July 17, 2017
DOL Releases FAQ on Conflicts of Interest During the Transition Period
WHAT HAPPENED?
On July 6, 2017, the SEC charged a registered real estate private equity firm (“Respondent”) with executing a transaction between two funds (“Fund I” and “Fund II”) it advised on different terms than what was disclosed to the Fund I investor advisory committee (“Fund I IAC”). Respondent had deemed that property owned by Fund I, would be more valuable as a development project owned by Fund II. Respondent thus informed Fund I IAC that Fund I would sell the property to Fund II and be reimbursed for any development expenses incurred prior to the sale. Respondent failed to disclose that Fund II never reimbursed Fund I for the expenses and consequently was in violation of the original agreement.WHAT ARE THE IMPLICATIONS?Respondent and its affiliates collectively owned 3% of Fund I and 26.7% of Fund II at the time of the sale. This created a conflict of interest since Respondent owed a fiduciary duty to both sides of the transaction and it owned a larger portion of Fund II than Fund I. Respondent subsequently could not approve the elimination of the reimbursement requirement which Fund I IAC expressed as a condition of the transaction.
Respondent’s conduct was in direct violation of Section 206(2) and 206(4) of the Advisers Act, which prohibit engaging in fraudulent or deceptive courses of business to a client or prospective client. Accordingly, the SEC has fined and censured Respondent.
WHAT DOES THIS MEAN FOR ME?
The SEC’s charges against Respondent follows a series of cases that have scrutinized advisers’ adherence to fund documents. In light of this trend, registered investment advisers should ensure that all conflicts of interest are identified and disclosed to the appropriate entities. Periodic reviews of the firm’s business for any potential new conflicts of interest should also be conducted to guarantee that the firm’s fiduciary duty is upheld. Please feel free to contact Fairview® with any questions or concerns you might have about this case and how it relates to your firm.
Sources: https://www.sec.gov/litigation/admin/2017/ia-4726.pdf
