SEC Issues Needed Guidance on Personal Securities Reporting in Discretionary Accounts

In June of this year, the Securities and Exchange Commission (“SEC”) issued guidance on subsection (b)(3)(i), the (“Reporting Exception”), of SEC Rule 204A. The rule states that registered investment adviser “access persons” (employees with access to non-public information regarding securities transactions or those who are involved in making securities recommendations to clients) must report all personal securities holdings and transactions. The Reporting Exception provides that accounts over which access persons have “no direct or indirect influence or control” are exempt from this rule.

The guidance addresses accounts where the access person is: (i) a grantor or beneficiary of a trust managed by a third-party trustee, or (ii) gives discretionary authority over the account to a third-party manager. The terms of these accounts may vary, making it difficult to provide a black and white answer. The SEC’s recent guidance offers the following suggestions to determine whether such an account meets the Reporting Exception:

  • Obtain information about the relationship between the access person and the third-party manager or trustee. Personal relationships with the manager or trustee may suggest that that the access person does have some influence or control over the account’s activities;
  • Request and assess account holdings and investments for any sign of trading in securities that indicate the use of the firm’s non-public information, e.g., to front-run client accounts. Compliance should also look for any issuers on the firm’s restricted and watch lists;
  • Periodically obtain signed certifications by the access persons and third party manager or trustee. The certification should include representations to the effect that the third party manager or trustee manages the account without the direct or indirect influence or control of the access person.

Carefully reviewing account details at the outset will assist compliance officers in determining whether an account initially qualifies for the Reporting Exception. Thereafter, compliance officers should periodically review the accounts and obtain certifications to ensure the account remains qualified for the exception. Because the terms of these accounts can vary widely, compliance teams should consult their outside legal counsel or consultant with any questions.