Personal Securities Transactions Reports By Registered Investment Advisers: Securities Held In Accounts Over Which Reporting Persons Had No Influence Or Control

In a recent Guidance Update, the Staff of the Division of Investment Management of the Securities and Exchange Commission addressed certain issues arising under Section 204A of the Investment Advisers Act of 1940 which requires registered investment advisers to maintain and enforce written policies and procedures reasonably designed to prevent the firm or its employees from misusing material nonpublic information.

In particular, Rule 204A-1 thereunder provides that an adviser’s Code of Ethics must include requirements that certain advisory personnel report personal securities trading to provide a mechanism for the adviser and examiners to identify improper trades or patterns of trading.  The Rule was designed, in part, to prevent the misuse of material nonpublic information, including the misuse of material nonpublic information about a registered adviser’s securities recommendations, and client securities holdings and transactions.

Among the issues addressed in the Guidance Update is whether certain arrangements satisfactorily establish that an access person’s securities are held in an account over which he or she had “no direct or indirect influence or control” and, accordingly, under the Rule are not required to be reported.  The Guidance provides that if 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, that, 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 Guidance then addresses certain arrangements that the adviser may be able to implement that could establish a reasonable belief that an access person had no direct or indirect influence or control over the trust or account and could, accordingly, rely upon the exception.