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SEC Says “Managed Accounts” May Not Provide Safe Harbor from Necessity of Monitoring Personal Securities Transactions for Investment Advisor Employees
In 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:
- obtain information about a trustee or third-party manager’s relationship to the access person (i.e., independent professional versus friend or relative; unaffiliated versus affiliated firm);
- obtain periodic certifications by access persons and their trustees or discretionary third-party managers regarding the access persons’ influence or control over trusts or accounts;
- provide access persons with the exact wording of the reporting exception and a clear definition of “no direct or indirect influence or control” that the advisor consistently applies to all access persons; and
- on a sample basis, request reports on holdings and/or transactions made in the trust or discretionary account to identify transactions that would have been prohibited pursuant to the advisor’s code of ethics, absent reliance on the reporting exception.
The Commission also suggested that IAs add the following certification into their processes by asking access persons the following questions:
- “Did you suggest that the trustee or third-party discretionary manager make any particular purchases or sales of securities for account X during time period Y?”
- “Did you direct the trustee or third-party discretionary manager to make any particular purchases or sales of securities for account X during time period Y?”
- “Did you consult with the trustee or third-party discretionary manager as to the particular allocation of investments to be made in account X during time period Y?”
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:
- suggested purchases or sales of investments to the trustee or third-party discretionary manager;
- directed purchases or sales of investments; or
- consulted with the trustee or third-party discretionary manager as to the particular allocation of investments to be made in the account.
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.”
What you should do now:
- Let the access person know that an account or trust managed on a third-party or discretionary basis does not itself provide an exemption to the reporting requirements for access persons securities transactions;
- Add additional questions to employee certifications regarding personal securities transactions to determine if influence over accounts managed by third-party managers has occurred;
- Provide access persons with the exact wording of the safe harbor and reporting exemption so that a clear definition and understanding of “no direct or indirect influence or control” exists in your organization;
- Update policies and procedures as necessary to include the bullet points above.
Whether you are looking to change from self-clearing to fully-disclosed (or vice-versa), exploring your clearing options or starting a broker-dealer, Oyster can assist with the assessment, analysis, vendor selection and conversion processes.Download