SEC Issues IM Guidance Update on Acceptance of Gifts and Entertainment (with Lofchie Comment)

The SEC issued an Investment Management Guidance Update regarding the acceptance of gifts or entertainment by advisory personnel.

According to the Guidance Update, a conflict of interest arises when a fund's investment advisor is presented with "gifts, favors, or other forms of consideration" from persons doing business or hoping to do business. Therefore, when fund advisory personnel act as agents, they are barred from accepting any source of compensation other than regular salary or wages for the purchase or sale of any property to or for the fund.

The Guidance Update states that Investment Company Act Rule 38a-1 ("Compliance Procedures and Practices of Certain Investment Companies") requires a fund's board of directors to approve and adopt written policies and procedures designed to prevent the fund and its service providers from accepting gifts and other entertainment that could present conflicts of interest. The guidance also notes that certain registered funds may opt for a "blanket prohibition" on the receipt of gifts or entertainment, or institute a pre-clearance mechanism for acceptances of gifts or entertainment.

Lofchie Comment: While the principal focus of the Guidance Update is on the advisory personnel of registered investment companies, the issue of conflicts created by the receipt of gifts is relevant to all investment advisers, including those who only advise private funds. At the very least, such funds should be mindful that compliance procedures address the circumstances in which personnel may receive gifts (and, for good measure, procedures should cover gift-giving as well).

See: Updated SEC Guidance.