Barbara Niederkofler Quoted in Hedge Fund Law Report on SEC Interpretation for Investment Adviser Standard of Conduct
Hedge Fund Law Report has quoted Barbara Niederkofler, partner in the investment management practice at Akin Gump, in the article “Navigating the Interpretation Regarding an Investment Adviser’s Standard of Conduct: What It Means to Be a Fiduciary (Part One of Three).” The article is the first in a three-part series looking at how fund managers can implement and enhance their processes to identify, monitor and mitigate conflicts of interest.
The first article explores some key takeaways from a new SEC Interpretation pertaining to standard of conduct. Niederkofler said the new Interpretation, compared to a previously established federal fiduciary standard governing the conduct of investment advisers, “is more expansive.” For those who have followed various SEC enforcement actions over the past decade, though, “a lot of these same concepts shine through” in the Interpretation.
Niederkofler also observed that Delaware law seems to be “at odds with what the SEC has articulated” with regard to whether partners can waive or even eliminate fiduciary duties of a general partner, and this, she said, is where the Interpretation may have the most significant impact going forward.
In the future, Niederkofler said the Interpretation could be used as a tool for future enforcement actions. Now that it has been finalized, “we are already seeing specific references to it in enforcement actions and other guidance issued by the SEC.”
In the second installment in the series, “Navigating the SEC’s Interpretation Regarding an Investment Adviser’s Standard of Conduct: Six Tools to Systematically Identify Conflicts of Interest (Part Two of Three),” Niederkofler spoke first about some of the challenges in identifying what those conflicts are.
Niederkofler stated there are several factors that can make it difficult for a fund manager to identify all of its conflicts, including that they are “quite individualized and very much dependent on the structure of the manager, its personnel and its investment strategies. The other tricky bit about this area,” she said, “is that managers not only have to think about actual conflicts of interest, but also about any potential conflicts of interest.
Niederkofler suggested using Form ADV Part 2 as a means of identifying conflicts. In addition, she advised creating and maintaining a risk matrix to use while conducting one’s annual compliance review. She explained, “It’s not always easy to identify conflicts before they occur, and they can arise very quickly. Thus, once an adviser has a working risk matrix, it should review it at least annually, along with the advisers’ conflicts of interest and Form ADV.”
The final installment in the series, “Three Tools to Systematically Monitor Conflicts of Interest,” addresses best practices for investment advisers to manage their conflicts of interest.
One of those practices, the article says, is documenting conflicts. According to Niederkofler, the manner in which one goes about this is partially driven by where the manager is based. Those that are authorized by the U.K.’s Financial Conduct Authority are required to prepare a conflicts log, whereas SEC-registered investment advisers, she has seen, are more likely to document conflicts in their risk matrices. Regardless of what format the adviser chooses, the concepts are similar, Niederkofler said, and the adviser in each case should identify the conflict as well as how it is addressing and mitigating it.
Niederkofler also advised establishing a committee to manage any conflicts of interest. In some cases, she said, that could mean referring any conflicts to the adviser’s executive committee.