Tag: Rule 206(4)-7

Conducting your annual review to ensure compliance

PEI PFC Forum 2013

These are my notes from the Private Fund Compliance Forum 2013. They are live notes, so please forgive the typos.

Brian Kawakami, Partner, Ascendant Compliance Management
Charles Lerner, Principal, Fiduciary Compliance Associates LLC, and Editor, The US Private Equity
Fund Compliance Guide and The US Private Equity Fund Compliance Companion
Jim O’Connor, Chief Compliance Officer, Golden Gate Capital

Rule 206(4)-7 specifically requires an annual review of the compliance program. The release identifies 10 points for review.

What is annually? There is no clear requirement. It is fine to have it run during a time that people are available. End of year can be a bad time. April 15 is a bad time.

The Commission has stated that it expects your policies and procedures, at a minimum, to address the following issues to the extent that they are relevant to your business and therefore would expect them to be included in the annual review:

  • Portfolio management processes, including allocation of investment opportunities among clients and consistency of portfolios with clients’ investment objectives, your disclosures to clients, and applicable regulatory restrictions;
  • The accuracy of disclosures made to investors, clients, and regulators, including account statements and advertisements;
  • Proprietary trading by you and the personal trading activities of your supervised persons;
  • Safeguarding of client assets from conversion or inappropriate use by your personnel;
  • The accurate creation of required records and their maintenance in a manner that secures them from unauthorized alteration or use and protects them from untimely destruction;
  • Safeguards for the privacy protection of client records and information;
  • Trading practices, including procedures by which you satisfy your best execution obligation, use client brokerage to obtain research and other services (referred to as “soft dollar arrangements”), and allocate aggregated trades among clients;
  • Marketing advisory services, including the use of solicitors;
  • Processes to value client holdings and assess fees based on those valuations; and
  • Business continuity plans.

Valuation is at the top of the list for private equity. You want consistency and you want adherence to the policies.

Charles recommended that you have the annual review include an outside person. It’s hard to review yourself. (He added a self-promotion disclaimer.)

There was a disagreement about the use of outside parties in the annual review. A gap analysis can be protected by attorney-client privilege. A written annual review cannot.

How do you show “tone at the top”? It’s key to have senior management in compliance training. It’s good to have a regular meetings between heads of the firm and the CCO. The CCO should regularly send out regular compliance remainders.

Conflict analysis should include allocation of expenses. Are expenses being reasonable allocated to the funds and to the manager.

A warning sign of a problem is people who are unwilling to offer up the requested information.

Charles shared a story over the use of the company plane. From a compliance standpoint you should review the flight log to make sure the  plane went to business locations and not to personal travel. One SEC examiner raised an issue that the plane should be subject to competitive bidding.

An annual review should look closely at co-investments and compare to the policy and procedures. Make sure the selection of co-investment meets the procedures.  You should not base that choice solely on the basis of the size of an investor’s interest in the fund. You don’t just want to have the biggest if others want to invest.

The SEC will want to know how you make money. How you make money will lead a path to business operations and conflicts.

Charles recommended that you don’t rely just on the personal trading software platform to identify red flags. It’s good to grab the statements and see the holdings more holistically.

Part of the annual review should include a risk matrix so you can produce something in response to enterprise risk management. Presence exams are, in part, focused on high risks. Plot how the risks are relevant to your firm and rate them.

 

Professional Certifications for Compliance

Do you need a certification to be compliance professional?

“Need” is not the right answer. Compliance is still a diverse and complex field, where the needs can differ remarkably from firm to firm.

I’m a bit skeptical that a generic certificate program is likely to help me much with my job or professional development. Whatever benefit comes from the program needs to balance the cost of the program and the time spent at the program’s courses (and away from the actual job).

I was contemplating the Society of Corporate Compliance and Ethics programs. They offer a Certified Compliance and Ethics Professional certification. You can combine a multi-day academy offering to meet the classroom requirements and take a test the next day.

With the SEC’s registration requirement for private fund managers, I took a closer look at what the SEC requires for compliance professionals.  Rule 206(4)-7 imposes no particular requirements on a chief compliance officer.  The SEC release for the rule provides a bit a more context on the professional background requirements:

“An adviser’s chief compliance officer should be competent and knowledgeable regarding the Advisers Act…”

So it’s not a lot of context. But you need to show that you understand the Advisers Act.

