4.6  Code of Ethics and Access Persons

The SEC says that registered investment advisers must adopt and enforce a code of ethics for all supervised persons. The purpose of this rule is to prevent fraud by reminding advisory firms of their fiduciary responsibility to their clients. Interestingly, the SEC does not require that firms adopt a specific standard of ethics; instead, they must develop their own standards. That code of ethics must put a priority on protecting material inside information and on overseeing certain employees’ personal trading.

The adviser must describe its code of ethics to clients, it must include a description of the ethics code in Form ADV Part 2A, and it must furnish a copy of its ethics code to clients upon request. This would make a great multiple choice question on an exam.

Violations of the code of ethics should be reported promptly.

An important part of this rule is the requirement that advisers monitor the personal securities transactions of access persons to prevent the misuse of nonpublic information.

Remember, access persons include employees, directors, officers, and fiduciaries with access to inside information about securities gained from their work with or for an investment adviser. The investments of persons must be monitored on an ongoing basis.

Reporting requirements. Access persons must report their securities holdings