Live by the Code! The SEC’s Ethics Code, That Is

Most notably, only access persons are required to submit personal securities transactions and holdings reports. The reality is that many supervised persons will likely be access persons as well, but it is not a distinction without a difference.

The SEC is essentially calling for heightened scrutiny of supervised persons that also have access to nonpublic information or who make securities recommendations to clients… and therefore may be in a position to use that information for their own benefit instead of for the benefit of clients. All of the other required provisions of the code other than reporting, however, are applicable to all supervised persons. 

The required contents of holdings and transaction reports are spelled out in the Rule, but remember that holdings reports must be provided by each access person within ten days of them becoming an access person and annually thereafter. Transaction reports must be provided by each access person no later than thirty days after each calendar quarter.

Reporting is not required for securities over which the access person has no direct or indirect influence or control, or for transactions effected pursuant to an automatic investment plan (e.g. dividend reinvestment or auto-rebalance, etc.). Participation in IPOs and limited offerings must be pre-cleared.

Two other definitions are worth noting: "reportable securities" and "beneficial ownership". The nuance of both determines what needs to be included in personal securities transactions and holdings reports submitted by access persons.

Reportable securities are essentially all securities with the exceptions enumerated in the Rule, the most impactful exception being open-end mutual funds not advised by the advisor or in a control relationship with the advisor. In other words, an access person investing solely in certain mutual funds (or other excluded securities) may not necessarily need to submit holdings or transaction reports. The beneficial ownership definition essentially results in reporting by immediate family members sharing the same household with the access person.

The good news is that there are several third-party vendors that will establish electronic feeds with your access persons' personal brokerage firms to receive automated transaction and holding data, and flag any code violations. This is certainly more efficient than manually reviewing paper copies of brokerage statements and trade confirms received in the mail.

A final point: Rule 204A-1 represents the minimum of what an advisor must adopt in its code of ethics. Many firms go beyond this minimum to address such controls as transaction preclearance, short-term trading prohibitions, and black-out periods. Each advisor's code will therefore be unique and should be tailored to the nature of the advisor's business.