I switched gears from the CCEP and took a look at the Investment Adviser Certified Compliance Professional co-sponsored by the Investment Adviser Association and National Regulatory Services. I assume this certification and designation would give me the right to say I am “competent and knowledgeable regarding the Advisers Act.” It will even give me a certification that says so.

But it’s a lot of work: 20 courses and a test.

I’m taking care of six of those course over the next two days.

Boston IA Compliance Symposium 2012

Northeastern University Batterymarch Conference Center
Second Floor of the Hilton Boston Financial District

DAY 1 – Tuesday, June 12, 2012

8:30 AM–10:30 AM (ET)

A New Look at the Advisers Act: Registration, Exclusions and Exemptions; Mid-Sized Advisers and Exempt Reporting Advisers; Private Fund Advisers and More

10:45 AM–12:45 PM (ET)

Books and Records Requirements for Investment Advisers

2:00 PM–4:00 PM (ET)

Insider Trading, Contracts and New ADV Delivery Requirements

Day 2 – Wednesday, June 13, 2012

8:30 AM–10:30 AM (ET)

Understanding Fiduciary Duties and the Sweep of the Anti-Fraud Provisions of the Advisers Act

10:45 AM–12:45 PM (ET)

Custody and Pay-to-Play Rules Plus Solicitors and Proxy Voting Requirements for Investment Advisers

2:00 PM–4:00 PM (ET)

Compliance Programs Rules and Strategies for Managing Your Annual Review

 

Three Compliance Failures

One for the money, two for the show, three because uh – uh, comes before four, and here we go!

 – Tigger

On Monday, the Securities and Exchange Commission announced not one, not two, but three actions against investment advisers for failing to put in place compliance procedures designed to prevent securities law violations. The firms charged with compliance failures in separate cases are Utah-based OMNI Investment Advisors Inc., Minneapolis-based Feltl & Company Inc., and Troy, Mich.-based Asset Advisors LLC. The SEC also charged OMNI’s owner Gary R. Beynon, who served as the firm’s chief compliance officer.

Under Rule 206(4)-7 of the Investment Advisers Act (the “Compliance Rule”) registered investment advisers are required to adopt and implement written policies and procedures that are reasonably designed to prevent, detect, and correct securities law violations. The Compliance Rule requires annual review of the policies and procedures for their adequacy and the effectiveness of their implementation. It also requires the designation of a chief compliance officer, responsible for administering the policies and procedures.

In the case of Asset Advisors, the SEC had previously warned the firm about compliance deficiencies. In 2007, the SEC examined Asset Advisors and issued a deficiency letter. The firm waited until November 2009 to update the compliance manual to incorporated the SEC comments. That happened to coincide with an announcement that the SEC was coming for another examination. The failings:

  • The firm did not collect from its staff written acknowledgements that the staff received the code of ethics.
  • The firm did not collect any quarterly transaction reports from any of its access persons.
  • The firm did not pre-clear any of its access person’s transactions in initial public offerings or limited offerings.
  • The firm failed to at least annually review its written policies and procedures and the effectiveness of their implementation.

Asset Advisors received the nuclear punishment. The SEC required the firm to close operations and transfer its advisory accounts to another SEC-registered investment adviser with a compliance program.

Feltl & Company was a dually-registered broker-dealer and investment adviser. The SEC charged the firm with failing to adopt and implement comprehensive written compliance policies and procedures. This failure resulted in Feltl engaging in hundreds of principal transactions with its advisory clients’ accounts without making the proper disclosures and obtaining consent in violation of Section 206(3) of the Advisers Act. It also resulted in Feltl charging undisclosed fees to its clients participating in Feltl’s wrap fee program by charging both wrap fees and commissions in violation of Section 206(2) of the Advisers Act. The SEC laid the blame for Feltl’s compliance breakdown on its failure to invest necessary resources in the firm’s advisory business as it changed and grew in relation to its brokerage business.

OMNI’s was penalized for a complete failure to adopt and implement a compliance program between September 2008 and August 2011. In 2007, the SEC examined OMNI and issued a deficiency letter noting several issues, including OMNI’s failure to conduct an adequate annual review of its compliance program. In November 2010, the Commission began another examination of OMNI. When the exam began, the Commission was provided with a Compliance Manual dated November 3, 2010, which was one day after OMNI responded to the examiners’ request to initiate an examination. OMNI was unable to provide the Commission with any compliance manual adopted and implemented prior to November 3, 2010. Additionally, OMNI was unable to provide any policies and procedures that would have been in effect prior to November 3, 2010. The November 3, 2010 Compliance Manual appeared to be an off-the-shelf compliance manual that included language from both broker-dealer and investment adviser regulations, and was not specifically tailored to OMNI’s business.

