CCO Sanctioned and Firm Fined $12 Million for Allowing PM Conflict of Interest
The SEC censured and fined a Chief Compliance Officer and fined his employer, a large mutual fund adviser, $12 Million for permitting, and then failing to report to fund boards, a portfolio manager’s outside business activities. According to the SEC, the PM managed several energy-focused funds and reported his interest in a family-owned energy-related company. The family company entered into a joint venture with a company held by the registered funds. The SEC charges that the CCO and other members of the firm knew about the activity and allowed it to continue in violation of its own policies. The SEC also faults the firm for failing to inform the fund boards or its advisory clients about the conflict of interest. Moreover, the firm failed to implement reasonable compliance policies and procedures by failing to follow-up on firm-imposed restrictions or implement policies and procedures to monitor the activities which expanded over time. The SEC charges the firm with breaching its fiduciary duty and violating the compliance rules (206(4)-7 and 38a-1). “This is the first SEC case to charge violations of Rule 38a-1 for failing to report a material compliance matter such as violations of the adviser’s policies and procedures to a fund board,” according to Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. The SEC notes that the conflict of interest was uncovered in a Wall Street Journal article.
OUR TAKE: How does this happen at a large asset manager with an experienced team of legal and compliance professionals and independent boards? Lack of independence. All firms should conduct a third party assessment of its compliance activities, including a review of conflicts of interest, to ferret out longstanding practices that internal personnel accept as part of the culture.