On June 26, 2015, the staff of the Division of Investment Management of the SEC issued a Guidance Update addressing the staff’s views on the application of the exception from personal securities and trading reporting under an adviser’s code of ethics for its directors, officers, partners and other supervised persons with access to nonpublic information regarding securities transactions (“access persons”) for securities held in an account over which the access person has “no direct or indirect influence or control” (the “reporting exception”). Specifically, the staff addressed the application of the reporting exception to an access person’s trusts and third-party discretionary accounts. In this connection, the staff states that an access person may rely on the reporting exception with respect to a blind trust, in which a trustee manages funds for the benefit of such access person, who has no knowledge of the specific management actions taken by the trustee and no right to intervene in the trustee’s management.
In the Guidance Update, the staff notes that some advisers have asserted that the reporting exception applies to (1) an access person’s trusts when such person (i) is a grantor or beneficiary of a trust managed by a third-party trustee, and (ii) has limited involvement in trust affairs, and (2) an access person’s personal account when a third-party manager has discretionary authority over the account. In this regard, the staff states its view 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 provides 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” for purposes of relying on the reporting exception. Although this would not, by itself, enable an adviser to rely on the reporting exception, the staff believes that the adviser may be able to implement additional controls to establish a reasonable belief regarding the absence of influence or control such that an access person could rely on the reporting exception. In the staff’s view, such additional policies and procedures should be reasonably designed to determine whether the access person actually has direct or indirect influence or control over the trust or account, rather than whether the third-party manager has discretionary or non-discretionary investment authority. Advisers may consider, for example:
- obtaining information about a trustee or third-party manager’s relationship to the access person (e.g., independent professional versus friend or relative; unaffiliated versus affiliated firm);
- periodically obtaining specific certifications by access persons and their trustees or discretionary third-party managers regarding the access persons’ influence or control over trusts or accounts (e.g., “Did you suggest that the trustee or manager make any particular purchases or sales of securities for account X during time period Y?”);
- providing access persons with the exact wording of the reporting exception and a clear definition of “no direct or indirect influence or control” that the adviser consistently applies to all access persons; and
- on a sample basis, requesting reports on holdings and/or transactions made in the trust or discretionary account to identify transactions that would have been prohibited pursuant to the adviser’s code of ethics, absent reliance on the reporting exception.
The Guidance Update is available at: http://www.sec.gov/investment/im-guidance-2015-03.pdf