OMNI was owned by Gary Beynon who also served in the role of CCO after the previous CCO left in 2008. The big problem with OMNI was that Beynon left for a three-year religious mission to Brazil in 2008, leaving OMNI’s advisory representatives completely unsupervised. He wanted to keep the firm in business while he was away so he could return to the firm when his religious mission ended.

The SEC expects more when you are responsible for other people’s money.

Sources:

Earthquakes, Hurricanes, and Disaster Recovery

Monday’s East Coast earthquake was far from a disaster. I just thought I had too much coffee, until I heard others in the hallway say “Do you feel that?” Then I realized the shaking was not just because I was over-caffeinated.

Even though significant earthquakes are rare on the East Coast, hurricanes are not. Irene, the first big hurricane of the season is also approaching the East Coast.

Perhaps these are some good reminders to blow the dust off your disaster recovery plan. As a registered investment adviser, you need to have a plan. Each of the thousands (hundreds?) of private fund managers getting ready to register as investment advisers with the Securities and Exchange Commission will need a plan.

It’s easy to miss the requirement for having a business continuity plan. It’s in Rule 206(4)-7. Oh, you don’t see anything about business continuity in the rule? It’s not in the rule, it’s in the Release for Rule 206(4)-7:

We believe that an adviser’s fiduciary obligation to its clients includes the obligation to take steps to protect the clients’ interests from being placed at risk as a result of the adviser’s inability to provide advisory services after, for example, a natural disaster or, in the case of some smaller firms, the death of the owner or key personnel. The clients of an adviser that is engaged in the active management of their assets would ordinarily be placed at risk if the adviser ceased operations. [SEC Release No. IA-2204]

Sources:

 

Image of 20111 VA Earthquake is by Frank Paynter

Job Description For CCOs of Advisers to Private Investment Funds

help wanted join the insanity now

Back in 2005, Associate Director Office of Compliance Inspection and Examinations of the SEC, Gene Gohlke gave a speech addressing hedge funds who would soon have to register under the doomed hedge fund rule. He focused on what the funds needed in a Chief Compliance Officer.

Rule 206(4)-7 requires a registered investment adviser to designate an individual responsible for administering the policies and procedures required to avoid violation of the Investment Adviser Act and its rules. That’s all the rule requires of a CCO.

The release adopting the Rule 206(4)-7 provides some more background on the requirement:

An adviser’s chief compliance officer should be competent and knowledgeable regarding the Advisers Act and should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the firm. Thus, the compliance officer should have a position of sufficient seniority and authority within the organization to compel others to adhere to the compliance policies and procedures. [C.1.]

The release also makes it clear that the adviser does not have to hire an additional person to take on the rule.

Knowledgeable

A CCO must have a good understanding of the requirements imposed by the Advisers Act, the related rules, and other aspects of the regulatory regime for advisers. A CCO should also remain current regarding changes to the regulatory requirements as the SEC changes and adds to them.

Competent

Gohlke lays out the need to have familiarity with the steps needed to create a compliance program:

  • Risk identification and assessment.  Know how to identify conflicts and other compliance factors creating risk exposure for the firm and its clients in light of the firm’s particular operations.
  • Creating policies and procedures. Address the risks identified. The policies and procedures should address all conflicts of interest and other risks the firm is exposed to and not a set of risks that advisers in general may have.
  • Implementation. Recognizing the principles of good management and controls.

Position in Organizational Structure

The compliance officer should have a position of sufficient seniority and authority within the organization to be able to compel others to adhere to the firm’s compliance policies and procedures. CCOs should be a member of the senior management of a firm.

The 24 Functions

Gohlke lays out a list of 24 functions that CCOs of advisers should perform or consider performing. (He admits that this ia an ambitious list and that they are above and beyond what is required by Rule 206(4)-7.)

