Investment Adviser To Mutual Fund Cited For Undisclosed Conflicts – Finance and Banking

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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