I’ve complained about the Securities and Exchange Commission focusing on the use of the word “may” in disclosures. I’ve typically expected “may” to offer some optionality for the adviser. The SEC has found it inadequate in several instances. We can agree to disagree.
I just came across a case in which I agree that the use of “may” was clearly inadequate in the disclosure.
Diastole Wealth set up a private fund to help its clients pool investments so that they can indirectly invest in things they would not otherwise be able to invest in individually, like private funds. Diastole is run by Elizabeth Eden. Her son had worked at Diastole. He also owned a piece of the firm.
The son left to set up software companies to make tools to help small investment advisers. Several of Diastole’s client invested in the software companies. A potential problem? Yes. Although Diastole and Eden were aware of these investments they did not select or recommend these investments to the clients and did not receive advisory fees related to these investments. No problem.
The problem comes in 2017 when Eden had the Diastole fund invest in the software companies. To me that seems like a conflict that would need to disclosed. Diastole eventually realized this as well and send a “Disclosure and Conflicts of Interest Waiver” to the fund investors. The Disclosure stated that the firm “may” recommend investments in the son’s software companies. In this case, the investments had already occurred. That’s a problem.
I agree in this case that “may” is misused. If you agree with me that “may” provides optionality, this is not a case of optionality. The investments has already occurred. The Disclosure should have been clear that the investments had already happened. If Diastole wanted to have the option to make future investments, then “may” would be appropriate. It does not work at all when the conflict has already happened.
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