Breaking Down the Code of Ethics Reporting Requirements
Main Contributor: Gretchen Sturdivan, CSCP, Creative Director & Compliance Manager
Preamble
Compliance departments truly understand the end-of-quarter dread when it comes to collecting personal securities transactions for their Access Persons. It can be a burdensome task that requires more hours than it should and sometimes lacks practical solutions. Yet, it is a Code of Ethics requirement that every registered investment adviser has to comply with on both a quarterly and annual basis. In this article, we dive into the concrete requirements and a few different methods that may make this task more approachable.
From Whence Came This Requirement?
We have the Investment Advisers Act of 1940, Section 204A-1 to thank for this requirement. Item (a) states that you “must establish, maintain, and enforce a written code of ethics that, at minimum, includes: (3) Provisions that require all of your access persons to report, and you to review, their personal securities transactions and holdings periodically.” Item (b) then details the reporting requirements, which we will discuss within this article.
Why the Timing Matters
Reports and statements with reportable securities transactions are due within 30 days following each quarter end for all Access Persons of the firm.
Initially, each new Access Person must submit their holdings report within 10 days of hire.
Annually, every Access Person must submit their holdings reports at a date chosen by the Firm.
There are no exceptions made for any firm. If these timing requirements are not met, then it will need to be logged as a Code of Ethics violation for the firm.
Who Must Submit Reports
As we noted, the rule requires that “Access Persons” must report their personal securities transactions. An Access Person is defined as:
Any of your supervised persons:
Who has access to nonpublic information regarding any clients’ purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any reportable fund, or
Who is involved in making securities recommendations to clients, or who has access to such recommendations that are nonpublic.
If providing investment advice is your primary business, all of your directors, officers, and partners are presumed to be access persons.
Once you’ve determined the Access Persons at your firm, those are the individuals you will need to collect attestations and statements from on a quarterly and annual basis.
Let’s Break This Down!
What Must Be Collected
Quarterly
On a quarterly basis, you only need to collect Access Persons’ brokerage statements for accounts that hold reportable securities in which there were transactions, over which the Access Person has beneficial ownership. You do NOT need quarterly statements on reinvestment accounts (i.e., 401K account if you don’t have the discretion to buy/sell or a 529 Plan) or accounts that do not hold reportable securities. Brokerage statements are sufficient for reporting as long as they are submitted in a timely manner (i.e., within 30 days of quarter-end) and include all of the required elements.
Although not required, we recommend all firms further require their Access Persons to complete quarterly attestations that support and substantiate the accurate and timely submission of the quarterly transactions of reportable securities.
If Access Persons do not have transactions to report, we further recommend, although not explicitly required, that the quarterly attestations note there are no transactions in reportable securities for that period.
Additionally, we recommend as best practice asking whether Access Persons opened any new accounts within the preceding calendar quarter and whether those accounts hold reportable securities on these quarterly attestations.
This ensures transparency and provides you with confidence that you have all of the required statements for the quarter and if they are not provided, then you have a document to support why (i.e., no transactions).
Annually
On an annual basis, Access Persons must provide all securities holdings in which they have beneficial ownership. This will include all securities, including those that are not considered reportable.
These statements are required to be current; no more than 45 days prior to the date submitted. The SEC did not prescribe a deadline, other than they must be provided within each 12-month period. You can establish a specific deadline in your policies – as we all know your Access Persons need it.
We further recommend, although not explicitly required, that annually, you also use an attestation to support and substantiate the receipt of all securities holdings and to request a list of all securities accounts in which they have beneficial ownership. This list of securities accounts will help you ensure that you are receiving all the information required on both a quarterly and annual basis.
Beneficial Ownership is defined as any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, has or shares a direct or indirect pecuniary interest in the securities, subject to the following:
the term pecuniary interest in any class of equity securities shall mean the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the subject securities.
the term indirect pecuniary interest in any class of securities shall include, but not be limited to, securities held by members of a person’s immediate family sharing the same household provided, however, that the presumption of such beneficial ownership may be rebutted.
