Senior SEC Enforcement Official Calls for Objective Person and Process to Eliminate Conflicts
The SEC’s Co-Chief of the Enforcement Division’s Asset Management Unit, Julie Riewe, warned the industry that the Enforcement Division will prosecute firms that fail to eliminate or significantly mitigate conflicts of interest. In a speech titled “Conflicts, Conflicts Everywhere,” Ms. Riewe says that firms must “[t]ake a step back and rigorously and objectively evaluate your firm, its personnel, its business, its various fee structures, and its affiliates.” She advised firms to designate an objective person or persons that are responsible for evaluating and deciding how to address conflicts pursuant to a consistent and objective process. As an example, she cited the Paradigm case where the firm failed because its “conflicts committee” was comprised of two senior officers that reported to the firm’s owner and, therefore, failed to stop principal transactions. Ms. Riewe also cited several examples of conflicts of interest including principal transactions, misallocations of fees and expenses, undisclosed compensation, share class recommendations, and best execution. Ms. Riewe specifically chided the hedge fund industry, private equity, registered funds, and RIAs.
OUR TAKE: Ms. Riewe’s message is clear: firms should retain an objective, independent party to identify conflicts and advise firms how to eliminate them. Firms could retain an independent compliance consultant, engage their auditors or lawyers, or retain independent directors. We believe that Ms. Riewe clearly favors eliminating conflicts of interest rather than trying to soften them through disclosure.