SEC Co-Chief of Asset Management Unit Discusses Conflicts of Interest (with Lofchie Comment)

SEC Co-Chief of the Asset Management Unit ("AMU") Julie Riewe delivered the keynote address at the IA Compliance Conference. Her address concerned the AMU's priorities in 2015, particularly in the area of conflicts of interest.

Ms. Riewe explained that the AMU divides the asset management industry into three primary categories, each of which presents unique risks and therefore requires different enforcement priorities for 2015.

• Registered investment companies. The AMU's priorities for this group include (i) valuation and performance and the advertising of that performance, (ii) funds that deviate from their investment guidelines or pursue undisclosed strategies, (iii) fund governance, and (iv) fund distribution.
• Hedge funds and private equity funds. The AMU's current priorities for this category include conflicts of interest, valuation, and compliance and controls. Ms. Riewe anticipates cases in 2015 that will involve undisclosed fees.
• Other client accounts, such as separately managed accounts and retail accounts. The AMU is prioritizing conflicts of interest, fee arrangements and compliance.

Ms. Riewe said that when it examines conflicts of interest, the AMU determines whether the adviser in question has discharged its fiduciary obligations to identify its conflicts of interest and to either eliminate them, or mitigate and disclose them. There is no exception to disclosure, she said, and the AMU plans to continue to pursue enforcement cases in this area aggressively.

Lofchie Comment: From a compliance standpoint, conflicts are some of the most difficult issues to address, since they require compliance officers and supervisors to take a holistic view of their businesses, both from a revenue and an expense standpoint. Conflicts also require firms to determine whether decisions or opportunities in one area may impact customers negatively in another. Thus, a thoughtful review of conflicts is more difficult to conduct than a mere check-the-box compliance exercise, such as determining whether a firm is keeping each type of required record. It is fundamentally impossible to remove all conflicts of interest, since any adviser that has more than one customer may experience some degree of conflict between their interests. That said, it is still possible to address and reduce conflicts by applying standardized rules that commonly arise, such as with regard to allocation issues.

See: Ms. Riewe's Speech.