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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. Meeting these standards can help advisors remain compliant with federal regulations. 1
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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.
| Reportable Securities Examples | Reportable Securities Exceptions |
|---|---|
| Common and preferred stock; initial public offerings (IPOs) | Direct obligations of the U.S. government |
| Mutual funds and exchange-traded funds (ETFs) | Bankers’ acceptances, bank certificates of deposit (CDs), commercial paper and high-quality short-term debt instruments |
| Corporate and municipal bonds | Shares issued by money market funds |
| Options and futures contracts | Shares issued by open-end funds that are not reportable funds |
| Closed-end mutual funds; private placements | 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 company directors, officers, 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. An advisory firm’s chief compliance officer (CCO) can designate other individuals who should be considered as access/covered persons.
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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. There are several components to the requirements regarding reportable securities.
- Initial: Initial reporting is required for anyone who is designated as a new access/covered person. This report must be filed within 10 days of the designation or by the end of the month in which access is granted. It must provide details about each reportable security the person owns.
- Quarterly: Quarterly reporting must be submitted within 30 days of the end of the calendar quarter. Transaction reports must be dated and include the relevant details of each reportable security, the nature of the transaction (i.e., purchase or sale) and the price at which securities were bought or sold.
- Annual: Annual reports are required every 12 months and must include a comprehensive view of all reportable securities the person holds at the end of the year. This report must be filed within 30 days of the year’s end.
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).
Reportable Securities Compliance Tips for Advisors
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 they’re required to report, who they report to and when this information 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. Conducting routine mock compliance audits can help you identify potential weak spots in your firm’s reporting practices.
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, options 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 All Advisors Required to Have a Code of Ethics?
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. If you don’t have a CCO on staff to handle compliance yet, that may be a priority to address.
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 increase your visibility, but building a consistent pipeline often takes time and sustained effort. SmartAsset AMP (Advisor Marketing Platform) is a 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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Article Sources
All articles are reviewed and updated by SmartAsset’s fact-checkers for accuracy. Visit our Editorial Policy for more details on our overall journalistic standards.
- Investment Adviser Codes of Ethics. https://www.sec.gov/rules-regulations/2004/07/investment-adviser-codes-ethics.