The Investment Advisers Act ensures ethical accountability.
Under the Investment Advisers Code of Ethics rules, the the U.S. Securities and Exchange Commission (SEC) now requires all securities advisers and investment companies registered with the SEC to devise, adopt, and enforce a code of ethics. Brokerages and broker/dealers must disclose the code(s) of ethics to all of its clients. The SEC has requirements that each code of ethics must include. After meeting all SEC requirements, firms are able to incorporate any additional ethics codes as they see fit.
Personal Trading
The term "access persons" refers to all employees who have access to non-public information regarding client portfolios and any employees who gives investment advice to clients. Access persons must report their personal securities transactions to the corporate executive officer responsible for SEC compliance. The executive officer reviews the reports, looking for any unusual or improper personal trading patterns. Personal trading ethics codes are in place to prevent conflicts of interest between the employees, the brokerage, and the clients.
Holdings Report Filing
Access persons must file their current personal securities holdings reports to the executive officer responsible for SEC compliance no more than 45 days before they begin working in the capacity of an access person. According to the Investment Advisers Code of Ethics, all access persons must also submit quarterly personal securities holding reports. The act also requires them to submit their annual securities holdings reports once a year while working in the capacity of an access person.
Report Filing Exceptions
Under the Investment Advisers Code of Ethics, the SEC does not require personal holdings reports of access persons for the following: automatic investment plans, investments for which the access person has no authority or control, and brokerages that have only one access person. Brokerages with only one access person are still subject to maintaining and reporting personal securities transaction records that are not a part of an automatic investment plan and transactions for which the access person has authority and control over.
Initial Public Offerings
The Investment Advisers Act requires that all access persons acquire permission from an adviser or supervisor of the brokerage before personally investing in or presenting to a client, an Initial Public Offering (IPO), or private placement purchase. The purpose of this requirement is to make certain that the access person is not unethically personally financially benefitting from the personal stock purchase or stock sale to a client, by means of collusion with executives or employees of the company offering the IPO.
Non-Public Information
Access persons are often privy to non-public information regarding client investment portfolios, transactions, and investment recommendations given by advisers of a brokerage. Access persons cannot reveal non-public client information if it has no material bearing on their ability to carry out their job duties. In an effort to prevent the misuse of sensitive and private client records, the SEC requires that all brokerages devise and maintain ethics codes controlling the disclosure of non-public client information.
