Code of Ethics
Holdings reports are required from employees on a(n) _____ basis and transaction reports are required from employees on a(n) _______ basis.
What is "annual" and "quarterly"?
This coach-from-Nebraska turned Minnesota Governor results in implications of the Pay-to-Play Rule for contributions to an upcoming federal election.
Who is Tim Walz?
This rule prescribes the books and records that are required to be retained by registered investment advisers.
What is "Rule 204-2"?
Although not required by SEC regulations, the compliance team should, at least annually, have all employees participate in this session where employees are reminded about the adviser's regulatory obligations and policies and procedures.
Rule 204A-1 violations may not regularly be severe enough to generate enforcement actions, but SEC examination staff regularly comment on them in these letters at the close of their examinations.
What are "deficiency letters"?
This rule prescribes the specific requirements for an adviser's Code of Ethics and the types of information required in access person's personal trade reporting.
What is "Rule 204A-1"?
Any general partner, managing member or executive officer, or other individual with a similar status or function;
Any employee who solicits a government entity for the investment adviser and any person who supervises, directly or indirectly, such employee; and
Any political action committee controlled by the investment adviser or any person described above.
What is a "Covered Associate"?
This rule was drastically amended in recent years and the amendments came into effect on November 4, 2022.
What is "Rule 206(4)-1, the Marketing Rule"?
Ideally, the CCO's personal trade reporting should be reviewed by this person / group of people.
What is: "Senior management / someone the CCO does not directly supervise"?
In this enforcement action from 2024, a covered associate made a $4,000 contribution to a government official in Minnesota while a Minnesota government entity was invested with the covered associate's advisory firm. The pay-to-play violation resulted in a $60k civil penalty, paid by the advisory firm.
What is "In the Matter of Wayzata..."?
Although often considered due each year on February 14th, annual holdings reports are actually due within this timeframe and must contain information no more than ___ days prior to the date the report is submitted.
What is "At least once each 12-month period thereafter on a date you select" and "45"?
These advisers (whose clients may only include venture capital funds or private funds), although exempt from most Advisers Act obligations, are still subject to Pay to Play Rules.
What are "exempt reporting advisers"?
These are the three components of Rule 206(4)-7.
What are: (a) Policies and procedures. Adopt and implement written policies and procedures reasonably designed to prevent violation, by you and your supervised persons, of the Act and the rules that the Commission has adopted under the Act;
(b) Annual review. Review and document in writing, no less frequently than annually, the adequacy of the policies and procedures established pursuant to this section and the effectiveness of their implementation; and
(c) Chief compliance officer. Designate an individual (who is a supervised person) responsible for administering the policies and procedures that you adopt under paragraph (a) of this section.
Rather than have political contributions policies that only apply to Covered Associates, investment advisers often have policies and procedures that apply to _______ and their ________.
This document from the SEC published in June 2015 describes the steps advisers should take to in order to exempt non-discretionary / managed accounts from holdings and transaction reporting.
What is "IM Guidance Update: PERSONAL SECURITIES TRANSACTIONS REPORTS BY REGISTERED INVESTMENT ADVISERS: SECURITIES HELD IN ACCOUNTS OVER WHICH REPORTING PERSONS HAD NO INFLUENCE OR CONTROL"?
Reportable Securities or not? You must get all correct to receive points.
- Futures on a broad-based index (like the S&P 500)
- Futures / forward contracts on commodities
- Currency / "FX" forward contracts
- ETFs organized as open-end mutual funds
What is:
- NO
- NO
- NO
- YES (discuss why ETFs are usually considered Reportable Securities in advisers' Codes)
This phrase found in Rule 204-2 supports the argument that a Covered Associate cannot funnel political contributions through his or her spouse, family members or other persons (e.g., an attorney) to avoid trigging Pay to Play implications.
What is "directly or indirectly"?
