SEC Rules Regarding Compliance Programs for Investment Advisers and Investment Adviser Code of Ethics
The Massachusetts Securities Division (the “Division”) has received a number of inquiries regarding the effect on Massachusetts-registered investment advisers of certain new rules promulgated by the U.S. Securities and Exchange Commission (the “SEC”) under the Investment Advisers Act of 1940. Specifically, these questions involve the applicability to investment advisers registered with the Division of the rules, discussed in Release No. IA-2204 (Compliance Programs of Investment Advisers) and in Release No. IA-2256 (Investment Adviser Code of Ethics).
The principal sources of authority for regulating state-registered investment advisers in Massachusetts are M.G.L. c.110A (the “Act”) and 950 CMR 12.205 (the “Regulation”) - although the SEC does retain some direct authority over state-registered investment adviser in certain matters. All investment advisers registered with the Division are required to comply with applicable provisions of the Act and the Regulation. Be advised that certain sections of the Regulation incorporate specific rules promulgated by the SEC under the Investment Advisers Act of 1940. For example, section 12.205(7) of the Regulation, dealing with record keeping requirements, includes all books and records required to be maintained under SEC Rule 204-2. Also, section 12.205(9) of the Regulation, dealing with fraudulent, dishonest or unethical practices, includes any practice proscribed under SEC Rules 206(4)-1 et seq.
SEC Release No. IA-2204 discusses the requirement that investment advisers adopt and implement written policies and procedures reasonably designed to prevent violations of federal securities laws. This is mandated by new SEC Rule 206(4)-7 and is therefore incorporated into section 12.205(9) of the Regulation. Likewise, the amendments to SEC Rule 204-2 that require a copy of these policies and procedures be included as part of the investment adviser’s records and state for how long they must be maintained and preserved are incorporated into section 12.205(7) of the Regulation.
SEC Release No. IA-2256 discusses the requirement that investment advisers adopt a code of ethics. This is mandated by a new SEC Rule 204A-1 which is not incorporated as part of the Regulation. However, while an investment adviser registered with the Division is not formally covered by the new rule, sections 12.205(8) and (9) of the Regulation dealing with Disclosure Requirements and Fraudulent, Dishonest and Unethical Practices, cover much of the same material. Consequently, the Division strongly recommends that state-registered advisers adopt such a code of ethics and generally comply with this new SEC rule.
These two IA releases from the SEC can be found on its website at www.sec.gov/rules/final.shtml.