October 16, 2021

Volume XI, Number 289

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SEC Issues Guidance on Personal Securities Transactions Reporting

On June 26, 2015, the Securities and Exchange Commission (SEC) issued a guidance update on Rule 204A-1 of the Investment Advisers Act of 1940 (Advisers Act). Rule 204A-1 requires, among other things, certain advisory personnel of a registered investment adviser to report their personal securities transactions to the adviser. This update clarifies when advisory personnel would be deemed to have "no direct or indirect influence or control" over a personal account, such that securities transactions in the account would be exempt from Rule 204A-1's reporting requirements.

Background

Section 204A of the Advisers Act requires registered investment advisers to establish and maintain written policies and procedures reasonably designed to prevent advisers and their employees from misusing material nonpublic information. Under Rule 204A-1, a registered investment adviser must establish and maintain a written code of ethics that requires, among other things, its directors, officers, partners, and any other supervised persons who (i) have access to nonpublic information regarding any clients' purchase or sale of securities or nonpublic information regarding the portfolio holdings of any of the adviser's funds or (ii) are involved in making securities recommendations to clients or who have access to such recommendations that are nonpublic (collectively, Access Persons) to report their personal securities transactions to the adviser. Subsection (b)(3)(i) of the Rule, however, provides that an Access Person would not be required to report personal transactions in an account over which the Access Person has "no direct or indirect influence or control." This exemption (Exemption) would cover, for example, a "blind trust" for which a trustee manages funds for the benefit of an Access Person and over which the Access Person has no right to intervene and no knowledge of the specific portfolio investments made by the trustee.

Guidance Update

As a response to industry inquiries, the update clarifies how the Exemption would apply to arrangements outside of a blind trust, such as (i) a trust managed by a third-party trustee for which an Access Person is a grantor or beneficiary and has limited involvement in the trust affairs or (ii) a personal account managed by a third-party manager who has discretionary investment authority over the account.

According to the update, whether an Access Person may rely on the Exemption with respect to a trust or account would depend on whether the Access Person actually has influence or control (directly or indirectly) over the trust or account. That the Access Person has granted investment authority to a third-party trustee or manager would not, by itself, be sufficient to establish that the Access Person is eligible to rely on the Exemption, given that the Access Person may still suggest or direct investments to the trustee or manager or consult with the trustee or manager as to particular investments. The update suggests that an investment adviser implement controls that look at whether the Access Person actually has direct or indirect influence or control over the trust or account, rather than whether the third-party trustee or manager has discretionary or nondiscretionary investment authority. The investment adviser may, for example:

  • Obtain information about a trustee's or manager's relationship to the Access Person (i.e., whether the trustee or manager is an independent professional or friend or relative of the Access Person, and whether the trustee or manager is an affiliated or unaffiliated firm);

  • Obtain periodic certifications by the Access Person and the trustee or manager regarding the Access Person's influence or control over the trust or account;

  • Provide the Access Person with the exact wording of the Exemption 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, request reports on holdings and transactions in the Access Person's trust or account so as to identify transactions that would have been prohibited under the adviser's code of ethics, absent reliance on the Exemption.

The update also indicates that general certifications by an Access Person would likely be insufficient to establish that the Access Person does not in fact exercise influence or control over a trust or account. Instead, investment advisers should obtain more specific certifications by asking questions such as:

  • "Did you suggest that the trustee or third-party discretionary manager make any particular purchases or sales of securities for account X during time period Y?";

  • "Did you direct the trustee or third-party discretionary manager to make any particular purchases or sales of securities for account X during time period Y?"; and

  • "Did you consult with the trustee or third-party discretionary manager as to the particular allocation of investments to be made in account X during time period Y?"

Registered investment advisers should consider reviewing and updating their code of ethics and any other policies or procedures on personal securities trading in light of the update. Advisers also should consider obtaining additional information and certifications from Access Persons as needed. 

© 2021 Proskauer Rose LLP. National Law Review, Volume V, Number 192
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About this Author

Howard Beber, Tax Attorney, Proskauer Rose Law Firm
Partner

Howard J. Beber is a partner in the Corporate Department and co-head of the Private Funds Group, which is recognized by Chambers GlobalChambers USA and US Legal 500. His practice focuses on representing private equity funds and institutional investors on a broad range of issues including fund formations, secondary transactions and portfolio investments. 

Howard is actively involved in all stages of fund formation and fund sponsor representation, counseling on terms and marketing strategy, preparing offering documents...

617-526-9754
Sean J Hill, Prosakuer Law Firm, Private Investment Attorney
Partner

Sean J. Hill is a Partner and co-head of the Private Investment Funds Group. His practice covers a full range of activities and operations of alternative investment managers, with a particular emphasis on representing U.S. and non-U.S. sponsors in fund formation and portfolio activities, as well as regulatory, compliance and operational issues. Sean works with fund sponsors to structure firm ownership and operations. He also advises clients with respect to third-party investments in, and acquisitions of, alternative investment managers.

617-526-9805
Robert G Leonard, Proskauer Rose Law Firm, Private Investment Attorney
Partner

Robert G. Leonard is a Partner in the Hedge Funds Group. For more than 25 years Rob has been structuring, organizing and representing hedge funds, funds of funds and other private investment funds (both domestic and offshore) and investment advisers.

212-969-3355
Michael F Mavrides, Proskauer Rose Law Firm, Private Investment Attorney
Partner

Michael F. Mavrides is a Partner in the Hedge Funds Group. Mike focuses his practice on representing domestic and offshore hedge funds, funds of funds and other private investment funds, including private equity and real estate investment funds. He regularly advises funds and their managers on a wide variety of issues, including formation and structuring, seed capital, anchor capital and other strategic arrangements, placement agency, solicitation and other marketing arrangements, succession planning, separately managed accounts, and all types of portfolio management, trading and...

212-969-3670
Christopher M Wells, Proskauer Rose Law Firm, Private Investment Attorney
Partner

Christopher M. Wells is a Partner and head of the Hedge Funds Group. Chris advises hedge funds, funds of funds and other pooled investment vehicles and their managers on all aspects of fund formation, operations and compliance.

212-969-3600
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