Investment Adviser to Mutual Fund Cited for Undisclosed Conflicts

11 May 2021 Foley Funds Legal Focus Blog
Authors: Stuart E. Fross
As proof that a little disclosure can go a long way, the SEC, on May 10, 2021, announced a settlement with an investment adviser to a registered investment company that was sanctioned for undisclosed conflicts of interest.  The matter is of interest because the alleged “bad behavior” did not involve a violation of the Investment Company Act at all: no 17(a) prohibited transactions were alleged, the conduct at issue did not involve a 17(d) joint transaction and no 17(e) illegal receipt of compensation was at issue.  Rather, the investment adviser was cited for violating Section 206(2) of the Advisers Act for negligently failing to include a description of a conflict of interest in its Form ADV, which conflict arose in the context of a contract by two advisers who would refer business to one another, and where the facts showed that the sanctioned mutual fund adviser made a significant mutual fund investment in the other adviser’s private fund while negotiating for a potential investment by the other adviser’s principals in a new fund of the sanctioned adviser.  The adviser’s principal was censured and fined, but nothing worse.  The cautionary tale here would seem to be that when it comes to ADV drafting, an “ounce of prevention is worth a pound of cure.”
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