In a speech delivered today entitled “Conflicts, Conflicts Everywhere,” Julie Riewe (Co-Chief of the SEC’s Asset Management Unit – Division of Enforcement), highlighted her group’s “overarching concerns” about manager conflicts-of-interest issues across different investment vehicles including hedge funds and private equity.
Key Quote
“Over and over again we see advisers failing properly to identify and then address their conflicts.”
Background
One of the most important principles guiding the U.S. asset management industry (including alternative investment managers) is that managers should assiduously avoid conflicts-of-interest practices that place their interests ahead of their clients in managing money. Over the years, the SEC has identified many practices that raise conflicts-of-interest concerns and has adopted an extensive regulatory regime to ensure that managers address and correct these concerns where necessary. Key is the notion that managers identify conflicts-of-interest issues to their clients and fix them where necessary.
Conclusion
Ms. Riewe’s speech identifies specific areas of anticipated SEC enforcement action against managers involving conflicts-of-interest matters (see below). These areas provide investors with valuable guide posts to consider related to their own due diligence procedures to identify potential conflict-of-interest issues associated with managers and alternative investment vehicles. In my opinion, broad, generic conflicts-of-interest disclosure that can be so typical of private fund offering memorandums often doesn’t cut it. A manager should provide investors with detailed conflicts-of-interest disclosure that is specific to its investment program, operations and overall business.
Anticipated SEC enforcement action will include:
A) Conflicts-of-interest matters to be brought against managers
- Best execution failures in share class context
- Undisclosed outside business activities
- Related party transactions
- Fee and expense misallocation issues in the private fund context
- Undisclosed bias toward proprietary products and investments
B) Specific for private fund managers
- Undisclosed fees (hedge funds)
- All types of undisclosed conflicts, including related-party transactions (hedge funds)
- Valuation issues including use of friendly broker marks (hedge funds)
- Undisclosed and misallocated fee and expense cases (private equity)