SEC discusses investment fund enforcement priorities for 2015
- Valuation and performance.
- Advertising of performance.
- Fund adherence to investment guidelines or pursuance of undisclosed strategies.
- Fund governance, including boards and advisers discharging their obligations under Section 15(c) of the Investment Company Act of 1940 (“Investment Company Act”) when they evaluate advisory and other types of fee arrangements. Section 15(c) of the Investment Company Act requires, among other things, that the terms of any investment advisory agreement be approved by a majority of a fund’s board of directors who are not interested persons, and that a fund’s board of directors be provided with information necessary to evaluate the terms of any contract whereby a person undertakes regularly to serve as an investment adviser of a registered investment company.
- Fund distribution, including whether advisers are causing funds to violate Rule 12b-1 of the Investment Company Act by using fund assets to make distribution payments to intermediaries outside of the funds' Rube 12b-1 plan, whether funds' boards are aware of such payments, and how such payments are disclosed to shareholders. Rule 12b-1 of the Investment Company Act permits funds to compensate, subject to certain conditions, brokers and other intermediaries out of the fund’s assets for services provided related to the distribution of fund shares.
(2) Private Funds (Hedge Funds and Private Equity Funds):
- Undisclosed fees.
- Undisclosed conflicts (i.e., related-party transactions).
- Valuation issues (i.e., use of friendly broker marks).
Private Equity Funds:
- Undisclosed and misallocated fees and expenses.
(3) Other Client Accounts (i.e., separately managed accounts/retail accounts)
- Conflicts of interest.
- Fee arrangements.
As specified above, conflicts of interest and valuation are a major concern for the AMU across each type of investment fund it monitors. Significantly, these include funds that are not registered which, although not subject to registration, are subject to antifraud and other provisions. In describing the SEC’s stance on conflicts, Ms. Riewe quoted the Supreme Court in SEC v. Capital Gains Research Bureau, Inc. that investors must be permitted to evaluate “overlapping motivations, through appropriate disclosure, in deciding whether an adviser is serving ‘two masters’ or only one, ‘especially . . . if one of the masters happens to be economic self-interest.’” Ms. Riewe defined conflicts of interest as “material facts that investment advisers, as fiduciaries, must disclose to their clients.”
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