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Fees remain SEC's top priority

The Division of Enforcement expects to recommend numerous conflict of interest cases for enforcement action, specifically regarding fee policies

The Division of Enforcement at the US Securities and Exchange Commission (SEC) is stepping up its focus on conflicts of interest and, when it comes to private funds, the “inherent conflicts in fee and expense arrangements,” according to a speech by Julie Riewe, co-chief of the Asset Management Unit (AMU) at the IA Compliance Forum last week.

Riewe discussed conflicts of interest for the different asset managers regulated by the SEC, noting that, for private funds, the AMU expects to see “more undisclosed and misallocated fee and expense cases like the Clean Energy Capital and Lincolnshire Management cases we brought in 2014.”

In the Clean Energy case, the SEC said that the firm’s president and chief executive officer Scott Brittenham improperly paid out more than $3 million in expenses using assets from 19 funds, without disclosing the terms related to the expenses in fund documents. In the Lincolnshire Management case, the SEC found that the private equity firm misallocated expenses between two portfolio companies owned by two separate funds.

Going forward, Riewe stated that the division expects to recommend “a number of” conflicts cases for enforcement action, including fee and expense misallocation issues in the private fund context.

In order to avoid such enforcement action, Riewe suggested multiple steps a firm might take in order to eliminate or better disclose any conflicts of interest. Firms should review their Form ADV, private placement memoranda, limited partnership agreements, client agreements and prospectuses to ensure that all conflicts are disclosed, and disclosed in a way that allows investors to understand the conflict and the risk it presents. The adviser should also keep the chief compliance officer and boards of directors informed about conflicts of interest, particularly on decisions whether to eliminate or mitigate a conflict.