IOSCO consults on mitigating private equity conflicts of interest
On 3 November 2009, the International Organization of Securities Commissions (IOSCO) published a consultation report on private equity conflicts of interest (consultation).
Publication of the consultation, prepared by IOSCO’s Technical Committee (Committee), follows a May 2008 IOSCO report identifying potential risks emerging from the private equity industry, including the potential for material conflicts of interest to arise among the parties involved in private equity-sponsored transactions. The report outlined the ways in which IOSCO intended to address those risks and recommended that further work be carried out in relation to conflict of interest risks for private equity firms. The consultation provides a summary of this follow-up work and details the conclusions reached by the Committee in this respect.
The consultation also outlines a number of factors to be considered by market participants and regulatory authorities when considering the management of conflicts of interest by private equity firms. The Committee has proposed eight principles for the effective mitigation of conflicts of interest by private equity firms. These are set out at chapter 5 of the consultation. In broad terms, the Committee recommends that mitigation take the form of appropriate alignment of interest through incentive structures, disclosure and legal agreements.
The consultation is open to responses until 1 February 2010. Once IOSCO has taken into account comments on the consultation, it will finalise the principles and its recommendations. Commenting on the consultation, Kathleen Casey, Committee Chairman, said: “[The] principles … are intended to be readily applicable to all private equity firms regardless of where they are organised or operating, their chosen investment strategy, fund structure or other investment business activities. The development of [the] principles demonstrates our commitment to ensuring that investors of all types receive adequate protection and markets remain fair, efficient and transparent.”