
By Oyster Consulting LLC
Subscribe to our original industry insightsIn a release published last week, the Division of Investment Management of the SEC issued guidance on the duties of investment advisors (IAs) to monitor personal securities transactions. The SEC pointed out that while a “blind trust” does provide a safe harbor from IAs’ need to monitor personal securities activities, a traditional managed or discretionary account may not. The Commission makes the case that some IA employees are able to provide suggestions about which securities to purchase or sell, and in this manner exercise influence over the account.
The Commission suggests that investment advisors implement policies and procedures to establish a “reasonable belief that an access person had no direct or indirect influence or control over the trust or account, rather than whether or not a third-party manager had discretionary or non-discretionary investment authority.”
In light of this, the SEC offered these actions for IAs to consider:
The Commission also suggested that IAs add the following certification into their processes by asking access persons the following questions:
Rule 204A-1 specifically provides that a registered investment advisor must establish, maintain, and enforce a written code of ethics that requires, among other things, its directors, officers and partners and its supervised persons who have access to nonpublic information regarding securities transactions (together “access persons”) to report their personal securities holdings and transactions. Subsection (b)(3)(i) of the rule (the “reporting exception”), however, provides an exception to these reporting requirements when an access person’s securities are held in accounts over which he or she had “no direct or indirect influence or control.”
SEC IM Guidance Update No. 2015-03 states:
“The staff believes that the fact that an access person provides a trustee with management authority over a trust for which he or she is grantor or beneficiary, or providing a third-party manager discretionary investment authority over his or her personal account, by itself, is insufficient for an adviser to reasonably believe that the access person had no direct or indirect influence or control over the trust or account for purposes of relying on the reporting exception.”
The SEC points out that influence over the management of a discretionary account has happened, if for example, the access person has:
Finally, the SEC staff “believes that discussions in which a trustee or third-party manager simply summarizes, describes, or explains account activity to an access person, without receiving directions or suggestions from the access person, would not implicate influence or control by the access person over that account.”
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