RIA Compliance Blog
A recent enforcement action settled in an administrative proceeding brought by the Securities and Exchange Commission (“SEC”) underscores the importance for investment advisers to adopt and follow rules designed to prohibit inappropriate gifts to and from clients by investment adviser personnel. In a matter previously discussed on our blog, Guggenheim Partners Investment Management, LLC (“Guggenheim”) settled charges, without admitting or denying any violations that it had failed to adopt, or implement reasonable compliance procedures as required by Rule 206(4)-7 under the Investment Adviser’s Act designed to regulate gifts and entertainment provided to and from the adviser or its personnel.
More specifically, the SEC’s Order instituting administrative proceedings recited that Guggenheim’s compliance manual adopted a rule that required supervised persons to seek and obtain approval of the Chief Compliance Officer before personnel could receive any gift above an established de minimis value that was defined in the manual as being $250.00 or less. Despite this policy, between 2009 and 2012 at least seven Guggenheim employees took 44 or more flights on private planes of Guggenheim clients, none of which were reported to the Chief Compliance Officer as required by the policy. The compliance log reflected only one such flight that was only recorded because the flight had been mentioned to the Chief Compliance Officer after the flight occurred. The Commission found that Guggenheim failed to enforce its own policies with respect to gifts and entertainment and failed to implement compliance policies and procedures regarding gifts and entertainment.
While there are no specific rules governing gifts as they relate to investment adviser firms, generally speaking the arena of giving and receiving gifts is regulated by reference to the anti-fraud provision of the Investment Adviser’s Act contained in Section 206 and the common law fiduciary duties an adviser owes to its clients. The SEC staff has provided some informal guidance on adviser’s policies regarding entertainment and giving and receiving gifts, and routinely asks for gift records during routine examinations. Advisers usually also find assistance through examining analogous rules such as FINRA Rule 3060 and its related Notice to Members 06-69, both of which pertain to influencing or rewarding employees of clients or perspective clients. Investment advisers shall adopt rules containing similar prohibitions with respect to their practice.
In addition, advisers should consider adopting rules that are geared toward avoiding or prohibiting extravagant gifts or gifts that could lead to a client or prospective client feeling obligated to use the services of the adviser, to dissuade a client from terminating the advisory relationship or to influence the decision making of the adviser.
Parker MacIntyre provides legal and compliance services to investment advisers, broker dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our website for more information.