Conflicts of Interest

"The SEC and its staff have a long tradition of focusing on conflicts of interest. As one example, in 2003, then-SEC enforcement director Steven Cutler gave an important speech on the topic of conflicts of interest in 2003 that was a call to action for the financial services industry to institutionalize its controls around conflicts of interest and to monitor and control conflicts at a senior level. Since Cutler's speech, I believe that the disastrous events leading to the financial crisis of 2008 are further support for the SEC's concern about properly managing conflicts of interest."

-Carlo V. di Florio, Director, Office of Compliance Inspections and Examinations,

U.S. Securities and Exchange Commission.

"Conflicts of Interest and Risk Governance."

National Society of Compliance Professionals, October 12, 2012

CONFLICTS OF INTEREST

Conflicts of interest can arise when a firm finds itself in a position where its own interests conflict of the interests of the clients it manages, or when the interests of a client conflict with the interests of another client. A registered investment adviser acts as a fiduciary to its clients and therefore, it owes certain duties to clients, including the duty to avoid, mitigate and disclose actual, potential or perceived conflicts of interest. Conflicts of interest may arise with respect to:

Allocation of investment opportunities among clients
Allocation of investment opportunities to investors, firm personnel and third parties
Management of client accounts with competing investment strategies
Management of client accounts with differing compensation structures
Allocation of fees and expenses among private funds, other clients, the firm, and/or portfolio investments
Buying or selling investments between clients or to investors
Use of investors or portfolio investments as service providers by the firm and/or clients
Favoring a client based on a higher fee structure
Putting an interest of an investor group of investors ahead of the interest of a client as a whole
Favoring certain service providers used by the firm and client and/or portfolio investments that may provide discounts to a firm.
Voting client proxies that benefit companies with which the firm has a business relationship

To identify and disclose potential conflicts of interest, a firm should consider its relationships with its (1) affiliates, (2) fund general partner, (3) service providers, (4) fund investors, and (5) employees' outside business activities, including services provided to non-profit entities. Firm associates who have operational responsibilities serving multiple entities affiliated with the registered adviser are particularly vulnerable to conflicts of interest. Full disclosure should include any direct or indirect compensation or benefit from affiliates to such associates. An adviser may benefit from adopting a conflicts of interest policy that articulates the firm's specific conflicts and provides guidelines on how they are resolved. For example, a firm should fully articulate and implement its employee personal transactions and insider trading policies, affiliated transactions, fee and expense allocations, proxy voting, and other compliance procedures designed to address conflicts of interest in time with the firm's effective date of registration and review periodically thereafter. The firm's other policies and procedural controls to mitigate risks should align with the conflicts that the firm has identified. The SEC continues to prioritize conflicts of interest in its examinations. A sound compliance program will include practices to monitor risks associated with conflicts in key business processes.