Appropriately Crafted Disclosure of Conflicts of Interest Can Mitigate the Likelihood of an Enforcement Action Against an Investment Adviser

The SEC recently filed an enforcement action against an investment adviser and its owner for fraud, self-dealing, conflicts of interest and other violations.  Conflicts of interest remain near the top of the SEC’s enforcement agenda.  See, e.g., “SEC’s Rozenblit Discusses Operations and Priorities of the Private Funds Unit,” Hedge Fund Law Report, Vol. 8, No. 37 (Sep. 24, 2015); and “Conflicts Remain an Overarching Concern for the SEC’s Asset Management Unit,” Hedge Fund Law Report, Vol. 8, No. 10 (Mar. 12, 2015).  The SEC charges that the defendants caused clients and funds they managed to invest in companies in which the owner had a financial interest without revealing the interest or the owner’s receipt of compensation from those companies.  It also charges that they engaged in undisclosed principal transactions, diverted client income, ignored investment guidelines, violated the custody rule and failed to update Form ADV.  The SEC seeks an injunction against the defendants, disgorgement of ill-gotten gains and civil penalties.  This article summarizes the SEC’s allegations and claims for relief.  For more on disclosure, see “RCA Panel Discusses Pay to Play Rules, GIPS Compliance, Disclosures, Risk Assessments and ERISA Proposals,” Hedge Fund Law Report, Vol. 8, No. 27 (Jul. 9, 2015).

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