A new guidance update issued by the Division of Investment Management of the US Securities and Exchange Commission (SEC) advises that firms include rules regarding the receipt of gifts or entertainment by fund advisory personnel in their compliance policies and procedures.
The update targets the conflict of interest that arises when gifts or other favors are sent to fund personnel from those doing business or hoping to do business with a fund. Although the guidance focuses on how these conflicts can arise with mutual funds in violation of section 17(e)(1) of the Investment Company Act of 1940, it noted that such conduct also may result in various violations of the Advisers Act.
The division instructs firms to adopt gift and entertainment policies and procedures, either banning the receipt of such favors or requiring pre-clearance for acceptances.
The guidance does not directly impact private equity firms as much as it does registered investment companies, as the private equity industry follows more comprehensive conflict of interest rules set out by the Financial Industry Regulatory Authority. The update does, however, shed a light on where the division is currently devoting its energy, notes Todd Cipperman, principal of Cipperman Compliance Services.
“It may be worth it for private equity firms to take a look and make sure they aren’t doing anything that runs afoul of the rules,” Cipperman told pfm.
He noted that the timing of the guidance update is surprising, as there is not a clear reason why the division is concentrating on gift policies now. Nonetheless, firms should be cautious. “It’s clear this is something the SEC is focused on,” Cipperman said.