Adviser Failed to Completely Disclose Conflicts of Interest
An investment adviser agreed to pay over $230,000 for failing to disclose financial interests in companies held by a fund he recommended to his clients. The relevant PPM and Form ADV did disclose that the adviser would receive compensation on sales of the fund, which included a portion of the management fee. However, the disclosure documents did not disclose that the adviser and his family members received finder’s fees and equity compensation based on the success of the companies in which the fund invested. The SEC criticizes the disclosure documents which notify investors about a conflict of interest but fail to fully disclose the specifics of the compensation received and the interests at stake.
The SEC hates obtuse conflicts of interest disclosures that fall short of completely describing the nature of the conflict and the specifics of the compensation. Avoid words and phrases like “may”, “generally”, “ordinarily”, and “in certain circumstances”. For best results, include the actual amount or calculation formula that creates the conflict.