Category Archives: Compliance

DOJ brings first-ever NFT “insider trading” case

The US Department of Justice and Federal Bureau of Investigation announced the first-of-its kind indictment of an “insider trading” scheme involving non-fungible tokens (or NFTs).

  • A former employee of an online marketplace for NFTs allegedly used confidential business information for personal financial gain.
  • The charged individual used new blockchain technologies to conceal the proceeds of the alleged illicit activity.
  • The DOJ brought charges without characterizing NFTs as securities.

Read more here. 

SEC proposes amendments to expand the reach of the fund “Names Rule,” with a specific focus on ESG

On May 25, 2022, the US Securities and Exchange Commission (the SEC) proposed amendments (the Proposal) to Rule 35d-1 (the Rule) under the Investment Company Act of 1940, as amended (the 1940 Act). The Proposal comes over 20 years after the original adoption of the Rule and seeks to greatly expand the scope of the Rule in the name of investor protection and modernization.  The Proposal includes the following primary amendments to the Rule:

  • Expansion of the 80% policy requirement to include funds with names that suggest the fund focuses on investments that have, or whose issuers have, “particular characteristics.”
  • A requirement that any unlisted closed-end funds or BDCs that are required to have an 80% policy under the Rule, adopt such policy as a fundamental policy.
  • Identification of particular circumstances under which a fund may depart from its 80% policy and specific time frames for getting back into compliance.
  • Establishment of the “notional amount” as the appropriate value for a derivative instrument used by a fund when calculating compliance with a fund’s 80% policy.
  • Clarification of what the SEC deems a materially deceptive and misleading use of environmental, social and governance (ESG) terminology.
  • A requirement that any terms used in a fund’s name that suggest an investment focus or a tax-exempt fund, must be consistent with those terms’ plain English meaning or established industry use.
  • Modernization of shareholder notice requirements.
  • Establishment of certain recordkeeping requirements related to a fund’s 80% policy.

Read more here.

Attracting and Retaining Talent

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.

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

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.


Tackle Operational and Client Risks Now for Smooth Selling Later

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.

Read more here.