Code Of Ethics

Aldbury Capital, an SEC-registered adviser, is drafting the code of ethics required by Advisers Act Rule 204A-1. Regarding the personal securities reporting it must collect from its ACCESS PERSONS, which statement is correct?

1. A.Access persons must report only trades in securities the firm also recommends to clients; all other personal trading falls outside the rule.Incorrect. The reporting obligation covers reportable securities generally, not just those on the firm recommended list.
2. B.Transactions in direct obligations of the U.S. government must be reported, while transactions in individual stocks need not be.Incorrect. This inverts the rule. Direct U.S. government obligations are excluded from reporting; individual stocks are reportable.
3. C.Access persons must file an initial and annual holdings report plus at least quarterly transaction reports, and the code must require prompt reporting of code violations to the chief compliance officer.Correct. Initial and annual holdings, quarterly transactions, and internal violation reporting are the core requirements of Rule 204A-1.
4. D.The rule requires the adviser to prohibit all personal securities transactions by its access persons.Incorrect. A flat prohibition is not required. The rule mandates a code, reporting and supervisory review of personal trading.

Why: Rule 204A-1 requires every registered adviser to adopt a written code of ethics setting a standard of business conduct and to police personal trading by access persons, the supervised persons who have access to nonpublic recommendations or client holdings. Each access person must submit a holdings report when he becomes an access person and at least annually thereafter, plus transaction reports at least quarterly. The code must also require prompt reporting of any violation of the code to the chief compliance officer or another designated person.

Ambleside Capital, an SEC-registered investment adviser, has grown to 40 employees but has never formalized its compliance arrangements beyond an informal understanding among the principals. Under the compliance rule of the Investment Advisers Act, the firm must:

1. A.File its compliance manual with the SEC and obtain approval before the policies take effectCompliance policies are not filed with or approved by the Commission.
2. B.Adopt written procedures but review them only when the SEC schedules an examination of the firmThe review must occur at least annually, independent of any examination.
3. C.Designate a chief compliance officer who is an attorney admitted to practise in the firm home stateThe CCO must be competent and knowledgeable and empowered to act, but need not be a lawyer.
4. D.Adopt and implement written policies and procedures reasonably designed to prevent violations, review their adequacy and effectiveness at least annually, and designate a chief compliance officer to administer themCorrect. Written policies, an annual review and a designated CCO are the three elements.

Why: The compliance rule requires an SEC-registered adviser to adopt and implement WRITTEN policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules under it, to review the adequacy and effectiveness of those policies and procedures at least annually, and to designate a chief compliance officer responsible for administering them. The policies must fit the firm actual business, so an off-the-shelf manual that does not match the firm operations does not satisfy the rule.

Under the code of ethics its adviser adopted pursuant to Rule 204A-1, portfolio manager Evander Krishnamurthy must report his personal securities holdings and transactions. Which of the following positions would he generally NOT have to include in those reports?

1. A.Shares of a U.S. Treasury note held in his personal brokerage accountCorrect. Direct obligations of the U.S. government are excepted from the definition of reportable security under Rule 204A-1.
2. B.Shares of an open-end mutual fund that his own firm sub-advisesThe open-end fund exception does not apply when the adviser advises or sub-advises the fund.
3. C.Shares of a listed common stock bought in a limited offeringEquities are reportable, and limited offerings additionally require pre-approval.
4. D.Corporate bonds of a company his firm coversCorporate debt is a reportable security under the rule.

Why: Rule 204A-1 requires each registered adviser to adopt a code of ethics and to obtain initial and annual holdings reports and quarterly transaction reports from access persons. The rule carves out a short list of reportable-security exceptions, including direct obligations of the U.S. government, bankers acceptances, bank certificates of deposit, commercial paper and other high-quality short-term debt instruments, money market fund shares, and shares of open-end funds that the adviser does not itself advise or sub-advise.