Investment Company Act – Zero Tolerance Policy on Gifts & Entertainment?!

Apparently, at a recent Investment Company Institute meeting, a member of the SEC’s Investment Management staff told the attendees that he reads the prohibitions in Section 17(e) of the Investment Company Act to be a zero tolerance policy prohibiting ALL gifts – regardless of how nominal their value– that are given to ANY advisory employee from a broker-dealer that is used or may be used to execute portfolio transactions. In his view, this includes any business dinner paid for by a broker-dealer as well as the nominal gift baskets sent around holidays.

US Dollar Money Gift BoxWhy is this cause for concern?

Investment Company Act Section 17(e)(1) states:

(e) It shall be unlawful for any affiliated person of a registered investment company, or any affiliated person of such person—
(1) 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;

This interpretation is obviously different from the manner in which fund advisers [and their outside counsel] have long read Section 17(e). Items of de minimis value have not been considered compensation in recent years, but I’m sure that the ICI staff will track this down and ensure that this is not a new interpretation, but merely one Staffer’s view. None of the Investment Management guidance to date seems to take such an extreme interpretation. In fact, gifts of de minimis value have typically been considered acceptable. As one individual pointed out, how could a tin of cookies shared over an entire office at Christmas time be considered compensation? At times like this, we need to remember that speakers from the SEC (including the Chair), start every public speaking engagement with the statement that the views expressed are their own and do not necessarily reflect those of the Commission nor other members of the Staff. Unfortunately, this individual either did not make that statement, or those reporting the incident failed to notice it.

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