Any story about the SEC, funds, gifts will catch my attention. Last week, the Staff of the SEC’s Division of Investment Management issued IM Guidance Update No. 2015-1 on gifts and entertainment in the fund industry.
The Guidance refers to section Section 17(e)(1), which did not seem familiar to me. The reference is to the Investment Company Act, so it’s not explicitly applicable to private funds.
The Guidance makes the point that the receipt of gifts or entertainment by fund employees may implicate Section 17(e)(1) of the Investment Company Act of 1940. Therefore gifts and entertainment should be addressed by the fund’s compliance policies and procedures. I’m not sure that’s big news to anyone in complaince.
Section 17(e)(1) generally prohibits fund employees, acting as agent, from accepting any compensation from any source for the purchase or sale of any property to or for the fund, other than regular wages from the fund. That means, a fund portfolio manager accepting any gifts/entertainment from a broker-dealer for the purchase or sale of the fund’s portfolio securities would violate Section 17(e)(1).
What to do? A fund can impose a blanket prohibition on receiving gifts or entertainment. The Guidance also suggests a pre-clearance mechanism for the acceptance of gifts or entertainment.