Private Fund Conflicts Burn Mutual Fund Manager
The SEC fined and censured the principal and portfolio manager of a registered mutual fund for investing fund assets in a private fund without disclosing conflicts of interest.
The fund, a series of a third party series trust, invested more than 27% of its assets in a private fund without disclosing to the investors or the Board (via prospectus, Form ADV or otherwise) that the portfolio manager had several conflicting business ties related to the private fund. The SEC cited the following conflicts: (i) the respondent’s firm served as a sub-adviser to an affiliate of the private fund; (ii) the respondent’s firm had a mutual referral arrangement with the investment adviser to the platform where it purchased the private fund; (iii) the respondent was seeking an investment from the chairman of the private fund’s adviser; and (iv) an unregistered fund managed by the respondent’s firm was an available investment option on the platform. Although none of the conflicts resulted in material payments either to or from the respondent, the SEC argues that he should have disclosed the conflicts because they provided an incentive to invest in the private fund, thereby breaching his fiduciary duty.
The SEC need not show material ill-gotten gains to bring a case for breach of fiduciary duty. The regulator only needs to demonstrate that a conflict creates an incentive for a fiduciary to act in its own interest rather than solely for the benefit of his clients.
Read the SEC Order here.