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SEC to prioritize conflicts of interest in 2017

  • SEC to examine “actions that benefit advisers” at expense of investors
  • Unlike 2015-2016, fees and expenses not mentioned specifically
  • Misallocations fall under broader category of conflicts

The SEC plans to prioritize conflicts of interest and the disclosure of conflicts in its examinations of private fund advisers this year, a release from its Office of Compliance Inspections and Examinations shows.

“We will continue to examine private fund advisers, focusing on conflicts of interest and disclosure of conflicts as well as actions that appear to benefit the adviser at the expense of investors,” an SEC news release said.

The release makes no mention of focusing on private equity fees and expenses, as it had in 2015 and 2016. But any misuse or misallocation of fees would fall under the broader category of conflicts of interest.

In addition to collecting annual management fees and shares of investment profits, most PE firms also collect revenue from the companies their funds own in exchange for consulting or monitoring services. As registered investment advisers, fund managers have to be up front in telling their investors what fees can be collected.

The SEC has settled several enforcement actions against major PE firms in recent years over issues relating to fees and disclosure. In August, Apollo Global Management paid $52.7 million to settle SEC claims that it had misled fund investors about fees and a loan agreement, as well as failure to supervise a senior partner. The firm did not admit or deny the findings.

In addition to focusing on conflicts of interest, the SEC also indicated it would continue to focus on cybersecurity and anti-money-laundering, the release shows. OCIE also noted its plan to examine public-pension advisers to assess conflicts of interest and ensure that advisers are acting in the best interests of their clients.

In October, SEC Director Andrew Ceresney said the regulator was stepping up its coordination with the FBI and U.S. Attorney’s Office to examine pay-to-play schemes involving public pensions.

Two months later the SEC announced fraud charges against New York State Common Retirement Fund fixed-income Director Navnoor Kang for directing billions of dollars to certain firms in exchange for gifts, vacations, cocaine and prostitutes.

Action Item: For a complete list of OCIE’s priorities: www.sec.gov/about/offices/ocie/national-examination-program-priorities-2017.pdf

U.S. Securities and Exchange Commission Chairwoman Mary Jo White is interviewed at the Reuters Financial Regulation Summit in Washington on May 17, 2016. Photo courtesy Reuters/Gary Cameron