Wednesday, February 25, 2015

IM Guidance Recommends Policy Updates to Guard Against Buyoffs

[This story previously appeared in Securities Regulation Daily.]

By Amy Leisinger, J.D.

The SEC’s Division of Investment Management has issued guidance to caution investment advisers regarding the conflict of interest that arises when an adviser’s personnel are presented with gifts or other forms of consideration from persons or entities doing business, or hoping to do business, with an advised fund. In the guidance update, the staff reminds industry participants that the receipt of gifts or entertainment, among others items and services, may implicate the compensation prohibition of Section 17(e)(1) of the Investment Company Act.

Section 17(e)(1). Section 17(e)(1) generally prohibits a fund’s investment adviser and its officers, directors, and employees from accepting compensation other than regular salary or wages for the purchase or sale property to or on behalf of a registered investment company. As an example, the guidance notes that, if a fund’s portfolio manager accepts a gift from a broker-dealer for the purchase or sale of the fund’s portfolio securities, that individual has violated Section 17(e)(1). The prohibition is designed to ensure that a fund is managed with regard to the best interest of shareholders, as opposed to the interest of the adviser or its affiliates, the guidance states.

Recommendations. Many advisers and funds expressly address this particular conflict of interest in their respective codes of ethics, the guidance notes, but the issue should also be considered within the compliance policies and procedures adopted and implemented by funds and their advisers pursuant to Rule 38a-1. The appropriate limitations concerning the receipt of gifts or other consideration will vary based on the nature of an adviser’s business; some funds and advisers may choose to impose a blanket prohibition while others may conclude that pre-clearance assessment of each particular situation is more suitable, according to the guidance.

However, the guidance cautions, the mere receipt of compensation in connection with the purchase or sale of property constitutes the violation of Section 17(e)(1), even without proof of inappropriate influence or injury to the fund. As such, the guidance suggests that funds and advisers should review their compliance policies and procedures to ensure they adequately protect against potential violations.

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