In February, the SEC’s Division of Investment Management issued Guidance Update No. 2015-01, “Acceptance of Gifts or Entertainment by Fund Advisory Personnel.” Section 17(e)(1) of the Investment Company Act of 1940 (“IC Act”) states that:
[i]t shall be unlawful for any affiliated person of a registered investment company, or any affiliated person of such person . . . 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…
For example, if a fund’s portfolio manager accepts any gifts or entertainment from a broker-dealer for the purchase or sale of the fund’s portfolio securities, the portfolio manager has violated section 17(e)(1). One of Congress’ fundamental policy concerns when it enacted the IC Act was the potential for funds to be managed in the interest of their investment advisers and their affiliates rather than in the interest of the fund’s shareholders.
The receipt of gifts or entertainment by fund advisory personnel should be addressed by funds’ compliance policies and procedures. The particular policies and procedures that might be appropriate would depend on the nature of the adviser’s business, among other considerations. Some might find a blanket prohibition on the receipt of gifts or entertainment by fund advisory personnel to be appropriate, while others might employ a pre-clearance mechanism for acceptances of gifts or entertainment to assess whether they would be prohibited under section 17(e)(1).
The full text of the Guidance Update may be found at: