New IM Guidance on Personal Trading

The SEC’s Division of Investment Management (IM) released new guidance on how investment advisers should treat advisory personnel’s trusts and third-party discretionary accounts. Up until now, it was commonplace for firms to treat third party discretionary accounts and trusts acting as “blind trusts” as non-reportable under their personal trading policies.This typically meant that a firm did not need to monitor those account types on an ongoing basis.That has now changed.

IM has taken a new position on these account types for reporting purposes. Its new guidance states that these account types (trusts and third-party discretionary accounts) must be evaluated on a case-by-case basis. The analysis is to determine the level of involvement an access person (as defined in the guidance) has with the account so the reporting decision rests on whether or not the access person has direct or indirect influence or control over the account (even indirect influence would require reporting). In making its determination, a firm should consider:

  • Does the access person have the ability to make suggestions regarding purchases or sales to the trustee or investment manager?
  • Is the access person able to direct purchases or sales?
  • Does the access person consult with the trustee or manager regarding asset allocation?

The guidance further states that written policies and procedures under Rule 204A-1 should cover how firms determine that a trust or third party account is reportable. Procedures could include:

  • Collecting information from the access person regarding the nature of the trustee or manager relationship (the more personal, the more risk).
  • Use of certifications/attestations from the access person and the trustee or manager that state the specific level of control via the use of probing questions (general attestation will not suffice).
  • A plain English definition of what the firm means by “no direct or indirect influence or control.”
  • Sampling these account types periodically to actually review transactions and holdings for prohibited transactions under the firm’s personal trading policy/Code of Ethics.

Based upon this new guidance, every SEC registered adviser will need to review its personal trading policy in relation to trusts and third-party discretionary accounts.

View SEC IM Guidance, “Personal Securities Transactions Reports by Registered Investment Advisers: Securities Held In Accounts Over Which Reporting Persons Had No Influence Or Control,” June 2015