Legal Risk Management Tips

The first step in the process of any new business is deciding which entity structure the new company will utilize.  However, this process is also riddled with possible pitfalls.  Taking the time to understand the pros and cons of any entity structure is vital to the short and long-term success of the company.  In this two-part series, we will focus on one such business entity type – the Limited Liability Company (“LLC”), and will describe the entity structure, governing rules in the State of California and some common pitfalls to avoid when registering and operating your company as an LLC.

Over the past few years, more and more firms are diversifying services and products. In an effort to support this business development and attract new talent, broker-dealers (“BDs”) are permitting associated persons to affiliate with independent, non-affiliated investment advisory firms (“IAs”) and vice-versa, which allows the representative to conduct both brokerage business (as a registered representative or “RR”) through the BD and advisory services (as an investment adviser representative or “IAR”) through the IA. This also allows for greater prospective client development opportunities, which leads to revenue generation.  However, with more diversity come greater compliance challenges that necessitate engagement of legal counsel during particular transactions. This legal tip will provide important information regarding challenges compliance officers have in overseeing the “hybrid” business model, with a case study involving special considerations for supervision of outside business activities and revenue flow. 

If you ever find yourself in a room full of investment advisers and are in need of a conversation starter, ask the following question: “Who believes that anti-money laundering (“AML”) regulations don’t apply to investment advisers?”  The likely outcome will be a spirited debate with some taking the position that AML regulations do not apply to investment advisers, only to broker-dealers, while others may argue that AML safeguards are part of their fiduciary duty as an investment adviser and therefore there is an obligation to develop AML procedures.  The answer to the question is the focus of this article and will discuss current anti-money laundering regulations, duties owed by investment advisers and the anticipated changes that may be occurring in this area in the not-too-distant future.

With the new-year comes new-rules.  Literally hundreds[1] of new laws will go into effect in the state of California during the month of January, with even more becoming effective later in 2015.  This article provides an overview of some of the new corporate laws affecting businesses.  While this article is geared towards California businesses, several other states have substantially similar laws in place, or are in the process of enacting such laws.  Further, out-of-state companies that operate in California are often subject to the rules of the state, so it is important to be aware of how such rules may impact your business.   

As part of its “Fiscal Year 2014 Financial Report” released by the Securities and Exchange Commission (“SEC”) last month, the SEC discussed how “new investigative approaches and the innovative use of data and analytical tools” helped contribute to a strong year of enforcement actions.  According to the report, the SEC ended the fiscal year of 2014 (which for the SEC concludes on September 30^th) having filed for a record 755 enforcement actions across a broad range of misconduct.  Furthermore, the SEC stated the resulting disgorgement and monetary penalties arising from these enforcement actions totaled $4.16 billion according to preliminary figures.  Compare this total to the $3.1 billion total in 2012 (based upon 734 enforcement actions), and $3.4 billion total in 2013 (based upon 686 enforcement actions), and it’s clear to see that the SEC is not only increasing the number of enforcement actions, but such actions are more costly than ever before.  According to SEC Chair Mary Jo White, “innovative use of technology, enhanced use of data and quantitative analysis was instrumental in detecting misconduct and contributed to the Enforcement Division’s success.” 

For many investment advisers, using an outside money manager provides a valuable means to
increase efficiencies. As every investment adviser has a fiduciary duty to act in the best interest of its clients, the adviser must consider its expertise and ability to actively manage client accounts at all times. An external manager has the ability to devote full time and attention to managing client portfolios, but moreover, the manager often has specialized capabilities to manage certain investment strategies that are not available to all investment advisers.