SEC Adopts Amendments to Code of Ethics RuleFall 1999
The SEC recently adopted amendments to the Code of Ethics rule applicable to directors, officers and advisory persons of mutual funds and their investment advisers and certain directors and officers of their principal underwriters ("access persons"). These amendments will become effective October 29, 1999 and implementation of these amendments will begin on March 1, 2000. The rule changes generally provide for greater board oversight of the personal trading activities of access persons, more complete reporting of securities transactions by access persons, pre-clearance of investments in IPOs and private placements and SAI disclosure of funds' policies on personal trading.
The rule changes require that a fund's board of directors play an active role in overseeing the fund's code of ethics. The rule changes specifically require that a majority of a fund's board, including a majority of independent directors, approve the fund's code of ethics, the code of ethics of any investment adviser or principal underwriter of the fund, and any material changes to these codes. In addition, a fund and any investment adviser or principal underwriter of the fund will be required to provide the fund's board a written issues and certification report. This report must describe issues that arose during the previous year under the code, including information about material code violations and sanctions, and certify that procedures reasonably necessary to prevent its access persons from violating its code of ethics have been adopted.
Reports by Access Persons
In addition to the quarterly securities transaction reports currently required by the Code of Ethics rule, the rule changes require each access person to provide the fund, its investment adviser or principal underwriter with an initial holdings report, as well as an annual holdings report. The access person must provide the initial holdings report to the fund, its investment adviser or principal underwriter within 10 days of becoming an access person. This report must disclose all securities beneficially owned by the access person, including any securities account maintained with a broker, dealer or bank. The rule changes also require that each code of ethics provide for review by management or compliance personnel of all quarterly securities transaction reports and initial and annual holdings reports submitted by access persons.
Pre-Clearance of Investments in IPOs and Private Placements
Instead of prohibiting all access persons from making investments in IPOs and private placements, the rule changes require that certain access persons obtain prior approval from the fund or its investment adviser before investing in IPOs or private placements. This pre-clearance requirement is limited to "investment personnel," which includes portfolio managers and other employees of the fund or its investment adviser who participate in making investment recommendations to the fund, as well as control persons of the fund who obtain information about investment recommendations made to the fund. Funds and investment advisers will be required to keep records of the approval of, and rationale supporting, any investments in IPOs or private placements by investment personnel.
SAI Disclosure of Policies on Personal Trading and Codes of Ethics
The rule changes also require SAI disclosure regarding a fund's code of ethics and that a fund file its code of ethics, as well as the codes of ethics of its investment adviser and principal underwriter, as exhibits to its registration statement. A fund will be required to disclose in its SAI that the fund and its investment adviser and principal underwriter have adopted codes of ethics, whether the codes permit access persons to invest in securities for their own accounts, and that the codes are on file with and available from the SEC.
If you have any questions regarding the SEC's proposed pay to play rules or would like to provide comments on the proposed rule and related amendments to the SEC, please do not hesitate to contact any of the members of Godfrey & Kahn's Investment Management Practice Group listed below at (414) 273-3500.
Scott A. Moehrke, Pamela M. Krill, Renee Hardt Torr
Carol A. Gehl, Dennis F. Connolly, Ellen R. Drought