Immediate family: any child, stepchild, grandchild, parent, stepparent, 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.
New Hires
When new hires come on board, it is critical to collect all of their initial holdings (no older than 45 days before the hire date) and a list of accounts within ten (10) days of hire.
Content of Securities Account Report (Annual & Initial)
The List of Securities Accounts Report should include the following:
name of financial institution,
account title,
account number,
whether or not you have beneficial ownership or, if non-reportable securities, and
whether or not you have influence or control.
Content of Holdings Reports (Annual & Initial)
The Holdings Report/Statement must include the following (this is explicitly required by the Advisers Act):
the title and type of security,
the exchange ticker symbol or CUSIP number,
number of shares,
the principal amount of each reportable security,
name of any broker, dealer, or bank where securities are held, and
the date the access person submits the report.
Note: You will notice that one of the requirements is the date the report was submitted – this is an element that the attestation mentioned above helps support.
Content of Transaction Reports (Quarterly)
The Transaction Report/Statement must include the following (this is explicitly required by the Advisers Act):
the date of the transaction,
the title,
the exchange ticker symbol or CUSIP number,
interest rate and maturity date,
number of shares,
principal amount of each reportable security involved,
the nature of the transaction (i.e., purchase, sale, or any other type of acquisition or disposition),
the price of the security at which the transaction was effected,
the name of the broker, dealer, or bank with or through which the transaction was effected, and
the date the access person submits the report.
Note: You will notice that one of the requirements is the date the report was submitted – this is an element that the attestation mentioned above helps support.
Which Securities Are Reportable?
The short answer is that all securities are considered reportable – with only FIVE exceptions, listed below:
Direct obligations of the US Government
Money market instruments (bankers acceptance, bank certificates of deposit, commercial paper, repurchase agreements, and other high-quality, short-term debit instruments
Share of money market funds
U.S. open-end mutual funds not affiliated with the firm (note: closed-end mutual funds and offshore funds are reportable)**
Unit investment trusts, if invested exclusively in unaffiliated U.S. open-end mutual funds
**ETFs are considered reportable securities.
Other Reporting Exceptions
In addition to those five exceptions, no reporting would be required for:
Transactions effected pursuant to an automatic investment plan (e.g., 529 Plan)
This would still need to be reported on annually, but not quarterly
Any transaction that overrides the preset schedule or allocations of the automatic reinvestment plan must be included in a quarterly transaction report.
Securities held in accounts over which the Access Person had no direct or indirect influence or control; although we recommend that annually you have Access Persons attest to these accounts that they do not have direct or indirect influence or control.
A quarterly transaction report if the report would duplicate information contained in confirmations or brokerage account statements that your firm holds in its records, so long as the firm receives confirmations or statements no later than 30 days after the applicable quarter end and they include all the required elements.
Collection Process
This can be an extremely manual process for some advisers, as they collect printed statements and affirmations in-house. This manual process turned into quite a stumbling block during the pandemic and continues to pose a challenge in the remote/hybrid workplace for some advisers. However, innovation is fueled by constraints, and as such, some creative solutions appeared during this time such as DocuSign or software providers that automate the collection of attestations, data feeds with brokers, and the reminder process. This is something SCS highly recommends in an effort to streamline the process and reduce the burden on CCOs each quarter.
DocuSign allows you to upload your PDF Affirmations and request that the Access Persons fill it out electronically, however, it still requires you to collect statements manually (either in person, via email, or through a file-sharing program).
Personal trading software programs allow you to generate the affirmations within the system and push those out to all Access Persons automatically each quarter in addition to providing data feeds directly with the brokers. All of your documentation and support of reviews is maintained within one program.
Conclusion
While this can seem like an overwhelming and tedious task to tackle each quarter, it can really be simplified and automated through the use of electronic solutions. Some Access Persons are not as excited as others to provide their personal information, but while this can be seen as an invasive request, CCOs can always lean on the fact that it’s not a firm-specific requirement, but rather a requirement of the Investment Adviser’s Act and something that the SEC will be looking at during an examination.