Legal Risk Management Tips

For Registered Investment Advisers (“RIAs”), acquiring another investment adviser’s practice can often serve as an efficient means for quickly increasing the assets under management and profitability of the RIA, while also adding scale and efficiency to client services.  However, in light of the numerous regulatory and corporate considerations involved in such corporate combinations careful analysis and planning should be conducted prior to entering into a definitive agreement.  Not only will the acquiring RIA face legal and compliance obstacles, but the selling RIA often has a personal connection to the business being sold that needs to be considered. 

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. 

The Form ADV is one of the most important documents compiled by an investment adviser.  Not only does it serve as the adviser’s client disclosure brochure to unveil important information related to the firm’s products and service offerings, fees, business practices and related conflicts of interest, but it also serves as a critical tool for the SEC’s regulatory program for measuring and analyzing risk for its registrants. 

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.

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.