  1. Advises senior management on the fundamental importance of establishing and maintaining an effective culture of compliance within the firm.
  2. Confers with and advises other senior management of the firm on significant compliance matters and issues.
  3. Is not only available but is sought out on a “consulting” basis regarding compliance matters and issues by business people throughout the firm. Should become known as the “go to person” on compliance matters.
  4. Becomes involved in analyzing and resolving significant compliance issues that arise.
  5. Ensures that the steps in the firm’s compliance process – risk identification, establishing policies and procedures and implementing those policies and procedures – are appropriate and are undertaken timely by staff of the firm to whom those functions have been assigned.
  6. Becomes personally involved in various steps of the process such as serving on risk or policies and procedures committees when necessary and appropriate.
  7. Ensures that compliance policies and procedures are comprehensive, robust, current and reflect the firm’s business processes and conflicts of interest.
  8. Ensures that appropriate principles of management and control are observed in the implementation of policies and procedures. These principles include separation of functions, clear assignment of responsibilities, measuring results against standards and reporting outcomes.
  9. Ensures that all persons within the firm with compliance responsibilities are competently and fully performing those functions.
  10. Ensures that quality control (transactional) testing is conducted as appropriate to detect deviations of actual transactions from policies or standards and that results of such tests are included on exception and other management reports and are promptly addressed, escalated when necessary, and resolved by responsible business people.
  11. Ensures there is timely and appropriate review of material and repetitive compliance issues as indicators of possible gaps and weaknesses in policies and procedures or risk identification processes and facilitates the use of such information in keeping the firm’s compliance program evergreen.
  12. Undertakes periodic analyses and evaluation of compliance issues found in the regular course together with the results of appropriate forensic testing conducted by compliance staff as a means for obtaining additional or corroborating evidence regarding both the effective functions of the firm’s compliance program and the possible existence of disguised or undetected compliance issues.
  13. Ensures that compliance programs of service providers used by the adviser are effective so that the services provided by these firms are consistent with the adviser’s fiduciary obligations to its clients.
  14. Establishes a compliance calendar that identifies all important dates by which regulatory, client reporting, tax and compliance matters must be completed to ensure that these important deadlines are not missed.
  15. Promotes a process for regularly mapping a firm’s compliance policies and procedures and conflicts of interest to disclosures made to clients so that disclosures are current, complete and informative.
  16. Manages the adviser’s compliance department or unit in ways that encourages proactive work, a practice of professional skepticism and “thinking outside the box” by compliance staff.
  17. Manages the adviser’s code of ethics which is a responsibility given to CCOs of advisers by rule 204A-1 under the Advisers Act.
  18. Undertakes or supervises others in performing the required annual review of an adviser’s compliance program. Every adviser is required to conduct at least an annual review of its compliance program. The review should consider any compliance matters that arose during the previous year, any changes in the business activities of the adviser or its affiliates, and any changes in the Advisers Act or applicable regulations that might suggest a need to revise the policies or procedures. Although the rule requires only annual reviews, advisers should consider the need for interim reviews in response to significant compliance events, changes in business arrangements, and regulatory developments.
  19. Reports results of the annual review to senior management and ensures that recommendations for improvements that flow from the review are implemented as appropriate.
  20. Is a strong and persistent advocate for allocating an appropriate amount of a firm’s resources to the development and maintenance of an effective compliance program and compliance staff.
  21. Recognizes need to remain current on regulatory and compliance issues and participates in continuing education programs.
  22. Ensures that staff of the firm is appropriately trained in compliance-related matters.
  23. Is the adviser’s liaison and point of contact with SEC examination staff, both during exams and as part of the SEC’s CCOutreach program.
  24. Is active in industry efforts to develop and implement good compliance practices for advisers to private investment funds.

That’s  a big list of things to take on.

Although the SEC does not require a separate individual to take on the role of CCO, I occasionally hear some skepticism when a person assumes this role as an additional part of their job. The question the SEC asks is “what responsibilities did you relinquish in order to have time to take on the CCO role?”

Sources:

Help Wanted image is by Andi Szilagyi

Disciplinary Actions Against Chief Compliance Officers

The Chief Compliance Officer should be a model for employee conduct. I don’t thing there is any better way to lead and educate than to set an example.

Not all Chief Compliance Officers succeed in this role and some get subject to discipline. Here are some ways to get in trouble.

Participation in Wrongful Conduct

David A. Zwick, chief executive officer and chief compliance officer of Suncoast Capital Group, Ltd. was held liable for participating in a scheme with a salesperson he supervised to provide kickbacks to a bond trader.  In exchange for the kickbacks, Suncoast received securities transactions at prices favoring Suncoast and provided signification compensation to Zwick. He was found to have knowingly or recklessly approved fraudulent prices on Suncoast trades.

