The staff of the SEC’s Division of Investment Management recently issued a Guidance Update regarding the receipt of gifts, favors or other forms of consideration (“gifts or entertainment”) by personnel of a registered fund’s investment adviser. The Guidance Update focuses primarily on the mutual fund industry and violations under the Investment Company Act of 1940 (the “1940 Act”); however, the issue of conflicts created by the receipt of gifts or entertainment is relevant to all investment advisers, including those advising private funds.
The staff warned in the Guidance Update that the receipt of gifts or entertainment by fund advisory personnel may implicate the prohibitions of Section 17(e)(1) of the 1940 Act. Generally, Section 17(e)(1) prohibits an affiliated person 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 that person’s business as a broker-dealer. The Guidance Update notes that the prohibition of Section 17(e)(1) generally applies whenever fund advisory personnel, acting as agent, accept from any source any compensation (other than regular salary or wages from the fund) for the purchase or sale of any property to or for the fund. The Guidance Update notes that a fund’s portfolio manager violates the Section 17(e)(1) prohibition when the manager accepts gifts or entertainment from a broker-dealer for the purchase or sale of the fund’s portfolio securities. It is important to note that this prohibition would apply to all fund personnel of a RIC, including sub-advisers to the RIC.
The Guidance Update states that it is the staff’s view that the receipt of gifts or entertainment by fund personnel should be addressed by compliance policies and procedures required under Rule 38a-1. The staff acknowledges that policies on the receipt of gifts or entertainment may differ based on the nature of an adviser’s business, with some advisers adopting blanket prohibitions and others adopting pre-clearance mechanisms for acceptance of gifts or entertainment, among other variations.
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If you have any questions regarding the matters covered in this memo, please contact any of the partners and counsel listed below or your primary attorney in Seward & Kissel’s Investment Management Group.
