The newly adopted rules that govern the personal trading practices of portfolio managers contain few changes from the SEC's original proposal four years ago, regulators, mutual fund lawyers and consultants said last week.
The final version of the rules, which the SEC approved Aug. 23, requires that portfolio managers and other executives with information about fund trading strategies provide an annual statement listing their personal securities holdings. That requirement was not in the original rule proposal, SEC officials said. The new rules also permit mutual fund companies to disclose their ethics standards deeper in fund registration statements - in the statement of additional information - rather than in the prospectus, SEC officials said. The original proposal, which the SEC issued Sept. 8, 1995, called for a summary of ethics codes to appear in fund prospectuses. The new rules take effect March 1.
The text of the new rules was not immediately available on the SEC's website, causing fund attorneys to warn that the details in the rules could provide new, unexpected requirements. Nevertheless, fund lawyers and industry consultants said that based on an SEC summary of the new rules available online and SEC officials' comments reported in the media, it appears that the new requirements will not bring major changes to most fund complexes.
The wait for the final version of the rule combined with a 1994 Investment Company Institute report defining best practices with respect to personal trading by fund executives have caused most fund companies to update their standards on personal trading years ago, lawyers said.
"The ICI report set the roadmap," said David Sturms, an attorney at Vedder, Price, Kaufman & Kammholz in Chicago.
Rule 17j-1 of the Investment Company Act sets limits on how portfolio managers and other executives with knowledge about fund trading strategies can buy and sell securities for their personal accounts. The rules are intended to keep fund insiders from profiting at the expense of their funds' shareholders.
The SEC last week did not adopt a rule prohibiting fund managers from investing in initial public offerings and private placements, although the agency invited comment on such a prohibition when it circulated proposed rules in 1995. Instead, portfolio managers must receive clearance from fund compliance officials before making IPO and private placement investments.
An absolute ban on IPOs would have precluded fund managers from investing in IPOs in circumstances when the opportunity to invest was purely personal and posed no conflict with a fund, said C. Hunter Jones, associate director of the SEC's Division of Investment Management. For example, a portfolio manager could receive IPO shares when the manager's personal insurance company demutualizes and issues stock to all policyholders, Jones said.
"Why have an across-the-board rule when there are going to be exceptions to it?" Jones said.
The SEC may also not have the legal authority to adopt a rule barring fund executives from buying IPOs, said Barry Barbash, a lawyer with Shearman & Sterling of New York.
As expected, the new rules provide more reporting requirements for fund executives regarding their personal trading and increase the responsibility of mutual fund directors in overseeing personal trading. Directors must approve the code of ethics both for the funds they oversee and for the fund's investment advisers under the new rule. They also must review annual reports regarding problems that have arisen under the codes.
Directors normally perform such oversight now, said C. Meyrick Payne, senior partner at Management Practice of New York, a consulting firm for fund directors. Nevertheless, the new rules will codify what is now a self-imposed duty, he said.
"It heightens the awareness," Payne said.