The Securities & Exchange Commission recently concluded a two-year investigation into conflicts of interest with Centre Partners Management, a public equity fund adviser based in New York. The conclusion was reached that three of the firm’s advisers had engaged in conflict-of-interest activities in having personal investments with a third-party service provider. The SEC levied a $50,000 fine in response.
Eaton & Van Winkle partner Paul Lieberman was quoted in the February 6 edition of ACA Insight, a weekly newsletter focusing on compliance and investor issues. Mr. Lieberman joins us here for a Q&A to discuss the settlement, it’s implications and how firms can avoid becoming entangled in situations like these…
Q: The three principals at Centre Partners owned a combined total of 9.6% of the outstanding shares in the third-party service provider. To set the general landscape for this discussion, how high is this percentage in the bigger picture?
A: The percentage ownership by the Adviser’s principals in a third-party service provider that they used is really not the issue. Even though this was a minority stake, the potential for a conflict of interest involving the activities of the adviser, such as paying a higher fee or costs, and the further possibility of less than an arms-length arrangement is what should be troubling for any principal of an investment adviser. In addition, Centre Partners did not make appropriate disclosure of the relationship. A concern should be: what is the firm’s culture of com
Q: The fine administered to Centre Partners was comparatively light, given the lack of profit to the principals or harm to the investors. In the ACA article, you saw it differently and called the settlement “disappointing.” Can you elaborate on the potential long-term negative impact of this settlement? What would have been a more appropriate sanction?
A: My opinion was that the sanction applied by the SEC was light, and sets a low bar for advisers who violate their fiduciary obligations, conceal a conflict of interest, or provide inadequate disclosure. While we can’t know the extent and depth of the SEC investigation, it is surprising that the decision did not mention the firm’s policies concerning conflicts.
Q: You called for a “robust process of vetting” to root out conflicts of interest in advance. What process do you have in mind? And, in your view, do most firms use a process that is robust enough or is a drastic upgrade generally required?
‘Robust vetting’ by the firm’s CCO would include: a review of all third-party relationships, existing and proposed, following the facts to assure vetting of ownership interests, other entanglements between vendor and adviser’s principals, and whether there is a need for specific disclosure to clients. Of course, the trial of money and extent of an ‘arm’s length relationship’ would be included. The COO should be alert for red flags, and have the ability to consult with the firm’s principals and counsel when considered necessary. This is a judgment call. I can’t opine on what most firm’s do, but every firm’s policies and procedures should contain a section on Conflicts of Interest, and such policies should be periodically reviewed to assure currency in light of events within the firm or as regulatory developments indicate as a ‘best practice’.
Q: In the article, you refer to a “zone of conflicts” danger that officers may fall in. Short of a direct conflict of interest, what is the sort of conflict that can place an officer in this zone?
I was referring to the firm’s principals and its CCO (or counsel) who are responsible for management of the adviser, establishing vendor engagements, and enforcement of the firm’s policies. Even potential conflicts should be investigated to assure that they are not actual conflicts and whether firm clients would be or are impacted by the relationship is what defines the scope of possible liability.