SEC NEWS AND SPEECHES—Risk Alert highlights investment adviser MNPI compliance issues - 09 May 2022

The most commonly observed deficiencies related to Section 204A and Rule 204A-1, the Code of Ethics Rule.

The SEC’s Division of Compliance has issued an alert to provide investment advisers, investors, and other market participants with information concerning deficiencies related to Section 204A of the Investment Advisers Act of 1940 and the Code of Ethics Rule, (Rule 204A-1), thereunder.

Section 204A and Rule 204A-1. All investment advisers, registered and unregistered, are required under Section 204A to establish, maintain, and enforce written policies and procedures to prevent material non-public information (MNPI) from being misused by an adviser or any associated person. Pursuant to Code of Ethics Rule 204A-1, investment advisers that are registered, or are required to be registered under the Advisers Act, must adopt a “code of ethics,” that, among other things, sets forth the standard(s) of business conduct expected from the adviser’s “supervised persons” (e.g., employees, officers, partners, directors, and other persons who provide advice on behalf of the adviser and are subject to the adviser’s supervision and control). In addition, certain supervised persons, called “access persons,” are required to report their personal securities transactions and holdings to the adviser’s chief compliance officer (CCO) or other designated persons.

Deficiencies. The alert offers examples of the deficiencies and weaknesses associated with Section 204A and Rule 204A-1, as observed by the Division of Examinations staff. The alert also explains that within the Code of Ethics Adopting Release, the Commission discussed practices that should be considered by advisers when crafting their respective codes and, in connection with that, division staff observed that there were instances where employees traded investments that were on the adviser’s restricted list and instances “where the adviser or its employees purchased securities at a better price, ahead of the adviser’s clients, in contravention of the adviser’s code.”

Conclusion. The SEC’s announcement notes that deficiencies related to Section 204A, and the Code of Ethics Rule have been among the most commonly observed, and many of the advisers have modified their ethics codes, written policies, procedures and practices in response to the issues identified in the deficiency letters. Advisers are encouraged to review their practices, policies, and procedures to ensure compliance with the Advisers Act and the rules thereunder.

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