Failure to Supervise

In its release for Rule 206(4)-7 SEC Release No. IA-2204 the SEC stated:

Having the title of chief compliance officer does not, in and of itself, carry supervisory responsibilities. Thus, a chief compliance officer … would not necessarily be subject to a sanction by us for failure to supervise other advisory personnel. … Section 203(e)(6) provides that a person shall not be deemed to have failed to reasonably supervise another person if: (i) the adviser had adopted procedures reasonably designed to prevent and detect violations of the federal securities laws; (ii) the adviser had a system in place for applying the procedures; and (iii) the supervising person had reasonably discharged his supervisory responsibilities in accordance with the procedures and had no reason to believe the supervised person was not complying with the procedures.

Clearly a CCO has a role in addressing serious misconduct by employees. For an investment adviser, the CCO could be a supervisor and the failure to adequately supervise could subject the CCO to discipline for failure to supervise.

Pre-packaged policies and procedures manual

Consulting Services Group did that and failed to meet the SEC’s standards. Unfortunately for them, the pre-packaged manual did not match up to its business. They provide consulting services to mostly institutional clients. It helps them search for and select money managers, allocate assets, review performance, and design investment policies. The pre-packaged policies and procedures manual “failed to address adequately the conflicts of interest unique to CSG’s operations as a pension consultant, and many of the sections within these generic forms were completely inapplicable and irrelevant to CSG’s provision of investment advisory services to clients.” I would guess they manual they bought was designed for a retail investment adviser.

Email server

Among the things Richard Campanella was disciplined for was the failure to stop the use of non-company email. He received several emails from an employee and told him to stop using the outside email address. Even after three warnings, he field to discipline the employee. Apparently, the employee used the email extensively for business purposes. The end result was record-keeping failure.

Background checks

Westpark Capital’s Chief Compliance Officer was William Morgan. “Among other things, Morgan was responsible for maintaining and updating the Firm’s written supervisory procedures, supervising the branch office managers, performing background investigations and participating in hiring decisions, and determining whether representatives required heightened supervision and the parameters of that heightened scrutiny.” Unfortunately, the company hired some representatives who engaged in churning and made unauthorized and unsuitable trades in customer accounts.

Reporting

Tim Poulus, the Chief Compliance Officer for Olympia Asset Management, failed to report customer complaints to FINRA. (FINRA Case #2008011806301) That statistical and summary information required by NASD Rule 3070(c). The violation lead to a $10,000 fine.

Sources:

Fail is by Amboo who?

Investment Advisers and Business Continuity Plans

When an investment adviser is designing its policies and procedures you need to identify the risks for their firm so they address those risks. A big risk is missing an applicable requirement under the regulatory scheme. So you sit down with the regulations and tie them to your specific policies and procedures.

An easy one to miss is the requirement for having a business continuity plan. It’s in Rule 206(4)-7.

Oh, you don’t see anything about business continuity in the rule? It’s not in the rule, it’s in the Release for Rule 206(4)-7:

We believe that an adviser’s fiduciary obligation to its clients includes the obligation to take steps to protect the clients’ interests from being placed at risk as a result of the adviser’s inability to provide advisory services after, for example, a natural disaster or, in the case of some smaller firms, the death of the owner or key personnel. The clients of an adviser that is engaged in the active management of their assets would ordinarily be placed at risk if the adviser ceased operations. [SEC Release No. IA-2204]

There is not much in the release to help you understand what is required, but there are two good places to help you.

One is to look at an intragency paper published by The Federal Reserve Board, the Office of the Comptroller of the Currency and the Securities and Exchange Commission on business continuity objectives. They lay out four broad sound practices for core clearing and settlement organizations and firms that play significant roles in critical financial markets:

  1. Identify clearing and settlement activities in support of critical financial markets.
  2. Determine appropriate recovery and resumption objectives for clearing and settlement activities in support of critical markets.
  3. Maintain sufficient geographically dispersed resources to meet recovery and resumption objectives.
  4. Routinely use or test recovery and resumption arrangements.

The other source (more practical source) is the disaster recovery requirements of broker/dealers. FINRA Rule 4370 is their emergency preparedness rule. They have a template for small introducing firms to help start designing a plan.

Sources:

Chief Compliance Officers and Private Investment Funds

If you are running a private investment fund, do you need a chief compliance officer?

