Amy R. Doberman
March 16, 2004
VIA E-MAIL: firstname.lastname@example.org
Jonathan G. Katz, Secretary
Re: Investment Adviser Codes of Ethics
SEC Release Nos. IA-2209; IC-26337 (the "Proposing Release"); File No. S7-04-04
Dear Mr. Katz:
UBS Global Asset Management ("UBS Global AM")1 appreciates the opportunity to comment on the rule proposal described in the above referenced SEC releases (the "Proposed Rule") that would require registered investment advisers to adopt written codes of ethics.
Under the Proposed Rule, the codes of ethics would: (1) set forth standards of conduct for advisory personnel; (2) include provisions reasonably designed to safeguard material non-public information about client transactions; and (3) address conflicts of interest that arise from personal trading by advisory personnel.
The Commission has solicited comment on whether certain substantial provisions should be mandated in the codes, and whether the Proposed Rule should require the reporting of transactions and holdings in unaffiliated mutual funds. We hereby provide comment on these issues.
New Rule Should Favor Tailoring of Codes of Ethics
Section 204A of the Investment Advisers Act of 1940 states that an adviser's policies and procedures should be designed "taking into account the nature of such investment adviser's business." The Proposing Release acknowledges the need "to give advisers flexibility to adopt codes appropriate to their businesses." (Proposing Release, Section II.C.1.) Accordingly, if the Proposed Rule is adopted, we urge the Commission to mandate few, if any, substantive requirements for the adviser's code of ethics, in favor of allowing advisers the flexibility to determine the requirements that are appropriate to their business model, an approach consistent with the Commission's history in adopting and amending Rule 17j-1 under the Investment Company Act of 1940.
Both at the time Rule 17j-1 was originally adopted, as well as when it was recently amended, the Commission considered whether to dictate substantive code provisions or to leave the determination of the vast majority of substantive restrictions to the judgment of each fund and adviser based on the parameters of their business. Both times, the Commission largely decided to enable funds and advisers to tailor restrictions based on their unique business considerations.2 We submit that, consistent with the language of Section 204A, and the approach taken in adopting and amending Rule 17j-1, a new rule under Section 204A should leave the determination of specific code provisions to the judgment of those who are closest to the business.
Requirement to Report Holdings and Transactions in Unaffiliated Mutual Funds
The Commission has solicited comment on whether the Proposed Rule should also require reporting of transactions and holdings in unaffiliated mutual funds. We respectfully submit that only marginal benefit would be gained in broadening the reporting requirement to include holdings and transactions in unaffiliated funds. Advisers have no fiduciary responsibility to unaffiliated funds or their shareholders. Moreover, an adviser's personnel typically do not as part of their responsibilities as employees of the adviser have knowledge of the portfolio securities of unaffiliated funds, and as such, are not "in a position to exploit [any] inside knowledge." (Proposing Release at Section II.C.2.) If an employee does somehow obtain such knowledge, it is clearly outside the scope of his or her employment. The employing adviser would not, as a legal matter, be responsible for any potential violations caused by the employee in this regard. There are numerous ways an unscrupulous person can engage in market timing, in which case the fund itself would be in a better position than an unaffiliated adviser to detect such activity. Therefore, we believe that the burden on an adviser's compliance department outweighs any additional investor protection caused by the remote possibility that the adviser might detect a fraud or other violation for which it is not even liable.
If you have any questions concerning these comments or would like additional information, please contact the undersigned at 212-882 5570.
Amy R. Doberman