SEC Charges Advisor with Failing to Disclose Conflict of Interest to Clients and Fund Boards

The SEC has charged an advisor with failing to disclose a conflict of interest to their clients and fund boards. In this significant case, the SEC alleges that the firm violated Rule 38a-1 and breached its fiduciary duty by failing to either eliminate the conflict of interest created by the outside business activity of a top-performing portfolio manager, or to disclose the conflict to the relevant fund board or advisory clients.

“This is the first SEC case to charge violations of Rule 38a-1 for failing to report a material compliance matter such as violations of the adviser’s policies and procedures to a fund board,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.

The advisor agreed to settle the charges and pay a $12 million penalty.  The firm also must engage an independent compliance consultant to conduct an internal review. The terms of the settlement also found that the firm failed to adopt and implement policies and procedures for outside activities of employees, and the Chief Compliance Officer caused this failure. The Chief Compliance Officer agreed to pay a $60,000 penalty to settle the charges against him.

SEC3’s Take:

The SEC continues to take conflicts of interest very seriously, and expects advisers to identify and mitigate conflicts where possible, and to disclose such conflicts where they continue to exist. Another lesson from this case is the important reminder that a CCO can, and will, be held personally liable for failure to create, implement and maintain adequate policies and procedures as outlined in the Advisors Act.