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Buying or Selling an Investment Advisory Firm: A Lawyer\'s Perspective

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This document provides an overview of key legal and compliance considerations for buying or selling an investment advisory firm from the perspective of attorneys. It outlines the typical process which includes conducting pre-sale audits, negotiating terms, and conducting extensive due diligence on legal, compliance, client, and financial matters. The due diligence process examines areas like regulatory filings and disclosures, compliance policies and procedures, custody of client assets, and any pending or potential litigation issues. The document advises structuring the deal appropriately, identifying and resolving issues before closing, and addressing closing logistics.

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Scott E. Galbreath, J.D., LL.M. (Tax) James J. Eccleston, J.D. Shaheen, Novoselsky, Staat, Filipowski & Eccleston, P.C. Buying Or Selling An Investment Advisory Firm A Lawyer’s Perspective
Anatomy Of A Deal Pre-sale self-audit Interest Letter of intent - confidentiality agreement Initial due diligence Agreement to go forward Negotiate and structure formal contract Due diligence (by both sides) Closing
Sale To Insider Shareholders/owners agreement Creates a market for ownership interest Sets price May provide funding mechanism Sale to successor Estate planning techniques- GRAT, GRUT, private annuity, SCIN, installment sale to a DGT
Self-audit Of Legal Risks Compliance Protection of key information and relationships Effects of litigation
Compliance General business- minutes, resolutions, shareholder agreements, shareholder loans, employment agreements, etc. Employee benefit plans Retirement, including nonqualified Health and other Tax returns Withholding and unemployment taxes Regulatory
Investment Advisory Contracts Must contain provision prohibiting assignment, without client’s written consent, pursuant to Section 205(a)(2) So, obtain written consents
Protection Of Key Information And Relationships Written contracts with key employees Appropriate incentives to stay Containing enforceable restrictions Covenants not to compete Covenants not to solicit Covenants not to disclose confidential information
Litigation Pending or threatened Disclosure requirement on financial statements Negative effect on business If large, may shut down business May require hold back or indemnification Can it be resolved before sale?
Structure Of The Deal Assets or ownership interest Client list only C-Corporation problem Seller financing Consulting agreement
Off-site Due Diligence Form ADV, parts 1 and 2 Info re. business Other business activities Financial industry affiliations Participation or interest in client transactions
Off-site Due Diligence Forms U-4 disclosures Criminal matters Regulatory actions Civil judicial matters Customer complaints / arbitrations / civil litigation complaints Termination disclosures Financial disclosures
On-site Due Diligence Interview chief compliance officer Third-party or merely internal annual reviews?
On-site Due Diligence Conduct “mock audit” Examine: Prior deficiencies and whether corrected Compliance policies and procedures Compliance with record-keeping requirements Soft-dollar and referral fee arrangements Regulatory and client disclosures
On-site Due Diligence Custody issues Performance reporting Advertising practices Trade errors Conflicts of interest Best execution practices
Closing Where? What? What if issues arise? Resolve and close Delay closing until resolution Close with agreement to resolve How long?
Questions ? NOTICE: The Internal Revenue Service requires us to state that advice contained in this document is not intended or written by the writer to be used, and cannot be used by the reader, for the purpose of avoiding penalties under the Internal Revenue Code.
Thank You Scott E. Galbreath [email_address] James J. Eccleston [email_address] 312.621.4400 www.SNSFE-law.com www.FinancialCounsel.com

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Buying or Selling an Investment Advisory Firm: A Lawyer\'s Perspective

  • 1. Scott E. Galbreath, J.D., LL.M. (Tax) James J. Eccleston, J.D. Shaheen, Novoselsky, Staat, Filipowski & Eccleston, P.C. Buying Or Selling An Investment Advisory Firm A Lawyer’s Perspective
  • 2. Anatomy Of A Deal Pre-sale self-audit Interest Letter of intent - confidentiality agreement Initial due diligence Agreement to go forward Negotiate and structure formal contract Due diligence (by both sides) Closing
  • 3. Sale To Insider Shareholders/owners agreement Creates a market for ownership interest Sets price May provide funding mechanism Sale to successor Estate planning techniques- GRAT, GRUT, private annuity, SCIN, installment sale to a DGT
  • 4. Self-audit Of Legal Risks Compliance Protection of key information and relationships Effects of litigation
  • 5. Compliance General business- minutes, resolutions, shareholder agreements, shareholder loans, employment agreements, etc. Employee benefit plans Retirement, including nonqualified Health and other Tax returns Withholding and unemployment taxes Regulatory
  • 6. Investment Advisory Contracts Must contain provision prohibiting assignment, without client’s written consent, pursuant to Section 205(a)(2) So, obtain written consents
  • 7. Protection Of Key Information And Relationships Written contracts with key employees Appropriate incentives to stay Containing enforceable restrictions Covenants not to compete Covenants not to solicit Covenants not to disclose confidential information
  • 8. Litigation Pending or threatened Disclosure requirement on financial statements Negative effect on business If large, may shut down business May require hold back or indemnification Can it be resolved before sale?
  • 9. Structure Of The Deal Assets or ownership interest Client list only C-Corporation problem Seller financing Consulting agreement
  • 10. Off-site Due Diligence Form ADV, parts 1 and 2 Info re. business Other business activities Financial industry affiliations Participation or interest in client transactions
  • 11. Off-site Due Diligence Forms U-4 disclosures Criminal matters Regulatory actions Civil judicial matters Customer complaints / arbitrations / civil litigation complaints Termination disclosures Financial disclosures
  • 12. On-site Due Diligence Interview chief compliance officer Third-party or merely internal annual reviews?
  • 13. On-site Due Diligence Conduct “mock audit” Examine: Prior deficiencies and whether corrected Compliance policies and procedures Compliance with record-keeping requirements Soft-dollar and referral fee arrangements Regulatory and client disclosures
  • 14. On-site Due Diligence Custody issues Performance reporting Advertising practices Trade errors Conflicts of interest Best execution practices
  • 15. Closing Where? What? What if issues arise? Resolve and close Delay closing until resolution Close with agreement to resolve How long?
  • 16. Questions ? NOTICE: The Internal Revenue Service requires us to state that advice contained in this document is not intended or written by the writer to be used, and cannot be used by the reader, for the purpose of avoiding penalties under the Internal Revenue Code.
  • 17. Thank You Scott E. Galbreath [email_address] James J. Eccleston [email_address] 312.621.4400 www.SNSFE-law.com www.FinancialCounsel.com