence-or-control exception is narrow. A firm relying on it for a managed account should be able to show why the access person has no say, not just that someone else places the trades.

Preclearance of IPOs and limited offerings

Rule 204A-1(c) requires access persons to get the firm's approval before acquiring beneficial ownership of a security in an initial public offering or a limited offering.

• An IPO is a registered offering by an issuer that was not already an Exchange Act reporting company.
• A limited offering is one exempt from registration under Securities Act section 4(a)(2) or 4(a)(5), or under Rule 504 or Rule 506. Most private placements, including private fund interests, fall here.

The rule requires preclearance only for these two categories. Many firms preclear far more, often every trade in a reportable security, but that is a firm choice. Whatever the firm requires, Rule 204-2(a)(13)(iii) requires it to keep a record of each decision to approve an IPO or limited offering purchase and the reasons for it.

Solo advisers

Under Rule 204A-1(d), a firm with only one access person does not have to submit reports to itself or approve its own IPO and limited offering purchases, as long as it keeps records of all the holdings and transactions the rule would otherwise require it to report. The adopting release says a sole proprietor with a clerical assistant or bookkeeper can still use the exception, as long as that employee is not an access person.

The exception covers reporting and preclearance only. A solo adviser still needs a written code with a standard of conduct, a requirement to comply with the securities laws, and the other minimum provisions.

Review is the requirement, not collection

The rule requires access persons to report and the firm to review. A drawer of statements nobody has read does not meet it. A workable review compares each access person's trades against client trades in the same securities, against the restricted list, and against preclearance approvals, and records who reviewed what and when.

The code should also say who reviews the CCO's own reports. The rule does not address it, but a reviewer reviewing their own trades is an obvious gap.

Records you must keep

Rule 204-2 requires an SEC-registered adviser to keep:

• (a)(12)(i): the code of ethics in effect now and any version in effect in the past five years
• (a)(12)(ii): a record of every violation of the code and any action taken as a result
• (a)(12)(iii): the written acknowledgments of every person who is, or in the past five years was, a supervised person
• (a)(13)(i): every report made by an access person, including the confirmations or statements received instead of reports
• (a)(13)(ii): the names of everyone who is, or in the past five years was, an access person
• (a)(13)(iii): each IPO or limited offering approval and the reasons for it, for at least five years after the end of the fiscal year in which it was granted

Records under the general retention rule, Rule 204-2(e)(1), are kept for at least five years from the end of the fiscal year in which the last entry was made, the first two years in an appropriate office of the adviser.

Disclosure on Form ADV

Form ADV Part 2A Item 11.A asks an SEC-registered adviser to briefly describe its code of ethics and to say it will provide a copy to any client or prospective client on request. Items 11.B to 11.D cover the conflicts when the firm or its people trade in the same securities as clients, or at about the same time. When the code changes in a way that affects these answers, the brochure needs to change with it.

What examiners look for

• Access persons defined too narrowly, most often by leaving out operations and technology staff who can see holdings.
• Reports collected and filed with no evidence anyone reviewed them.
• Late reports with no follow-up and no record of the lateness.
• Household member accounts that were never disclosed.
• IPO or private placement purchases with no recorded approval.
• Acknowledgments missing for new hires or for the latest amendment.

Common questions

Who counts as an access person under Rule 204A-1?

Any supervised person with access to nonpublic information about client trades or holdings, or about the holdings of a reportable fund, or who is involved in making recommendations or can see them before they are public. At a firm whose primary business is advice, directors, officers and partners are presumed to be access persons.

Do access persons have to report ETFs and mutual funds?

Shares of open-end funds are excluded unless the fund is a reportable fund, meaning one the firm or an affiliate advises. Money market fund shares are always excluded. Other securities, including individual stocks and bonds, are reportable. Where a product's legal structure is unclear, ask what the fund actually is before treating it as excluded.

Does every personal trade need preclearance?

No. The rule requires preclearance only for IPOs and limited offerings. A firm may require more, and many do, but the code must say exactly what is required so that compliance with it can be tested.

Does a solo adviser need a code of ethics?

If the adviser is registered with the SEC, yes. A firm with one access person is excused from filing reports with itself and preclearing its own IPO and private placement purchases, but only if it keeps records of all its holdings and transactions. The rest of the code still applies.

When is the quarterly transaction report due?

No later than 30 days after the end of each calendar quarter. The initial holdings report is due within 10 days of becoming an access person, and the annual holdings report at least once every 12 months on a date the firm chooses.

Keep the record as it happens

Luna's code of ethics template covers each element of Rule 204A-1 and leaves room for the provisions your firm adds. The code of ethics and personal trading modules collect acknowledgments, holdings and quarterly reports, record each preclearance decision with its reason, and show who reviewed what and when. For the information side of the same program, see What is MNPI?, and for gifts, the gifts and entertainment guide.