Managing Conflicts of Interest: HFM Global European Legal Virtual Summit Re-cap

Managing conflicts of interests is not just a key issue for global regulators, but investors too. In the recent HFM Global European Legal Virtual Summit, we explored some of the issues and ways funds can mitigate and reduce their exposure to common conflicts of interests.
For those who missed it, see below some of the key takeaways from the discussion.

  1. Conflicts of interests is not just a regulatory issue; it is also a broader legal fiduciary issue and goes to the heart of so many things an investment manager does.
  2. Having the right framework to manage conflicts of interests, both within the investment manager and within the fund’s board of directors, is key to having a well-run asset management business.
  3. Conflicts of interests is a key focus for the FCA and SEC alike. From an FCA perspective, the obligation on an AIFM is not just to identify what its conflicts of interests are but also to try and avoid them and if they can’t be avoided then the AIFM needs to manage and monitor conflicts of interests.
  4. From an SEC perspective, the topic of managing conflicts is a main point in examinations for private fund advisors. In a recent risk alert highlighting deficiencies in examinations a key point highlighted by the regulator was conflicts of interests and, in particular, the disclosure of conflicts.
  5. Independent non-executive directors are vital to building a robust framework for managing conflicts. They are a good sense check and bring fresh insight into how asset managers should be running their business and how fund boards should be operating.
  6. Don’t underestimate the value of a truly independent board. Having a robust governance framework, separate from legal, compliance and fund administrator teams, allows you to objectively identify potential breaches.
  7. Make sure you have diversity of skillset on your board of directors. Depth of perspective on boards enables you to draw upon a wide set of experiences and thus make more effective decisions.
  8. Embed conflicts of interests into your company culture. Make it everyone’s responsibility, not just your legal and compliance teams; teach your staff what to look out for and the necessary steps for flagging new potential conflicts of interests.
  9. Businesses move and change; the regulatory environment changes; investor expectations change; it follows that your conflicts policy and framework must be able to keep up to date with how the industry, and expectations of the industry, is evolving.
  10. Conflicts of interest is one of the areas of greatest concern for investors. Asset managers can suffer great damage reputationally if they get this wrong. Investors and allocators look closely at board composition and routinely interview boards in assessing the strength of the governance framework in place.  A strong board that asks good/smart questions and tests assumptions can improve investor confidence and reduce exposure for all parties.