An Investment Company Director’s Guide to Oversight of Codes of Ethics and Personal Investing

An Investment Company Director’s Guide to Oversight of Codes of Ethics and Personal Investing

I. Introduction
As investment company directors are aware, they are not the only persons who
act as fiduciaries on behalf of investment companies and their shareholders.
Other investment company personnel1 also are charged with the rigorous
duties of fiduciaries. The federal securities laws reflect congressional recogni-

tion of “the delicate fiduciary nature of an investment advisory relationship” as
well as an intent to address any potential conflicts of interest that might inhibit
an investment adviser’s ability to render disinterested advice to its clients.2 
Congress, the U.S. Securities and Exchange Commission (SEC), and the
fund industry have long recognized the need to reconcile these fiduciary 
obligations with personal investing practices. For over five decades, these 
issues have received regular and detailed review, resulting in the development
of statutory and regulatory requirements and industry codes of ethics. Most
significantly, the SEC’s Rule 17j-1, promulgated under Section 17(j) of the
Investment Company Act of 1940, requires that all investment companies and
their investment advisers and certain principal underwriters adopt codes of
ethics and procedures designed to detect and prevent inappropriate personal
investing.
Beginning in early 1994, personal investing became the subject of renewed
focus from Congress, the SEC, and the media, and the Institute formed an
Advisory Group of senior industry officials to review existing standards govern-

ing personal investing and to develop appropriate recommendations. The
Advisory Group issued a report in May 1994 that concluded that existing 
standards—found in the federal securities laws and in fund codes of ethics—
had worked well to prevent potential conflicts of interest in personal investing.
Nevertheless, the report recommended that all funds voluntarily adopt thirteen
specific measures beyond those required by the federal securities laws, tailored as
necessary to the particular structure and operations of the fund complex.

Later that same year, the SEC’s Division of Investment Management issued
a detailed report on personal investing issues and fund codes of ethics. This
SEC staff report also found that existing regulatory requirements generally
have worked well, but suggested some ways in which the regulatory scheme
could be improved. In 1995, the SEC proposed amendments to Rule 17j-1
that the industry strongly supported. The amendments were adopted in 1999.
These amendments emphasized the role of investment company directors in
exercising effective oversight of personal investing by requiring for the first
time that a fund’s board of directors approve the codes of ethics of the fund, its
investment adviser, and its principal underwriter. The board of directors also
must review written reports of any problems in this area at least annually.
To assist fund directors in fulfilling their responsibilities, this Guide
describes the relevant statutory and regulatory provisions that govern personal
investing by investment company personnel, with special emphasis on the
duties of fund directors with respect to fund codes of ethics. The Guide also
describes the recommendations of the Advisory Group Report, which represent
additional voluntary measures that have been adopted by a majority of the
industry in whole or in part, depending on the particular circumstances of the
fund complex.

An Investment Company Director’s Guide to Oversight of Codes of Ethics and Personal Investing