Investment Adviser Code of Ethics: Reports, Approvals, and Records

An SEC-registered investment adviser’s code of ethics has to meet the minimum requirements of Rule 204A-1 under the Investment Advisers Act of 1940: a written document setting standards of conduct, requiring compliance with federal securities laws, requiring personal securities reports from access persons, requiring prompt internal reporting of violations, and distributed to every supervised person with a written acknowledgment on file. On top of those five elements, the rule requires pre-approval before access persons invest in IPOs or private placements, and Rule 204-2 requires the firm to keep the related records for five years.

Who the Rule Covers

Rule 204A-1 applies to any investment adviser registered with the SEC or required to be registered under Section 203 of the Investment Advisers Act. State-registered advisers fall outside this federal rule, though states generally impose their own comparable requirements.

Inside a covered firm, the code reaches two groups. A supervised person is any partner, officer, director, employee, or other person who provides investment advice on behalf of the adviser and is subject to the firm’s supervision and control.¹ Every supervised person is bound by the conduct standards and has to acknowledge the code in writing.

An access person is a supervised person who has access to nonpublic information about client trades or portfolio holdings, or who is involved in making securities recommendations to clients, or who has access to nonpublic recommendations. At firms whose primary business is investment advice, all directors, officers, and partners are presumed to be access persons.² Only access persons owe the personal trading and holdings reports described below.

The Five Mandatory Elements

Every code of ethics has to include, at a minimum:

Standards of conduct for all supervised persons that reflect the adviser’s fiduciary obligations to clients.
A requirement to comply with applicable federal securities laws.
Personal securities reporting by access persons, on the schedules the rule specifies.
Internal reporting of violations to the chief compliance officer or another designated person, promptly, by any supervised person who becomes aware of a problem.
Distribution and written acknowledgment. The firm must give each supervised person a copy of the code and any amendments and collect a signed acknowledgment of receipt.

Those five components are the regulatory floor.² Firms commonly layer additional policies on top, covering gifts, outside business activities, and political contributions. The SEC expects the code to be tailored to the firm’s actual business risks rather than lifted from a template.

Holdings Reports From Access Persons

Access persons file two holdings reports.

The initial holdings report is due no later than 10 days after the person becomes an access person. Its information must be current as of a date no more than 45 days before that start date.

An annual holdings report follows at least once every 12 months, on a date the firm selects, with information current as of a date no more than 45 days before it is submitted.²

Both reports have to include, at a minimum:

The title and type of each reportable security the access person beneficially owns, directly or indirectly, together with the exchange ticker symbol or CUSIP number where applicable, the number of shares, and the principal amount.
The name of every broker, dealer, or bank where the access person has an account holding any securities.
The date the report is submitted.

Quarterly Transaction Reports

Access persons also file a transaction report within 30 days after the end of each calendar quarter, covering every transaction in a reportable security during that quarter. Each entry has to include:

The trade date, the title of the security, and the exchange ticker symbol or CUSIP number, with interest rate and maturity date where applicable, plus the number of shares and principal amount.
Whether the transaction was a purchase, sale, or other acquisition or disposition.
The execution price.
The name of the broker, dealer, or bank through which the trade was effected.
The date the report is submitted.²

Which Securities Are Not Reportable

Not every investment triggers reporting. The rule defines “reportable security” broadly but excludes several categories from both holdings and transaction reports:

Direct obligations of the U.S. government.
Bankers’ acceptances, bank certificates of deposit, commercial paper, and other high-quality short-term debt instruments, including repurchase agreements.
Shares issued by money market funds.
Shares of open-end mutual funds, unless the fund is a “reportable fund,” meaning your firm or an affiliate acts as its adviser or sub-adviser.
Shares of unit investment trusts invested exclusively in non-reportable open-end funds.

Individual stocks, bonds, options, and ETFs remain reportable. Transactions made through an automatic investment plan are exempt from quarterly transaction reporting, but the underlying holdings still appear on annual reports.²

Pre-Approval for IPOs and Private Placements

Access persons cannot invest in an initial public offering or a private placement without the firm’s approval in advance. The code has to require pre-clearance before any beneficial ownership is acquired in either type of investment.²

The firm must document each approval decision and the reasons for it, and keep that record for at least five years after the end of the fiscal year in which the approval was granted.³

Sole Proprietor Exception

If you are a sole proprietor and no one else at the firm is an access person, you do not have to submit holdings or transaction reports to yourself, and you do not have to obtain your own approval for IPO or private placement investments. You still have to maintain records of the holdings and transactions that would otherwise have been reported.²

Recordkeeping

Rule 204-2 sets out the records a firm has to keep to back up its code of ethics:

Every holdings and transaction report filed by an access person, along with any information provided in lieu of those reports.
A list of everyone who is currently an access person and everyone who held that status within the past five years.
A record of each IPO and private placement approval decision and the supporting reasons.
The signed acknowledgments from supervised persons confirming receipt of the code and any amendments.

These records have to be preserved for at least five years after the end of the fiscal year in which they were created or last relevant, and kept in a readily accessible form.³

Disclosure in Form ADV

The code is not purely an internal document. Item 11 of Form ADV Part 2A requires SEC-registered advisers to describe their code of ethics briefly in the firm brochure delivered to clients and prospective clients, and to state that a full copy is available to any client or prospective client on request.⁴ A request for the full document should be answered promptly.

What Happens if the SEC Finds Problems

The SEC checks compliance with the rule through routine examinations and, where warranted, formal enforcement actions. Examiners who find deficiencies typically issue a deficiency letter directing corrective action. More serious matters, especially those involving self-dealing or repeated recordkeeping failures, move into formal proceedings.

The remedies available under the Advisers Act include cease and desist orders, censure, civil monetary penalties, disgorgement of profits, bars from associating with an adviser, and injunctions sought in federal court. The severity turns on the nature of the violation, the harm to clients, and the firm’s cooperation with the investigation.

1
Legal Information Institute (Cornell Law School). 15 U.S. Code 80b-2 – Definitions
2
eCFR. 17 CFR 275.204A-1 – Investment Adviser Codes of Ethics
3
eCFR. 17 CFR 275.204-2 – Books and Records to Be Maintained by Investment Advisers
4
U.S. Securities and Exchange Commission. Form ADV Part 2 – Uniform Requirements for the Investment Adviser Brochure and Brochure Supplements