SEC Cracks Down on Conflicts of Interest

April 28, 2015

On April 20, 2015 the SEC announced that one of the world's largest asset managers with about $4.8 trillion in assets under management (“Adviser”) agreed to pay $12 million to settle claims that it failed to tell clients about a conflict created by one of its top portfolio managers.

The U.S. Securities and Exchange Commission ("SEC") charged that the Adviser breached its fiduciary duties to clients by failing to disclose that a portfolio manager, who oversaw some of the Adviser's energy funds, was running a family-owned oil and natural gas company. This family-owned company eventually partnered with another similar company and by 2011, was the largest holding in a fund managed by the portfolio manager.

While the SEC claimed that the Adviser knew and approved of the portfolio manager’s outside business activities and took some steps to mitigate the conflicts of interest created by the outside business activities, the SEC charged that the Adviser failed to disclose those conflicts to the boards of the Adviser’s registered funds or its advisory clients, as required by law.

In addition to the $12 million fine assessed to the Adviser, a senior compliance officer at the firm during the time in which the conflict existed agreed to a related $60,000 penalty. For a copy of the settlement order click here.

Although this case marks the first time the SEC has charged a firm over failing to report a "material compliance matter" to a fund board, this is not the first time the SEC has commented on a firm’s failure to eliminate, or mitigate and disclose a conflict of interest. ACA has seen a number of deficiency letters from the SEC relating to conflicts of interest and the lack of disclosures made to advisory clients. ACA notes that SEC examiners continue to focus in great detail on how firms are eliminating, or mitigating and disclosing to their advisory clients, any conflicts of interest. Earlier this year, the SEC’s Division of Enforcement Co-Chief, Ms. Julie M. Riewe, stated that in nearly every ongoing matter in the Asset Management Unit (which recently celebrated its 5th year anniversary), the SEC is examining, at least in part, whether the adviser in question has discharged its fiduciary obligation to identify its conflicts of interest and either eliminated the conflict, or mitigated the conflict and disclosed the existence to boards and investors1. Ms. Riewe stated that over and over, advisers are failing to properly identify and then address their conflicts of interest.

As part of the effort to address conflicts of interest, advisers should consider what may be deemed a conflict of interest. In addition, ACA recommends that firms:

  • Perform an in-depth analysis to ensure all of its conflicts of interest are identified;
  • Consider how to eliminate or mitigate all conflicts of interest that may affect the firm; and
  • Establish or amend its policies and procedures to ensure its policies and procedure cover all conflicts of interest, and any roles and responsibilities involved in managing these conflicts.

For more information on or assistance with assessing and managing conflicts of interest within your firm please contact Lynne Carreiro, Managing Director at +44 (0) 207 042 0593 or your ACA consultant.

1Riewe, Julie M. "Conflicts, Conflicts Everywhere – Remarks to the IA Watch 17th Annual IA Compliance Conference: The Full 360 View." Washington, DC. 26 Feb. 2015.