Rule 204A of the Investment Advisers Act of 1940 requires an RIA to maintain written policies and procedures reasonably designed to prevent the RIA and its employees from misusing material non-public information. The RIA is to provide and maintain a written “Code of Ethics” to require certain of its personnel (“access persons”) to report his or her personal securities transactions to the RIA. The term “access persons” includes the RIA’s officers, directors, partners and all supervised persons who have access to non-public information. Such persons are required to report their holdings and securities transactions to the RIA at certain times.
An exception to the reporting requirement by such persons is where an access person has securities in one or more accounts over which the access person has no “direct or indirect influence or control.” The SEC’s Division of Investment Management through a recent IM Guidance Update (No. 2015-03) provides some guidance on use of the exception under Rule 204A. The staff receives questions about what types of accounts would fall under those where the access person has no direct or indirect influence or control.
One such account may be a “blind trust” but only under certain conditions. A blind trust is typically set up for the benefit of an access person but is managed by a trustee and the access person has no knowledge or influence over the trustee’s investment decisions for the trust’s account.
The SEC’s staff of the Division of Investment Management believes that a blind trust set up for the benefit of an access person may qualify for the exception to the reporting requirements of the Rule if the access person did not:
- Suggest purchases or sales for investments to the trustee or third-party discretionary manager
- Direct purchases or sales of investments
- Consult with the trustee or third-party discretionary manager as to particular investments to be made by the trust
In order for the RIA to help determine if the access person directly or indirectly had influence or control over the blind trust, the staff suggests that the RIA consider the following:
- Obtain information about the relationship between the access person and the trustee or third-party manager
- Obtain periodic certifications from the access person and the trustee or third-party manager as to the access person’s influence or control
- Provide precise wording to the access person as to the exception from the reporting requirement as to having “no direct or indirect influence or control”
- On a random basis, require a report on holdings and transactions in the trust to determine if such holdings or transactions would have been prohibited without the availability of the exception
The staff cautions that obtaining certifications from the access person, trustee and third-party manager are not, by themselves, sufficient to ensure that the access person does not directly or indirectly have influence or control over the person making the investment decisions for the trust.