Related party transactions are rife with problems in all areas of the financial services industry. It’s hard to know if someone is looking out for your best interest, if they have interests on the other side of a transaction. Most private equity funds have some structure set up in the organizational documents to deal with affiliate transactions. A recent SEC action highlights the need to have that structure.
According to the Securities and Exchange Commission action, VERO Capital Management cause one of its sponsored funds to purchase notes from an affiliate without providing notice or consent to the fund’s investors.
Section 206(3) of the Investment Advisers Act prohibits an investment adviser from acting as a principal on its own account or acting as a broker for the sale to a client unless the adviser obtains the client’s consent to the transaction before completion. Rule 206(4)-8 applies the anti-fraud provisions to investors in a fund.
On one hand you have the agreements with your fund investors on how to address related party transactions. On the other hand, you must comply with the SEC’s requirements. It’s worth taking a look as the requirements to make sure you are complying with both your investor requirements and the regulatory requirements.
According to the SEC, VERO went further and tried to hide the transactions from investors. But that is just the SEC’s side of things. VERO has not agreed to the charges and has not had a chance to refute the charges.
Sources:
- SEC Announces Charges Against N.Y.-Based Firm and Three Executives Accused of Siphoning Investor Money
- SEC order
Image of Plain Dealing is by Billy Hathorn
