Clarification on Common Questions with Your Code of Ethics

As an adviser registered with the SEC, you are required to maintain and enforce a written Code of Ethics in compliance with Rule 204A-1. This is a rule that the SEC takes literally during an examination and is a common deficiency. Although there are no new amendments or recent guidance, we thought it would be helpful to summarize a few of the questions that we often receive.

Q. Are Access Persons required to have all securities pre-cleared?

A. Rule 204A-1 requires advisers to include, within their Code of Ethics, the requirement that all access persons obtain pre-clearance prior to purchasing any IPO or Private Placement. It does not matter what kind of business you are involved in or what you are purchasing for client accounts. This is a requirement for all. Any other pre-clearance requirements administered by the adviser’s Code of Ethics are simply a preference for the firm.

Q. Would an intern be considered an Access Person, thereby requiring them to report their personal securities information?

A. You must first determine if that intern meets the definition of an access person:

  1. Does the intern have access to nonpublic information regarding the purchase or sale of any clients’ securities?
  2. Does s/he have access to nonpublic information regarding the portfolio holdings of any reportable fund?
  3. Is s/he involved in making securities recommendations to clients?
  4. Does s/he have access to such recommendations that are nonpublic?

If the answer is YES to any of the items above, the intern must report his/her personal securities information for any account in which s/he has “beneficial ownership”. Keep in mind that beneficial ownership is presumed for members of a person’s immediate family sharing the same household (child, stepchild, parent, stepparent, grandchild, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law) and shall include adoptive relationships. So, if that intern is living at home with his/her parents (or just temporarily away at college) then the reports of the parents would need to be reported.

Q. Would a brokerage statement delivered to the adviser’s CCO satisfy the reporting requirements for both the quarterly transaction and annual holdings report?

A. Rule 204A-1 requires an access person to provide the following reports within the prescribed period of time:

  1. Initial Holdings Report
  2. Annual Holdings Report
  3. Quarterly Transaction Report

There are specific elements that must be included on each of these reports. If the brokerage statements include ALL of these elements, then submitting the brokerage statements will satisfy the reporting requirements for the Quarterly Transaction Reports.

However, as stated in the case of Thomas E Meade, there is no such exception for the Initial and Annual Holdings Report. Therefore, we recommend, at the very least, an attestation be provided in addition to the brokerage statements—provided that they again include all the required elements and all holdings, not just those securities that are reportable—certifying that the statement is complete. If the brokerage statements are not complete, then the attestation reports can include the additional holdings; in the case where there are not reportable holdings, the access persons can attest to this fact.

To further clarify this point, the Quarterly Transaction Report need ONLY include reportable securities, which include all securities except the following:

(i)    Direct obligations of the Government of the United States;
(ii)   Bankers’ acceptances, bank certificates of deposit, commercial paper and high quality short-term debt
instruments, including repurchase agreements;
(iii)  Shares issued by money market funds;
(iv)  Shares issued by open-end funds other than reportable funds; and
(v)   Shares issued by unit investment trusts that are invested exclusively in one or more open-end funds,
none of which are reportable funds.

Whereas, the Initial and Annual Holdings Report must include ALL securities in which the access person has beneficial ownership. This is part of the reason why, in some cases, the brokerage statements in and of themselves would not be sufficient in place of the Initial and Annual Holdings Report. Also, exempt from quarterly transaction reporting requirements are reports with respect to transactions effected pursuant to an automatic investment plan and ANY report with respect to securities held in accounts over which the access person had no direct or indirect influence or control.

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2 Responses to “Clarification on Common Questions with Your Code of Ethics”

  1. Jim Cunningham

    Does Rule 204A-1 require reporting on company sponsored (or not sponsored, such as for a spouse) 401(k) plans if the asset type needs to be reported? Similarly, does Rule 204A-1 require reporting on 529 plans?

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