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Personal Securities Reporting: Push Back at Your Peril

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Investment advisor representatives (IARs) widely appreciate that they work in a highly regulated industry. As a result, even new IARs are rarely concerned when they are required to periodically report their personal securities holdings and transactions under SEC Rule 204A-1 (the “reporting requirement”).

This reporting requirement, however, may cause conflict when IARs learn they are also required to submit reports for family members who share the same household. More often than not, the conflict arises when an IAR’s spouse refuses to provide this critical information. In the event of a stalemate, the IAR may lose his or her employment.

The issue is compounded by a spouse’s inability to trace the source of the reporting requirement. The process is essentially an exercise in “connecting the dots.” Here is how those dots are connected.

Under Rule 204A-1(b)(1)(i)(A) and Rule 204A-1(b)(2)(i), “access persons” must submit holdings and transaction reports for “reportable securities” in which the access person has “beneficial ownership.”

An “access person” is any “supervised person” who is involved in making securities recommendations to clients, or who has access to nonpublic information about clients’ purchase or sale of securities, portfolio holdings of any reportable fund or securities recommendations made to clients.

A “supervised person” is any partner, officer, director or employee of a firm, or another person who provides investment advice on behalf of the firm and is subject to its supervision.

A “reportable security” is essentially all securities of every kind except:

  • Direct obligations of the government of the United States

  • Bankers’ acceptances, bank CDs, commercial paper and high-quality short-term debt instruments, including repurchase agreements

  • Shares issued by money market funds

  • Shares issued by open-end funds other than reportable funds (as defined in Rule 204A-1(e)(9)), i.e., open-end mutual funds

  • Shares issued by unit investment trusts that are invested exclusively in one or more open-end funds, none of which are reportable funds (as defined in Rule 204A-1(e)(9)).

Rule 204A-1(e)(3) provides that “beneficial ownership” is to be interpreted in the same way that beneficial ownership is determined for purposes of Rule 16a-1(a)(2) under the Securities Exchange Act of 1934. That rule defines a beneficial owner as “any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares … indirect pecuniary interest” [emphasis added].

“Indirect pecuniary interest” in any class of equity securities shall include, but not be limited to, securities held by members of a person’s immediate family (defined by Rule 16a-1(e) as any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law and adoptive relationships) sharing the same household, provided, however, that the presumption of such beneficial ownership may be rebutted.

To rebut that presumption, both Rule 16a-1(a)(4) and Rule 204A-1(e)(3) permit “any person filing a statement … [to] state that the filing shall not be deemed an admission that such person is … the beneficial owner of any equity securities covered by the statement.” An access person is therefore permitted to report her spouse’s securities holdings under 204A-1 with a statement in addition to (and not instead of) those reports indicating he or she does not beneficially own any of the securities reported.

In short, rebutting the presumption of beneficial ownership does not relieve an access person of the duty to report the required securities positions.

Though it may be tedious to “connect the dots,” the reporting requirement is very real and inflexible. Access persons are strongly cautioned to comply with this requirement.