Report of the Advisory Group on Personal Investing May 9, 1994

Report of the Advisory Group on Personal Investing May 9, 1994

THE REPORT OF THE ADVISORY GROUP
ON PERSONAL INVESTING
I. FORMATION AND WORK OF THE ADVISORY GROUP
Scrutiny of the personal investing activities of portfolio managers and others in the
investment company industry is not new. For at least five decades, these activities have
received regular and detailed reviews, resulting in the development of statutory and regulatory
requirements and industry codes of ethics. Recent attention to this issue is attributable largely
to three factors. First, investment company assets under management have grown dramatically
in recent years, and mutual funds in particular have achieved widespread acceptance as an
investment vehicle for individuals and institutional investors alike. Second, in recent years the
Securities and Exchange Commission (“Commission”) and Congress
 have conducted an
extensive review of the industry, its current regulations and other issues. Finally, press reports
early this year related that a prominent portfolio manager had been terminated because he
failed to comply with his company’s internal procedures relating to securities trading practices.
About the same time, several articles reported that the country’s largest investment company
complex had reviewed and updated its internal procedures regarding personal trading.

Together, these three developments precipitated renewed exploration of the potential
conflicts of interest that might exist when investment company portfolio managers engage in
personal securities transactions.
 The potential conflicts identified in recent accounts include
frontrunning,
 the opportunity for lucrative side deals in the form of initial public offerings and
private placements,
 and issues that may arise when portfolio managers serve on boards of
directors of public companies.
In light of these developments, Representative Edward J. Markey, Chairman of the House
Subcommittee on Telecommunications and Finance, wrote on January 11, 1994 to Securities and
Exchange Commission Chairman Arthur Levitt to inquire about the issue of personal securities
trading by investment company portfolio managers.
 Chairman Levitt’s February 9, 1994 reply
included a memorandum from the Commission’s Division of Investment Management stating
that inspections to date “have not revealed a systematic pattern of widespread abusive personal

Report of the Advisory Group on Personal Investing May 9, 1994