In a June 2015 Guidance Update, the staff of the Division of Investment Management clarified how the code of ethics reporting rules apply to investment advisers.
Current rules require certain advisory personnel who have access to non-public information regarding securities transactions to report their personal securities transactions to their firms, so that advisers and SEC examiners can identify improper trades or patterns of trading. The guidance clarifies which types of accounts may take advantage of a regulatory exception to that reporting obligation.
The staff apparently was prompted to issue the guidance based upon its concern that certain advisers have tried to take advantage of the reporting exception in circumstances when the reporting persons – so-called “access persons” – may in fact have some influence or control over such accounts. Rule 204A-1 under the Investment Advisers Act requires an adviser to adopt and maintain a written code of ethics that, among other things, obligates certain access persons - directors, officers and partners and its supervised persons who have access to nonpublic information regarding securities transactions – to report personal securities transactions.
The Rule includes an exception from the reporting obligation for accounts over which an access person has “no direct or indirect influence or control.” In the guidance, the staff states that blind trusts, which are managed by a third party for the benefit of an access person who has no knowledge of specific investments made by the trustee and no right to intervene in the management of the account, qualify for the exception.
Other accounts, however, may not qualify for the exception. The guidance states that simply providing a third-party manager with discretionary investment authority over an access person’s 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.” The staff said that, in order to take advantage of the reporting exception, an adviser needs to implement compliance “reasonably designed to determine whether the access person actually had direct or indirect influence or control over . . . an account, rather than whether the third-party manager had discretionary or non-discretionary authority.”
Advisers should review their policies and procedures related to personal securities transactions and consider if they need to be amended to ensure, among other things, that access persons fully understand the meaning of the phrase “no direct or indirect influence or control.” Advisers may also want to obtain certifications from access persons and their third-party managers regarding whether an access person has any influence or control over such accounts. In this regard, however, the staff cautioned that obtaining only a general certification would not necessarily meet the standards outlined in the guidance.
In short, advisers should carefully evaluate whether their existing procedures would enable the adviser to demonstrate that an access person did not, in fact, exercise influence or control over an account. Current practices of obtaining an annual general certification of non-influence and non control from the access person and his third-party manager may no longer be sufficient to enable an adviser to rely on the reporting exception in Rule 204A-1.