Any direct or indirect communication an investment adviser makes to more than one person, or to one or more persons if the communication includes hypothetical performance, that offers the investment adviser's investment advisory services with regard to securities to prospective clients or investors in a private fund advised by the investment adviser or offers new investment advisory services with regard to securities to current clients or investors in a private fund advised by the investment adviser, but does not include:
(A) Extemporaneous, live, oral communications;
(B) Information contained in a statutory or regulatory notice, filing, or other required communication, provided that such information is reasonably designed to satisfy the requirements of such notice, filing, or other required communication; or
(C) A communication that includes hypothetical performance that is provided:
(1) In response to an unsolicited request for such information from a prospective or current client or investor in a private fund advised by the investment adviser; or
(2) To a prospective or current investor in a private fund advised by the investment adviser in a one-on-one communication; and
What is "an advertisement"?
As a best practice, __________, __________, __________, and _________ are sometimes included as access persons - even though they may not clearly fall under the definition of access persons.
What are:
- interns
- administrators / office managers
- operating partners / consultants
- third-party IT professionals
The no-action-letter written to WilmerHale, LLP on July 28, 2010 provides this key guidance to investment advisers with respect to access persons' personal trade reporting. (Describe)
What is "that advisers do not need to keep records (i.e., obtain holdings and transactions reports) with respect to access persons' 529 Plans"?
Would you exempt or not exempt from Code reporting? You must get all correct to receive points.
1. An access person's spouse's accounts. Such accounts are protected from the access person legally by a prenup agreement.
2. A donor-advised fund where the access persons controls investment selection but has no beneficial ownership of the fund.
3. The accounts of an access person's parents, whom the access person lives with. The access person has no control or discretion over their parents' accounts.
What is:
1. TECHNICALLY EXEMPT. Best practices: Confirm existence of prenup, potentially report existence of accounts, have access person attest periodically they did not suggest trades to their spouse.
2. TECHNICALLY EXEMPT. Best practices: Treat as an outside business activity, monitor investment selection for conflicts of interest, potentially ask access person to recuse themself from investment decisions.
3. TECHNICALLY NOT EXEMPT. Best practices: In most cases, exceptions are made in these cases as long as the employee attests they have no control over the accounts and do not suggest trades to their parents accounts. Treat like managed / non-discretionary accounts.
These are the conditions under which an adviser or its covered associates may return / take-back a contribution already made to undo the triggering of Pay to Play rules. (Describe)
(A) The investment adviser must have discovered the contribution which resulted in the prohibition within four months of the date of such contribution;(B) Such contribution must not have exceeded $350; and
(C) The contributor must obtain a return of the contribution within 60 calendar days of the date of discovery of such contribution by the investment adviser.
AND (adviser has not exceeded their limit, see below)
(ii) In any calendar year, an investment adviser that has reported on its annual updating amendment to Form ADV (17 CFR 279.1) that it has more than 50 employees is entitled to no more than three exceptions pursuant to paragraph (b)(3)(i) of this section, and an investment adviser that has reported on its annual updating amendment to Form ADV that it has 50 or fewer employees is entitled to no more than two exceptions pursuant to paragraph (b)(3)(i) of this section.
(iii) An investment adviser may not rely on the exception provided in paragraph (b)(3)(i) of this section more than once with respect to contributions by the same covered associate of the investment adviser regardless of the time period.
These are the (3) primary things a private fund adviser needs to do to comply with Rule 206(4)-2 (the Custody Rule).
1. Hold client funds and securities at a qualified custodian.
2. Annual audit (OR *bonus points* an annual surprise independent verification and delivery of account statements).
3. Delivery of audited financials to investors within 120 days of private fund's fiscal year end.
This line in Rule 204A-1 is used to support the best practice that access persons include in their annual holdings reports a list of their beneficially owned accounts that hold securities.
What is: "Content of holdings report... The name of any broker, dealer or bank with which the access person maintains an account in which any securities are held for the access person's direct or indirect benefit"?
- Rule 204A-1 Adopting Release - encourages blackout periods / watch lists around client investments
- Plenty of employee front-running cases, including: https://www.sec.gov/newsroom/press-releases/2021-118
- Code of Ethics Risk Alert from April 2022 - SEC staff noticed employees trading at better prices than clients on certain trades.