Considerations for Year-End Certifications Concerning Employee Personal Securities Accounts
As another calendar year comes to a close, SEC-registered investment advisers once again will collect personal securities reports and certifications of compliance with their Codes of Ethics from their “access persons”. Many advisers allow their access persons to take advantage of a reporting exception for accounts over which the access persons have no direct or indirect influence or control (e.g., blind trusts and third-party managed accounts) (the “Reporting Exception”). These advisers should consider a guidance update issued by the SEC staff earlier this year (the “Guidance”) when analyzing certifications given by access persons in reliance on the Reporting Exception, as well as in determining whether any modifications to their year-end certifications, Codes of Ethics and/or other compliance policies and procedures may be necessary.
Pursuant to Rule 204A-1 under the Investment Advisers Act of 1940, every SEC-registered investment adviser is required to maintain and enforce a written Code of Ethics that requires, among other things, its access persons to report personal securities holdings and transactions. The Reporting Exception, however, provides an exception from such reporting requirements for accounts over which the access person had “no direct or indirect influence or control.”
The Guidance discusses different types of arrangements in the context of the Reporting Exception. For example, the SEC staff believes that blind trusts can be established such that an access person would have no direct or indirect influence or control, and thus would qualify for the Reporting Exception. In addressing whether other types of accounts might also qualify under the Reporting Exception (such as (i) where an access person is a grantor or beneficiary of a trust managed by a third-party trustee and has limited involvement in trust affairs, or (ii) a personal account of an access person where a third-party manager has discretionary investment authority over the account), the staff stated that the fact that an access person provides a trustee with management authority over a trust for which he is grantor or beneficiary, or provides a third-party manager discretionary investment authority over his personal account, by itself, is insufficient for an adviser to reasonably believe that the access person had no direct or indirect influence or control over the trust or account for purposes of relying on the Reporting Exception.
In particular, the Guidance noted that even if an access person provides a trustee with management authority or a third-party manager with discretionary investment authority over his account, the access person may still retain direct or indirect influence of control to the extent that he can (a) suggest purchases or sales of investments to the trustee or third-party discretionary manager, (b) direct purchases or sales of investments, or (c) consult with the trustee or third-party discretionary manager as to the particular allocation of investments to be made in the account. Furthermore, the staff believes that an access person’s discussions with the trustee or third-party discretionary manager regarding account holdings also could reflect direct or indirect control or influence, unless the trustee or third-party manager simply explains the account activity and does not receive suggestions or directions from the access person regarding the account.
According to the Guidance, an adviser may be able to implement additional controls to establish a reasonable belief that an access person had no direct or indirect influence or control over the trust or account. These controls should focus on whether the access person actually had direct or indirect influence or control over the trust or account, instead of whether the third-party manager had discretionary or non-discretionary investment authority. In designing these controls, advisers may consider:
• obtaining information about a trustee or third-party manager’s relationship to the access person (e.g., independent professional versus friend or relative; unaffiliated versus affiliated firm);
• obtaining periodic certifications by access persons and their trustees or discretionary third-party managers regarding the access persons’ influence or control over trusts or accounts;
• providing access persons with the exact wording of the Reporting Exception and a clear definition of “no direct or indirect influence or control” that the adviser consistently applies to all access persons; and
• on a sample basis, requesting reports on holdings and/or transactions made in the trust or discretionary account to identify transactions that would have been prohibited pursuant to the adviser’s Code of Ethics, absent reliance on the Reporting Exception.
With respect to periodic certifications, the Guidance indicated that obtaining a general certification from an access person stating that he did not exercise direct or indirect influence or control over a trust or discretionary account would likely be insufficient to qualify for the Reporting Exception. The staff instead believes that advisers should consider obtaining more specific certifications from access persons, such as certifications that the access person did not direct or suggest that the trustee or third-party discretionary manager make any particular transactions for the account, or consult with the trustee or third-party discretionary manager as to any particular allocation of investments for the account.
Investment advisers should take the Guidance into account and make any necessary adjustments to their year-end certifications, Codes of Ethics and other relevant compliance policies and procedures.
 Under Rule 204A-1(e)(1), the term “access person” generally includes an adviser’s directors, officers and partners and its supervised persons who have access to nonpublic information regarding client securities transactions.
 A blind trust is typically a legal arrangement in which a trustee manages funds for the benefit of somebody (e.g., an access person) who has no knowledge of the specific management actions taken by the trustee and no right to intervene in the trustee’s management.
 The Guidance is entitled, “Personal Securities Transactions Reports by Registered Investment Advisers: Securities Held in Accounts Over Which Reporting Persons Had No Influence or Control,” and can be found here [http://www.sec.gov/investment/im-guidance-2015-03.pdf].