A registered investment adviser owes its clients a fiduciary duty, and the code of ethics is where that duty is translated into rules the firm's own people must follow. It is a required document, and its heart is managing the conflicts that arise when the people advising clients also trade for themselves.
A code of ethics generally must set a standard of business conduct reflecting the firm's fiduciary obligations, require compliance with securities laws, govern personal securities trading by access persons, and require reporting of personal holdings and transactions. It also typically addresses handling of material nonpublic information and the reporting of violations.
The most operationally significant piece is personal trading. Access persons, those with knowledge of client trades or recommendations, must report their personal holdings and transactions, and the firm must review them, often with pre-clearance for certain trades. The concern is front-running or otherwise trading on the firm's advantage ahead of clients, and the review is how that risk is contained.
A code that exists on paper but whose personal-trading reports are never actually reviewed is a classic finding. The document is only as good as the monitoring behind it, which is why the code and its enforcement are examined together.
A duty to clients, enforced on yourselves.
Greenridge L&C Advisors is a compliance consultancy, not a law firm. This is general information, not legal advice.