January 25, 2013

The AdvisorAssist CCO Series: Code of Ethics

It's not the Magna Carta or the Code of Hammurabi, but it is the central document that defines the fiduciary relationship between you and your clients. The most successful RIA firms we know treat their Code of Ethics as the cornerstone of their culture and practices.

Sure, it's filled with procedures and reporting requirements that aren't worthy of inclusion in any history textbook. But the essence of it defines our industry by capturing the decades of case law that ultimately shape what it means to be a fiduciary.

RIA Code of Ethics In a Nutshell

As fiduciaries, your RIA's Code of Ethics defines the standard of business conduct that you are expected to follow to ensure that your supervised persons are acting in your clients' best interests at all times.

In addition to defining the fiduciary standard that your firm follows, your Code of Ethics also imposes reporting requirements and restrictions for personal securities trading, confidentiality, gifts and entertainment, and outside business activities.

For additional details, see SEC Rule 204-1 (the "Code of Ethics Rule") here.

Through the Regulator's Eyes

Each of the activities covered in your Code of Ethics can result in a conflict of interest that could impact your ability to carry out your fiduciary duty. As we often tell clients, many RIAs have conflicts of interest, which is okay as long as they are properly disclosed. The worst conflict of interest of all, of course is the one that is not disclosed to clients.

Regulator's efforts focus on determining if your firm has procedures for supervised persons to report conflicts, and that CCOs have procedures to identify and monitor for conflicts. Regulators expect CCOs to either eliminate or mitigate conflicts of interest and (in instances where conflicts remain), disclose them to clients appropriately

CCO Best Practices

  • Review your Code of Ethics at least annually so that you reinforce your understanding of the concepts.
  • During your annual compliance meeting, educate your staff on the Code of Ethics by laying out not only their responsibilities but also your responsibilities. This can be done by explaining the motivation behind the Code of Ethics and some examples of how conflicts can damage your firm's reputation.
  • Be sure that you receive signed Code of Ethics certification once a year from all supervised persons.
  • Keep an updated list of the supervised persons and access persons within your firm so that you are always certain who is subject to the Code of Ethics and personal securities reporting.
  • During your annual compliance meeting, educate your staff on the Code of Ethics by laying out not only their responsibilities but also your responsibilities. This can be done by explaining the motivation behind the Code of Ethics and some examples of how conflicts can damage your firm's reputation.
  • Create a distribution and tracking system to collect personal securities trading reports from access persons. Your CRM could be the good tool for this tracking.
  • Maintain logs of all gifts that are given or received by your firm's supervised persons. SEC rules does not define a hard limit on the dollar amount for gifts. One rule of thumb is between $100 and $500 but the key is to come up with an amount that is reasonable based on the client relationship and be sure that gifts are not so large that they can be construed as an inducement or could impair the judgement of your staff or clients. (Note for hybrids: Broker-dealers generally impose a $100 limit per client per year, so you you should consider aligning with the most restrictive policy.

The AdvisorAssist CCO Series is a collection of blog posts that cover each of the elements of your RIA's compliance program. Each post will provide an overview of one compliance topic, including our insights on how regulators view each topic as well as some practical steps to help Chief Compliance Officers address this topic. As always, we would welcome your comments and thoughts.

Brian Lauzon

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