In a risk alert issued on April 26, 2022 (“Risk Alert”), the SEC’s Division of Examinations (“DOE”) described certain deficiencies relating to investment advisers’ use of material non-public information (“MNPI”). The DOE identified deficiencies stemming from Section 204A of the Investment Advisers Act of 1940 which requires registered investment advisers to implement written policies and procedures reasonably designed to prevent the misuse of MNPI and Rule 204A-1 thereunder (“Code of Ethics Rule”). Among other things, the Code of Ethics Rule requires investment advisers to adopt a code of ethics setting forth the standard of business conduct expected from their supervised persons. The Code of Ethics Rule also requires access persons (a subset of supervised persons) to report their personal securities transactions and holdings to the adviser’s chief compliance officer (“CCO”).
There is nothing really new regarding the general code of ethics obligations that the DOE articulated in the Risk Alert. However, the fact that the DOE focused on the CCO’s compliance with the adviser’s code of ethics obligations can be read as fair warning to advisers to prioritize corrective action. One deficiency related to the Code of Ethics Rule that the DOE observed related specifically to the personal securities transactions, holdings reports and written certifications of the CCO. The DOE noted that investment advisers did not have procedures in place to have another individual (e.g., an internal employee or outside consultant) review the CCO’s submissions, thereby causing the CCO to effectively review and approve his or her own reporting.
Although many investment advisers require the CCO to pre-clear certain security transactions, many may not have the policies, procedures, or qualified internal staff necessary to review and approve the CCO’s securities transactions and holdings, and other aspects of the firm’s code of ethics. If investment advisers cannot take on this review task internally, the Kroll Financial Services Compliance and Regulation team is available to apply its practical knowledge and expertise gleaned from years of assisting clients in creating, monitoring and testing the effectiveness of code of ethics programs, along with its in-depth experience in all the leading third-party compliance software solutions.
Contact your current Kroll team member to discuss how we can deploy our expertise to enhance the adviser’s code of ethics compliance program and reduce the risk of the negative consequences of non-compliance.