IOSCO Consults On Mitigating Private Equity Conflicts Of Interest

by Robin Pilgrim, LawAndTax-News.com, London

06 November 2009

The International Organization of Securities Commissions (IOSCO) has proposed ways to mitigate potential conflicts of interest encountered in private equity firms, and the risks these conflicts pose to fund investors or the efficient functioning of the market.

The proposals are outlined in a consultation document which examines the material conflict of interest risks encountered at each stage of the life cycle of a typical private equity fund, managed by a multi-fund, multi-strategy firm, and sets out the potential and common methods for mitigating these potential conflicts of interest alongside each risk.

Mitigation typically takes the form of appropriate alignment of interest through incentive structures, disclosure and legal agreements. This issue was originally identified as an emerging risk in the private equity industry in a report published by IOSCO in June 2008.

The management of each private equity firm, and their investors, should take into consideration the nature of the firm in question when seeking to apply the following principles for the mitigation of conflicts of interest. According to IOSCO, under the principles in question, a private equity firm should:

• Seek to manage conflicts of interest in a way that is in the best interests of its fund(s), and therefore the overall best interests of fund investors;
• Establish and implement written policies and procedures to identify, monitor and appropriately mitigate conflicts of interest throughout the scope of business that the firm conducts;
• Make the policies and procedures available to all fund investors both at inception of their relationship with the firm, and on an ongoing basis;
• Review the policies and procedures, and their application, on a regular basis, or as a result of business developments, to ensure their continued appropriateness;
• Favour mitigation techniques which provide the most effective mitigation and greatest level of clarity to investors;
• Establish and implement a clearly documented and defined process which facilitates investor consultation regarding matters relating to conflicts of interest;
• Disclose the substance of opinion given through the investor consultation process and any related actions taken to all affected fund investors in a timely manner (save where to do so would breach any other legal or regulatory requirement or duties of confidentiality); and
• Ensure that all disclosure provided to investors is clear, complete, fair and not misleading.

The report was produced by a working group, chaired by Dan Waters of the UK Financial Services Authority, established by the Technical Committee Standing Committee on Investment Management, and composed of representatives of the global supervisory community and private equity industry experts.

The consultation period closes on February 1, 2010.

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