If you are not registered with the SEC, it’s a gray area. If you are registered with SEC, then “yes.”

Rule 206(4)-7 requires a registered investment adviser to “[d]esignate an individual (who is a supervised person) responsible for administering the policies and procedures that you adopt under paragraph (a) of this section.”

Since the financial reform bill is going to remove the small adviser exemption from registration, hundreds (thousands?) of private fund managers will need to register with the SEC once the bill is finalized and signed by the president.

Do you need to hire a new person to serve as CCO? The rule does not require advisers to hire an additional executive to serve as compliance officer. [See Footnote 74 of SEC Release No. IA-2204] You merely have to designate someone to serve in the role.

What are the requirements for a CCO for private equity fund?

  • Must be competent and knowledgeable regarding the Advisers Act.
  • Must be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the firm.
  • Must have sufficient seniority and authority within the organization to compel others to adhere to the compliance policies and procedures.

Having the knowledge about the act is going have many firms look toward their general counsel to act as CCO.

A dual role of general counsel and CCO may put the individual into conflict with their obligations to maintain attorney-client privilege.

Sources:

Image is Yes from Administration by Ranken Jordan

Code of Ethics for an Investment Adviser

With the upcoming requirement that advisers to many private investment funds must register with the SEC, I figured it was time to look at some of the requirements that registration will impose.

Section 204A of the Investment Advisers Act requires registered investment advisers to

“establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of such investment adviser’s business, to prevent the misuse … of material, nonpublic information by such investment adviser or any person associated with such investment adviser.”

It also requires the SEC to adopt “adopt rules or regulations to require specific policies or procedures reasonably designed to prevent misuse.” That leads to the issuance of  Rule 204A-1 under the Investment Advisers Act of 1940

Rule 204A-1 has three key elements: Adoption, Reporting, IPOs.

The adoption element lays out what needs to be in the advisers code of ethics:

  1. A standard of business conduct that you require which reflect the fiduciary obligations;
  2. Provisions requiring your supervised persons to comply with applicable federal securities laws;
  3. Provisions that require all of your access persons to report, and you to review, their personal securities transactions and holdings periodically;
  4. Provisions requiring supervised persons to report any violations of your code of ethics promptly; and
  5. Provisions requiring you to provide each of your supervised persons with a copy of your code of ethics and any amendments, and requiring your supervised persons to provide you with a written acknowledgment of their receipt of the code and any amendments.

Number five requires the standard delivery of the code and signature that they received the code. The prompt reporting is also standard for a code of conduct, as is the compliance with laws.

The fiduciary obligations may be a surprise for the advisers to private investment funds. Fund managers typically structure the funds as limited partnerships. The enabling statute impose a fiduciary duty on the general partner of a limited partnership, which for a private fund will be the investment adviser affiliate. Delaware limited partnership law allows a general partner to reduce its fiduciary obligations, but still must retain the implied contractual covenant of good faith and fair dealing. (see 17 Del Code §17-1101)

On the other hand, Section 206 of the Investment Advisers Act imposes fiduciary duties on investment advisers, regardless of whether or not they are registered with the SEC. This is a different body of law defining the obligations of an investment adviser as opposed to the general partner of a limited partnership.

The fiduciary obligation in 206 make its a violation to

  • employ any device, scheme, or artifice to defraud any client or prospective client;
  • engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client;
  • engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative;

Those are your conventional anti-fraud provisions. There is one more violation and it gets the most attention:

“Acting as principal for his own account, knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction.”

The key here is that is a violation to if you don’t disclose the conflict prior to completion of the transaction.

Fora private fund, you will need to take a look at Rule 206(4)-8 because it lays out some additional fraud prohibitions for investment advisers to private investment funds.

If you run a private fund and don’t have written code of  ethics, it’s time to start thinking about putting one in place. Here are some examples of investment adviser code of ethics:

If you don’t have a code of conduct and are looking for a starting point. Those three are worth taking a look at. There are plenty of others out there and findable with an internet search.

Also keep in mind that you will have to revisit your code next year. Rule 206(4)-7 requires an annual review of your code of ethics.

Sources:

  • Section 204A of the Investment Adviser Act
  • Rule 204A-1 – Investment Adviser Code of Ethics
  • Investment Adviser Code of Ethics Rule by Shearman and Sterling
  • Section 206 of the Investment Advisers Act
  • Rule 206(4)-7
  • Rule 206(4)-8