In accordance with the Securities and Exchange Commission’s stated focus on conflicts of interest, SEC staff recently released an Investment Management Guidance Update regarding the acceptance of gifts or entertainment by employees or agents of an investment adviser from persons doing business, or hoping to do business, with a fund.
Section 17(e)(1) of the Investment Company Act of 1940 generally prohibits fund advisory personnel from accepting compensation, other than regular salary or wages from the fund, for the purchase or sale of property to or for the fund if the advisory personnel is acting as agent for the fund. The Guidance Update provides an example: if a fund’s portfolio manager accepts any gifts or entertainment from a broker-dealer from whom the fund purchases or sells portfolio securities, the portfolio manager may have violated section 17(e)(1). The Guidance Updateexplains that this prohibition reflects one of Congress’ stated policy concerns – that an adviser may manage the fund in its own interest rather than in the interest of shareholders.
The Guidance Update states that the receipt of gifts or entertainment by fund personnel should be addressed by the compliance policies and procedures of the adviser required under Rule 38a-1 and approved by the mutual fund’s board. The Guidance Update suggests that acceptable policies on the acceptance of gifts or entertainment by advisory personnel may include blanket prohibitions or pre-clearance mechanisms, but also acknowledges that appropriate policies depend on the nature of the adviser’s business.
Investment advisers and mutual fund boards should review their compliance policies and procedures to ensure that their gift and entertainment policies specifically address the conflict of interest issue under section 17(e)(1).