Fund compliance policies and procedures should address the receipt of gifts or entertainment by fund advisory personnel, according to guidance published by the SEC’s Division of Investment Management.
Section 17(e)(1) of the Investment Company Act of 1940 (1940 Act) generally prohibits first-tier or second-tier affiliates of a registered fund, acting as agent, from accepting from any source any compensation (other than regular salary or wages from the registered fund) for the purchase or sale of any property to or for the registered fund, except in the course of the person’s business as an underwriter or broker. The staff noted that fund advisory personnel are second-tier affiliates of a fund, and that they generally act as agents of a fund. Thus, for example, fund portfolio managers who accept gifts or entertainment from a broker-dealer in connection with the purchase or sale of a fund’s portfolio securities, would violate Section 17(e)(1).
Courts have held that the mere receipt of compensation is enough for a violation of Section 17(e)(1); a showing of intent to influence the actions of a fund or economic injury to the fund is not required. There is no de minimis exception. To violate the section, however, there must be some nexus between the compensation received and the property bought and sold.
The staff guidance states that funds should address compliance with Section 17(e)(1) in their compliance programs adopted and implemented pursuant to Rule 38a-1 under the 1940 Act. The staff noted that a fund’s and an adviser’s policies and procedures related to gifts and entertainment may vary (e.g., blanket bans or preclearance mechanisms), and will depend on the nature of the business. Moreover, the staff reminded funds and their boards that fund compliance policies must provide for oversight of fund service providers, including investment advisers. Thus, fund compliance officers should seek to ensure that the adviser’s compliance policies and procedures appropriately address the receipt of gifts and entertainment by fund advisory personnel.