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Portfolio Manager Made Personal Loan to CEO to Get on Board

 A portfolio manager of an activist investment firm failed to disclose a $3 Million personal loan to the CEO of a company in which he invested.  The portfolio manager made the loan, according to the SEC, to secure the CEO’s support for his election to the Board as part of a broader initiative to exert control over the company.  The SEC asserts that the portfolio manager violated his fiduciary duty to his clients by concealing his personal interest and that the investment manager failed to file a Schedule 13D (indicating more than passive investment).  Also, the SEC faults the adviser for failing to implement a reasonable compliance program because the policies and procedures “did not discuss conflicts of interest more broadly in sufficient depth so as to capture and train employees to recognize other violative conduct not specifically identified.”

OUR TAKE: Because portfolio managers are often treated like the rock stars of investment management, compli-pros must implement heightened supervision to protect against reckless actions that will ultimately hurt the firm.  Procedures should include reviews of investment decisions, due diligence about personal dealings, reviews of transactions outside the ordinary course, and training all employees how to identify unlawful activity.

 

Adviser Failed to Disclose Kickbacks from Vendors

The SEC fined an investment adviser $8 Million for failing to disclose compensation received from vendors it recommended to clients.  The respondent and its investment adviser representatives routinely counselled clients with UK pension benefits to transfer those assets to offshore vehicles operated by third party custodians and trustees.  The SEC alleges that the adviser did not disclose that the third parties paid a portion of their fees back to the adviser and its IARs based on the business recommended.  The SEC faults the firm for inadequate disclosure and a compliance program that failed to address this inherent conflict of interest.

OUR TAKE: The best solution for avoiding compensation conflicts is to include all compensation in the disclosed management fee and avoid any payola from third parties.  Receiving payments from third parties raises such a significant conflict of interest that the SEC may not be satisfied with mere disclosure, no matter how fulsome.