Conflict of interest in Investment Management Firms

Mar 07
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Conflict of interest in Investment Management Firms

Title II of Law 22/2004 of 12 November, on regulation of venture capital bodies, other closed-end collective investment bodies and closed-end collective investment management firms, regulates Closed-end collective investment management firms, (Sociedades gestoras de entidades de inversión colectiva de tipo cerrado “SGEIC”).

Chapter I of Title II regulates access to activity of such bodies, as well as the conditions for the exercise of such activity.

Among the operational and organizational requirements of SGEICs, Article 59 sets forth the general principles which regulated these operations.

In my opinion, one of the main principles of the activity of a SGEIC is conflict of interest, stipulated in Art. 59.1, point d):

  1. d) All reasonable measures will be taken to avoid conflicts of interest and, when this is not avoidable, to detect, manage and control and, should this be the case, reveal such conflicts of interest with an aim to avoid negative impact on the interests of the investment undertakings and their investors and ensure that the investment undertakings they manage are treated fairly.

Furthermore, Art. 61, specifically regulates conflicts of interest in SGEICs.

Among the essential aspects to consider when managing conflicts of interest, we would like to point out:

  • Creation of efficient administrative and organization procedures in order to detect, manage and control conflicts of interest;
  • Adoption of reasonable measures for the detection of conflicts of interest among the Management Firm and its employees, managers, shareholders and its clients, for example.

Article 61. Conflicts of interest

  1. SGEICs must provide and apply administrative and organizational procedures to detect, prevent, manage and control conflicts of interest which might arise in order to avoid negative impact on the interests of VCF or CEF and their stakeholders and shareholders.
  2. specifically, they must adopt reasonable measures for the detection of conflicts of interest which might arise during management activities:
  3. a)Between the management firm, including managers, employees or any person directly or indirectly linked by a control relationship, further to Art. 42 of the Commercial Code, and the investment undertakings managed by them, or the stakeholders or shareholders;
  4. b)Between an investment undertaking managed by a management firm or their stakeholders or shareholders and another investment undertaking managed by itself or its stakeholders or shareholders;
  5. c)Between an investment undertaking managed by a management firm or their stakeholders or shareholders and other clients of the management firm;
  6. d) Between two clients of the management firm.
  7. SGEICs must separate, within its operations, the tasks and responsibilities which may be considered incompatible or which might give rise to systematic conflicts of interest and assess whether the conditions of its activities might entail any other conflicts of interest, in which case it shall inform the stakeholders and shareholders of the managed undertakings.
  8. In such case as the organization measures adopted to detect, prevent, manage and control conflicts of interest do not sufficiently and reasonably ensure the prevention of damage to the stakeholders and shareholders affected by such conflicts, the management firm must, prior to acting on their behalf, clearly reveal the nature and source of the conflicts of interest and develop policies and procedures to avoid the conflicts as well as the risks of damage.

In this regard, SGEICs must comply with Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012-

 

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