All posts by Richard Chen

Electronic Signature Policies and Procedures for IAs

June 6, 2022 Richard Chen Leave a comment

The SEC has begun examining investment advisers to evaluate their practices around the use and authentication of electronic signatures. The focus is on ensuring that advisory firms have policies and procedures designed to ensure that electronic signatures are not being exploited to perpetrate fraud that could harm advisory clients.

Among other things, the staff has requested information pertaining to (a) the types of documents that firms allow to be electronically signed; (b) a firm’s procedures for authenticating changes to clients’ contact information (including email addresses); and (c) a firm’s controls addressing how a client is authenticated for electronic signatures and how the firm prevents unauthorized changes to this information.

Advisers utilizing electronic signatures should ensure that their policies and procedures address such issues to minimize the likelihood of identity theft and fraud.

Read more here.

Compliance, Regulatory

Attracting and Retaining Talent

May 16, 2022 Richard Chen Leave a comment

In the increasingly challenging race to attract and retain top talent, investment advisers should consider all of the tools at their disposal. One of the most helpful and flexible options are profits interests.

Profits interests can be structured to provide an employee with the right to participate in a share of the ongoing net income earned by the firm and/or the proceeds from the sale of the firm down the road. Profits interests can also be structured to “vest” over time, meaning that an employee can only receive them after certain conditions have been satisfied (e.g., the employee remains with the firm for a period of time and remains in good standing), which provides employees with an incentive to remain loyal to the firm.

Read more here.

Compliance, Standard of Care

DBA’s: Knowing when to hold them and fold them . . .or at least use them

May 10, 2022 Richard Chen Leave a comment

From Richard Chen:

Far too often, I’ve encountered situations where advisors and other business owners do not fully understand their use of a DBA or “doing business as” trade name, and this can potentially lead to very serious legal risks.

Many advisers utilize a DBA to facilitate their branding, whether they own their own firm or work as an investment adviser representative for another firm. Yet, many advisers fail to understand that a DBA is not a formal legal entity, such as a limited liability company, and the holder of a DBA does not enjoy the same rights as the owner of a formal legal entity (such as limited liability protection) if it is not used properly.

Read more here.

Compliance, Standard of Care

Tackle Operational and Client Risks Now for Smooth Selling Later

May 2, 2022 Richard Chen Leave a comment

While investment advisers looking to sell, merge, or acquire an advisory business typically focus most on pricing multiples, price adjustments, and earnouts, often overlook are key considerations that can easily sink a deal – namely, operational and compliance-related risks.

Once a term sheet is signed, selling advisers are often shocked to discover how much due diligence is involved when an acquiror asks pointed and very detailed questions about the operations, compliance program, and personnel of a firm. These questions are not only designed to determine if the transaction represents a good fit for the purchaser, but also whether the target firm’s operations and compliance program present regulatory or legal risks that are unacceptable to the purchaser.

Client Communications — The Importance of Documenting

April 18, 2022 Richard Chen Leave a comment

Investment advisers that manage assets on a non-discretionary basis i.e., executing a transaction only after a client accepts an investment recommendation) face regulatory and legal risks if communications with clients are not properly documented. Because such authority is contingent on client consent, the failure to obtain consent in writing could lead to claims by clients, down the road, that they never authorized an adviser to proceed with a transaction, particularly if the client is unhappy with the results of the investment. Regulators could also charge an adviser with exceeding the authority granted by a client to an adviser if consent is not properly documented.

Read more here.