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Sunday, February 26, 2012

Goldman Sach disclosures on mutual fund conflicts of interest

While reading the offer document for Goldman Sachs India Equity Fund (http://www.sebi.gov.in/cms/sebi_data/attachdocs/1329211311237.pdf) filed last month, I noticed a very interesting section titled 'Material Interests of the Sponsor, AMC and Trustee Company', in which they went all out to explain the direct and indirect interests that their various arms may have. I think this was to stave off conflict of interest accusations which popped up post the infamous Abacus controversy, in which though Goldman Sachs lost money themselves, they were accused of playing both sides by advising Paulson and then helping sell the securities he helped select. So thought he CEO did apologize and clarify things later, they seem to be playing extra cautious. Just sample some of the illustrations in that offer document
  1. Due to information barriers, conflicting fund objectives etc, the investment decisions taken by GS for its proprietary and client accounts may be superior to or conflicting with its decisions as an AMC. For example, a scheme holding debt securities of an issuer may seek liquidation while a scheme holding equity securities may push to delay it. 
  2. The AMC may not have access to, and may make recommendations different from the research/models/information of the GS group. 
  3. While allocating investment opportunities/purchase sale decisions to different schemes, that depends entirely on the AMCs good faith assessment, and may result in no allocation to the scheme
  4. Due to regulatory requirements resulting from other activities of GS group like market making/capital market advisory etc, the scheme may not be permitted to deal in certain securities. 
  5. GS may act as broker/dealer/lender/agent/trading network owner/settlement system or trading system owner etc, and would benefit from the incomes to that extent when the scheme uses those services.
SEBI does try to investigate and stop some of these conflicts by imposing code of conduct, transfer pricing approval by 'Mutual Fund advisory board' etc, but can do things only till a point. Investors are helpless to find out and act on the above points even if they exist. Atleast GS is explicitly disclosing these risks, which is commendable. 

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