Ethics, governance and investor protection
Ethics items on this exam are situational: a manager faces a choice, and you must identify the fiduciary answer, the disclosure required and the protection owed to investors.
Fiduciary core and conduct
- The manager owes a fiduciary duty; investors' interests come first, with honesty, fair dealing, independence, confidentiality and no misrepresentation or assured returns.
- Fees, expenses, carried interest and any sponsor support must be fully disclosed; undisclosed economics is a governance failure even when performance is strong.
Conflicts and fair allocation
- Investment opportunities must be allocated under a disclosed policy (mandate fit, or pro rata to committed capital); cross-scheme transfers need arm's-length pricing, independent valuation, disclosure and often consent.
- No preferential treatment beyond what the PPM discloses; side letters must not disadvantage other investors.
- Related-party deals, co-investments and manager-owned assets need disclosure and approval under policy.
Investor protection mechanics
- Minimum commitment and illiquidity disclosed; consent of two-thirds of investors by value for tenure extension; unit transfers only with manager consent and to eligible investors.
- KYC/AML, data confidentiality, grievance redress through the manager and then SEBI SCORES, no front-running or misappropriation of scheme opportunities, insider-trading compliance.
Worked example
Scheme A is in its exit period and holds a company stake; the manager wants Scheme B to buy it at the last valuation. This is a conflict: the asset must be independently valued, priced at arm's length, disclosed to both investor sets and processed under the conflict policy. Disclosure alone does not make an unfair price fair.
Traps
Believing disclosure cures a conflict; treating a signed side letter promising priority exit as automatically enforceable; using one scheme's cash for another's expenses; accepting a "guaranteed" 12% return because the sponsor is strong; ignoring allocation policy when two schemes can take the same deal.