Activities that conflict with the Adviser's professional obligation could raise the firm's regulatory risk and cause it or its employees to incur fines, not to mention potential reputational damage.
An example for this type of enforcement as stated by the SEC is failing to disclose a conflict of interest arising from any relationship an investment individual may have in the distribution company in which investor monies will be invested.
Andrew Dean, Co-Chief of the Enforcement Division’s Asset Management Unit, said: “Investment professionals must be forthcoming about any conflicts of interest they may have with the companies in which they invest client funds, including situations involving favors or assistance to family members. Investors must be able to know that the advice they receive is free of undisclosed conflicts, regardless of whether the conflict is financial in nature.”
What are conflicts of interest
On August 3, 2022, the SEC shared a bulletin that reiterated the standards of conduct for Advisers in identifying and addressing conflicts of interest under the Investment Advisers Act of 1940. They affirmed that “firms must address conflicts in a way that will prevent the firm or its financial professionals from providing recommendations or advice that places their interests ahead of the interests of the investor.”
Examples of conflict of interest include
- Compensation, revenue or other benefits, including fees and other charges for the services provided to retail investors (e.g., compensation based on assets gathered or products sold)
- Compensation, revenue or other benefits to financial professionals from their firm or its affiliates (e.g., quotas, bonuses, sales contests, special awards and incentives tied to appraisals or performance reviews, forgivable loans based upon the achievement of a specified performance goal related to asset accumulation, revenue benchmarks, client retention)
- Compensation, revenue or other benefits related to financial professionals’ relationships with third parties that may relate to the firm, including gifts, entertainment, meals, and travel associated with a financial professionals’ attendance at a third-party sponsored training or conference
How to mitigate these risks
Advisers must have adequate policies and procedures. These policies should include procedures regarding the collection, supervision and disclosure of all outside business activities and potential conflicts of interest. In addition, training should be given to all firm employees annually by the firm covering compliance topics such as what constitutes a conflict of interest or outside business activities and what must be reported. Additionally, it should be clear what steps need to be taken by employees to gain approval for any activities and, more importantly, what activities are prohibited by the company.
How Apex Group can help
Apex Group’s global compliance team has many years of experience managing SEC regulatory compliance programs giving clear insight into how to help Advisers navigate the complexity of identifying and mitigating conflicts of interest. Reach out to Michael Barakat, Assistant Director, Compliance on michael.barakat@apexfs.com or a member of our team for additional information.
