Drafting Tips for Your Supervisory Procedures and Code of Ethics

Whether you supervise staff or are running a one-person operation, the Investment Advisers Act of 1940 requires that you establish, maintain, and enforce written policies and procedures for the conduct of your business.  These policies and procedures are commonly called “Compliance Manual” or “Written Supervisory Procedures” (“WSP”).

 

Furthermore, you are also required to adopt a Code of Ethics, which sets forth standards of conduct expected of advisory personnel, and addresses conflicts that arise from personal trading by advisory personnel.  The Code of Ethics as required by the SEC goes beyond a simple code of ethical standards.  It requires specific procedures to report personal securities transactions. 

 

 

The Code of Ethics overlaps areas of the WSP, as it relates to specific procedures.  So you do want to draft these two documents as complimentary.  Try to avoid redundancy or even contradictory procedures.  You may actually keep these requirements as two separate documents, or you could merge the required procedures into one master document.  However, remember that clients may request a copy of your Code of Ethics (this offer is to be made in your Form ADV disclosures), so you may want to segregate the Code of Ethics – or be able to just print and forward the applicable section.

 

If you are a one-person show, you may ask, “If it is just me, why do I have to have written procedures?”  When the regulators come in, they want documentation that you have thought through the compliance issues and that you are consistently following the proper procedures.  For practical purposes, it really is handy to have these things written down so that you can follow through with what you are supposed to be doing.  Since compliance is probably not your forte, it is prudent to take the time to figure out what you should be doing, so that you will do the right things.

 

What if you are a state registered advisor?  Many state rules require you to adopt WSP.  Most of these states follow the federal guidelines.  Be sure to review your state law for specifics.

 

While space does not permit a complete listing of all areas that should be included in your WSP and Code of Ethics, here are some of the hot topics that should be covered.

 

  • Supervisory System (Duties of Chief Compliance Officer and other persons)
  • Books and Records
  • Custody
  • Proxy Voting
  • Trading Errors
  • Personal Securities Trading
  • Best Execution
  • Soft Dollars
  • Block Trading (Aggregation of Trades – Fair Allocation)
  • Accuracy of Disclosures (Form ADV, Client Reports, Advertising/Marketing)
  • Asset Valuations
  • Privacy Policy
  • Solicitors
  • Principal Trades and Agency Cross Transactions
  • Prohibition on Insider Trading

Your Business Continuity Plan is also part of your WSP.  However because of the nature of this beast, it almost assuredly will be as a separate document.

 

There are some areas that will not apply, but regardless, should be duly noted in your WSP.  Perhaps you don’t pay Solicitors.  But this fact should be documented.  It then serves as a reminder that if you ever do want to change your policy, that there is a section in your WSP that needs to be addressed.

 

Remember to review your WSP and Code of Ethics at least annually for updates in law, regulatory opinion, and changes in your own operations.  However, updates to your WSP and Code of Ethics should be done as necessary during the year as these changes occur.

 

Have you made changes to your WSP yet for the new references from ADV II to ADV 2, and the new regulatory rules regarding the delivery requirements?

 

Also, while certain parts of your supervisory reviews can be done annually (e.g. the overall adequacy of your WSP), some of your reviews should be conducted on a monthly or quarterly basis (e.g., best execution trade reviews).

 

 

About Nancy Lininger

Nancy Lininger (www.liftburden.com) is founder/consultant of The Consortium®, Camarillo, CA, providing compliance and marketing consulting to Investment Advisors and Broker/Dealers, and publisher of the CompliancE-News.