The Division of Examinations of the U.S. Securities and Exchange Commission (“SEC”) recently issued the Fiscal Year 2024 Examination Priorities signaling areas of particular interest for the upcoming audits of investment advisers. Notably, this year’s exam priorities introduces what appears to be a new focus on whether investment adviser firms are obtaining “informed consent” from clients when making material changes to advisory agreements:
During the last several years, the United States Securities and Exchange Commission (“SEC”) has intensified its scrutiny of liability hedge clauses within investment advisory client agreements used by investment adviser firms.
Although the Investment Advisers Act of 1940 (“Investment Advisers Act”) does not explicitly require investment advisory contracts to be written, Section 205 of the Investment Advisers Act requires all advisory contracts to include certain provisions and prohibits investment advisory contracts from including other provisions. Most state securities regulations require written agreements between the investment adviser and each client. Regardless of whether a written contract is required by the investment adviser’s primary regulator, the use of a written agreement with each client is generally considered best practice and in the best interest of the investment adviser and the investment advisory client. A properly drafted investment advisory agreement can help limit an investment adviser’s professional liability. During an investment adviser examination, the U.S. Securities and Exchange Commission (“SEC”) or state securities regulator will likely review an investment adviser’s written client contracts and the following are some of the common deficiencies that an investment adviser may encounter:
Routinely, the U.S. Securities and Exchange Commission (“SEC”) will conduct examinations of investment adviser firms. During the examination process the SEC will request certain information or documents that the SEC examiners will review as part of the examination process. As part of the examination process, investment adviser can anticipate that their firm’s investment advisory agreements will be reviewed. Investment advisers may encounter deficiencies or similar regulatory violations if the investment adviser’s advisory contracts do not comply with the applicable SEC or state regulations. Additionally, having in place a properly drafted investment advisory agreement or contract can help limit an investment adviser’s professional liability. To help your investment adviser further understand investment advisory client contracts, RIA Compliance Consultants is hosting a webinar, “Key Elements that Should be Included in an Investment Advisory Client Contract – Presented by Bryan Hill Law.” (RIA Compliance Consultant’s is not a law firm.) This webinar will cover topics pertaining to advisory client contracts, including, but not limited to:
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which was signed into law on July 21, 2010, provides the U.S. Securities and Exchange Commission (“SEC”) with the authority under the Investment Advisers Act of 1940 to prohibit or impose conditions upon the use of pre-dispute, mandatory arbitration clauses within investment advisory client agreements.
Under Section 205 of the Investment Advisers Act of 1940 (“Investment Advisers Act”), an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”) shall not “enter into, extend, or renew any investment advisory contract, or in any way to perform any investment advisory contract entered into, extended, or renewed…” unless the investment advisory contract meets certain requirements specified under Section 205. Section 205(d) of the Investment Advisers Act defines an investment advisory contract as “any contract or agreement whereby a person agrees to act as an investment adviser to or to manage an investment or trading account of another person….”
