SEC’s Division of Investment Management Issues Guidance Update Regarding Gifts and Entertainment

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This February the Securities and Exchange Commission’s (“SEC’s”) Division of Investment Management issued Guidance Update Number 2015-01 titled  “Acceptance of Gifts or Entertainment By Fund Advisory Personnel — Section 17(e)(1) of the Investment Company Act.” The Update highlights potential conflicts of interest between the personnel of a fund’s investment adviser and those doing business or hoping to do business with the fund.

According to the Update, while there are many provisions of the  Investment Company Act of 1940 prohibiting fund personnel from participating in certain transactions involving the fund, Section 17(e)(1) specifically states “[i]t shall be unlawful for any affiliated person of a registered investment company, or any affiliated person of such person . . . acting as agent, to accept from any source any compensation (other than a regular salary or wages from such registered company) for the purchase or sale of any property to or for such registered company or any controlled company thereof, except in the course of such person’s business as an underwriter or broker.”

The guidance is aimed at mutual fund industry participants to remind them “that the receipt of gifts or entertainment by fund advisory personnel, among others, also may implicate the prohibition in section 17(e)(1) of the 1940 Act.” In an example provided in the Update, it is explained that a fund manager would be in violation of section 17(e)(1) by accepting gifts or entertainment from a broker-dealer in exchange for trades of the fund’s portfolio securities.

Rule 38a-1 under the 1940 Act requires funds to create and implement written policies and procedures, appropriate to the fund’s business and reasonably designed to prevent violations of the federal securities laws. The update states that the receipt of gifts or entertainment should be addressed by such policies and procedures. Some funds may outright prohibit the receipt of gifts or entertainment while others may require pre-clearance.

To learn more about this subject please refer to Jacko Law Group, PC’s Legal Risk Management Tip entitled Gifts, Gratuities, Entertainment and Other Forms of Influence and Reward.

For more information on this and other related subjects, please contact us at info@jackolg.com or (619) 298-2880.

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