One example is where CLO tranches might be sold at different levels to different investors, with some firms buying the parts of a capital structure that are most difficult to sell in exchange for favourable pricing. Majority versus minority positions in the same CLO tranche might also price differently.

Multi-tranche investing was another area managers failed to adequately disclose, both in relation to when a fund can invest in debt and equity, and when different funds can invest in different tranches of debt from a portfolio company.

O’Mary says that credit managers should be particularly diligent around client accounts. “In certain circumstances, pro rata investments can mitigate these conflicts,” she says, but managers should be thoughtful about issues that will prevent pro rata participation, for example in restructurings when one client account may have insufficient capital.

The SEC also highlighted inadequate disclosure of conflicts between special financial arrangements and service providers. For example, a fund manager may sell the equity of a portfolio company directly to one of its investors, a sale which should be disclosed.

Similarly, some parties — such as fund administrators — might also be portfolio companies. This should be specifically disclosed rather than mentioned in a statement which says the relationship is at “arms-length”, as has been popular.

In these cases, the SEC has said the manager should be able to validate that terms are no less favourable than could be obtained from a third party.