All posts by Richard Chen

Client Communications — The Importance of Documenting

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.

SEC Scrutinizing Advisers transitioning from BD model to IA model

Advisers transitioning from wirehouses and independent broker-dealers must heed a warning from the SEC contained in its 2022 Examination Priorities that is pertinent to their transition.  The SEC noted that it will be scrutinizing whether advisors migrating from the broker-dealer model to the investment adviser model have evaluated their existing client accounts to determine whether it is in the client’s best interest to move from a brokerage account to an advisory account. As such, it will be important for transitioning advisors to evaluate the type and frequency  of services and investments currently offered and to be offered for each client and to document why, if applicable, it is advisable for the client to move from a brokerage account to an advisory account. Of course, client preferences should be solicited and documented in such analysis.  The failure to demonstrate that an adviser conducted such an evaluation could lead to allegations that the adviser breached its fiduciary duty of care to its clients.

Read more here.

SEC Examination Priorities for 2022 – Key Takeaways

On March 30, 2022, the SEC’s Division of Inspections and Examinations (“staff”) published its examination priorities for 2022 (“Examination Priorities”). The central theme of the priorities for investment advisers seems to focus on the increasingly complex nature of the investment advisory industry, and the priorities focus principally on private funds, environmental, social and governance (ESG) investing, retail investor protections, information security and operational resiliency, emerging technologies, and crypto-assets.

For a summary of the priorities and guidance for mitigating regulatory risk in the coming year, read more here.

SEC Proposes New Rules for Private Fund Advisers

The SEC recently proposed new rules that would impose additional practice and disclosure requirements on private fund advisers which, if adopted in their current form, could collectively have severe consequences for such advisers. Among other things, the proposed rules would require SEC-registered advisers to:

  • provide quarterly reporting to fund investors including detailed and standardized disclosures about fund expenses and performance; and
  • obtain and deliver audited financial statements for each advised private fund annually and upon liquidation.

Importantly, the proposed rules would prohibit all private fund advisers (including exempt reporting advisers) from:

  • entering into side letter arrangements granting preferential redemption rights or certain portfolio information rights if such rights would have a material adverse effect on fund investors;
  • requiring reimbursement from investors for the adviser’s breach of its fiduciary duties including situations involving simple negligence;
  •  Charging private funds for certain fees and expenses;
  • deducting taxes owed from any clawback they must provide to investors; and
  • Borrowing funds or securities from a fund or receiving an extension of credit from a fund.

Very importantly, the proposed rules do not have a grandfathering provision, and, therefore, if the rules are adopted as proposed, advisers would need to assess whether existing private fund documents must be amended, which can be challenging given that the adviser and fund investors negotiated fund terms based on circumstances prior to the existence of the new requirements.

Read more here.

SEC Considers Changes to Accredited Investor Definition

Those looking to launch hedge, private equity, venture, or real estate funds in the near future should take notice that the SEC intends to consider, in April 2022, changes to the definition of the “accredited investor” definition found in Regulation D under the Securities Act of 1933, which allows many private fund sponsors to offer their securities without having to register them with the SEC when they limit sales of securities to accredited investors.


While the SEC has not indicated whether it intends to restrict the definition to reduce the pool of investors that qualify as “accredited investors,” it should be noted that several rule proposals recently published by the SEC are designed to enhance investor protection and promote increased disclosure when it comes to investments in private funds.


Changing the accredited investor definition will invariably impact private fund capital raising, and therefore existing and prospective fund sponsors should take notice.

Read more here.