The Securities and Exchange Commission (SEC) imposes certain rules on registered investment advisors governing ethical behavior. Rule 204A-1 of the Advisers Act outlines minimum standards for establishing an advisor code of ethics, including the treatment of reportable securities. Ensuring these standards are met is critical for remaining compliant with federal regulations.
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What Are Reportable Securities?
A reportable security is generally any security that isn’t otherwise considered to be exempt under SEC rules. Per SEC guidelines, reportable securities include all securities as defined in Section 202(a)(18) of the Advisers Act, with some exceptions.
Those exceptions include:
- Direct obligations of the U.S. government
- Bankers’ acceptances, bank certificates of deposit (CDs), commercial paper and high-quality short-term debt instruments
- Shares issued by money market funds
- Shares issued by open-end funds that are not reportable funds
- Shares issued by unit investment trusts that are invested exclusively in open-end funds, none of which are reportable funds
In the context of advisor ethics, reportable securities are any securities that an access person or covered person has a beneficial interest in, direct or indirect, excluding the aforementioned exceptions. A covered person is any supervised individual within an advisory firm who:
- Has access to nonpublic information regarding any client’s purchase or sale of securities
- Participates in making securities recommendations to the firm’s clients
- Has access to nonpublic securities recommendations
Covered persons are presumed to include directors, officers of the company, individual advisors, portfolio managers and traders. Support staff may meet the definition of a covered person, depending on the scope of their duties.
Spouses and immediate family members can also be included if an opportunity exists for a covered person to share nonpublic information with them. The chief compliance officer (CCO) can designate other individuals who should be considered as access/covered persons.
SEC Rules and Reportable Securities
Under Rule 204A-1, advisors must include a provision in their code of ethics directing covered persons to report their personal securities holdings and transactions to be compliant. There are several components to the requirements regarding reportable securities.
Access/covered persons must:
- Report their current securities holdings within 10 days of being designated as an access person
- Submit an annual report of current holdings once every 12 months
- Submit quarterly reports disclosing all transactions involving reportable securities in which they had direct or indirect ownership at the end of each calendar quarter
The SEC has specific formatting requirements each report must meet. Holding reports, initial or annual, must include the date of submission and provide details about each reportable security the covered person has beneficial ownership of. Those details extend to the name of the security, the number of shares held, the principal amount of the investment and the name of the brokerage or financial institution where the securities are held.
Likewise, the transaction report must be dated and include the relevant details of each reportable security. This report must also explain the nature of the transaction (i.e., purchase or sale) and the price at which securities were bought or sold.
It’s important to note that reporting is not required for securities held in accounts that an access person has no direct or indirect control over. For example, a workplace 401(k) plan wouldn’t meet the standard for reporting unless reportable securities are held within a self-directed account. Transaction reports are not required for transactions related to automatic investment plans, such as dividend reinvestment plans (DRIPs).
How to Ensure Compliance With SEC Reportable Securities Rules
Staying compliant is essential for avoiding SEC scrutiny and penalties, which may include fines or public censure. Creating a simple screening framework can help you determine when reporting is necessary. This framework should identify:
- Who in your firm is an access/covered person
- What information those individuals are required to report
- Whom that information should be shared with
- When it must be submitted
The CCO is typically tasked with meeting compliance requirements for all regulatory guidelines, including establishing a code of ethics. Compliance software can make it easier to keep track of initial, annual and quarterly transaction reporting. If you run a one-person firm, you’re not required to report securities to yourself, but it’s wise to keep accurate records of all your securities holdings and transactions.
Your firm’s code of ethics should define covered persons or access persons and outline reporting requirements for reportable securities. Though not specifically mentioned under Rule 204A-1, you may choose to include the following in your ethics code:
- Approval requirements and procedures covered persons must complete before engaging in securities transactions
- Approval requirements and procedures for covered persons who want to invest in an Initial Public Offering (IPO) or limited offering
- Guidance for blackout periods, in which covered persons may be prohibited from completing personal securities transactions
- Prohibitions on short-swing trading
- Guidelines for identifying potential violations of the ethics code and reporting them promptly
The SEC does not require you to maintain records of reportable securities in electronic form. However, you may find it more efficient to do so, particularly if you have a large number of covered persons to account for.
Frequently Asked Questions
What’s a Reportable Security?
Reportable securities are any securities defined by the Advisers Act that are not exempt or excluded. Examples of reportable securities include stocks, bonds, futures, bank CDs and profit-sharing agreements.
Are Tax-Advantaged Plans Reportable Securities?
A tax-advantaged plan, such as a 401(k) or 529 college savings account, is not a reportable security by itself. However, these types of accounts may hold reportable securities.
Are Tax-Advantaged Plans Reportable Securities?
The SEC requires registered investment advisors to establish a code of ethics that spans five core areas, including reportable securities. The same code of ethics is not required for financial advisors and professionals who are not SEC-registered. However, developing an ethics code can lend credibility to your business, cultivate a positive brand image and foster trust with current and prospective clients.
Bottom Line
When determining how to handle reportable securities in your firm, it may be most helpful to start with the exceptions. Knowing what’s not required to be reported can help you drill down to what covered employees should be sharing regarding their personal securities holdings and transactions. And if you don’t have a CCO on staff to handle compliance yet, that’s an important priority to tackle.
Tips for Growing Your Advisory Business
- Compliance rules govern what you can and can’t do when marketing your advisory business. For example, if you’re investing in a digital ad campaign you can’t use false or misleading information to attract clients. You must also disclose any affiliate relationships you’ve established if you’re working with a personal finance influencer or another business to promote your services.
- Marketing online can help to increase your visibility, but it can take time to generate positive results. If you’re interested in a less taxing way to gain the attention of your ideal client base, you might consider using an online lead generation service. SmartAsset AMP (Advisor Marketing Platform) is our holistic marketing service financial advisors can use for client lead generation and automated marketing. Sign up for a free demo to explore how SmartAsset AMP can help you expand your practice’s marketing operation. Get started today.
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