March 12, 2004

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549-0609

RE: File No. S7-04-04 - Investment Adviser Codes of Ethics

I welcome the opportunity, on behalf of National Regulatory Services (NRS), to comment on the Commission's proposed new rule and related rule amendments under the Investment Advisers Act of 1940 that would require registered advisers to adopt codes of ethics.

NRS, based on its practice as a leading compliance and risk management consulting firm with twenty years experience, feels strongly that the great majority of investment advisers, large or small, act in the best interests of their clients at all times and that the self-serving acts of the minority have made these rule amendments necessary to help restore the confidence of investors and the integrity of the financial industry.

NRS supports the Commission's efforts in proposing rules to reduce unethical activities by advisers. It is true that codes of ethics alone will not eliminate fraudulent activities by advisers, but a requirement to remind regularly supervised persons of their fiduciary responsibilities can only help to create and/or reinforce a "culture of compliance."

With respect to the specific questions raised in the rule proposal, NRS offers the following comments:

A. Standards of Conduct and Compliance with Laws

NRS agrees with the proposed formulation of the business conduct element of the code of ethics because it requires the obvious compliance with law while also allowing for flexibility. This will allow each adviser to establish appropriate standards of business conduct that meet both the needs of its business practices and its clients.

B. Protection of Material Nonpublic Information

NRS feels that the "need to know" requirement is overly broad and difficult to apply in practice and, therefore, disagrees with the proposed criteria. In addition, NRS disagrees with requiring computer files containing nonpublic information to be identified and segregated. Advisers and their information technology personnel are able to implement appropriate security and entitlement to their computer files to allow only personnel with a "need to know" to access the nonpublic information based on their systems and business practices.

Furthermore, NRS believes that it is not necessary to require integration of a summary of insider trading law as long as that information is readily available to supervised persons.

All SEC advisers are now required, under various securities laws and the Advisers Act, to establish and maintain written insider trading policies.

C. Personal Securities Trading

NRS feels that the listed personal securities trading best practices should not be required elements of a code of ethics. Advisers should have the flexibility to design and implement procedures that are best for its business and its clients.

In addition, NRS doubts there would be any substantive benefit to documenting the factors considered by an adviser while developing its procedures to justify the recordkeeping burden.

NRS does not believe that holdings reports should be required more frequently than once a year. An initial and annual holdings report and quarterly transaction reports should be sufficient to confirm the current holdings report.

NRS feels that small transactions should be reported to avoid the opportunity for creative abuse and to promote a zero-tolerance environment.

In our opinion, the proposed rule does not clearly express that required information to be submitted in a transaction report can be contained in more than one original record and recommend that the Commission clarify this in the final rule.

D. Initial Public Offerings and Private Placements

NRS has found that it is quite common for Investment Advisers that do allow their employees to participate in initial public offerings and private placements employ a mandatory pre-clearance requirement. NRS feels that this practice is a sound and effective approach to avoiding the conflicts of interest noted.

E. Reporting of Violations

NRS recommends that the final rule require all advisers with more than ten (10) access persons to designate at least two persons to accept reports of code of ethics violations.

F. Acknowledged Receipt of Code of Ethics

NRS recommends that the final rule require advisers' codes of ethics to include procedures that ensure that each employee receives initial education regarding the code of ethics, is notified of changes to the code in a timely manner and attests to their receipt and understanding of each change notification.

G. Other Code of Ethics Provisions

As stated earlier, NRS believes that each adviser should have the latitude to design and implement codes of ethics provisions that reflect their business practices and the needs of their clients. Required disclosure of such codes, as proposed, will enable prospective and existing clients to drive best practices through market forces.

H. Adviser Review and Enforcement

While NRS agrees that the implementation and enforcement of the codes of ethics should fall under the purview of an adviser's chief compliance officer, the final rule must be flexible enough to allow for the subordination of this responsibility to another responsible party. This rule and its many predecessors have exponentially increased the burden and responsibility of the chief compliance officer to the point that it is difficult to think that one person can fulfill this role at even a mid-sized firm.

I. Recordkeeping

The proposed rule states "advisers would have to keep a record of the names of their access persons." NRS asks for clarification of this requirement. Do advisers need to compile records of access persons on a daily basis, or at the end of each quarter? The definition of access persons makes it plausible that certain support personnel will be considered access persons for short periods of time, which will add to the burden attributable to this requirement if records are necessary on a daily basis.

NRS disagrees with the requirement to maintain personal securities reports electronically. While it may be easy to create a spreadsheet or database to store this information, it is our belief that fulfilling all of the electronic media requirements is a serious undertaking and advisers should not be forced to maintain one record electronically if they have not already voluntarily undertaken that burden for other records. Requiring a specific method of recordkeeping is inconsistent with all previous rulemaking and limits the ability of an adviser to determine the method that best suits its business practices and clients' needs.

J. Amendment to Form ADV

NRS believes that it is reasonable to require summary disclosure of an adviser's code of ethics and suggests that the final rule include disclosure provisions similar to the recently adopted proxy voting rule [206(4)-6] that allows the advisor some flexibility in means and methods it employs to provide this information to its clients.

K. Investment Company Advisers

NRS believes that the Commission's intent to alleviate the need for two different access person reports is well founded, but in practice, it is likely that most investment companies and advisers will ask their access persons to create one report that can be used to fulfill both requirements.

In summary, NRS feels that the proposed rule, with the minor modifications mentioned above, will be a significant and effective addition to the Advisers Act and will go a long way to meet the stated goal of promoting compliance and fiduciary standards by advisers and their personnel.

Respectfully submitted by,

Richard S. Cortese
Vice President, Consulting Services