1. The Four Core Asset Management Transactions and Their Governing Legal Frameworks
Asset management legal work concentrates in four transaction types. The table below maps each to its governing law, key document, and primary legal obligation.
| Transaction Type | Governing Law | Key Document | Primary Legal Obligation |
|---|---|---|---|
| Investment Advisory Agreement | Investment Advisers Act of 1940 | IAA or SMA agreement | Fee disclosure, performance allocation restrictions, fiduciary duty |
| Private Fund Formation | Securities Act of 1933; ICA Section 3(c)(1) or 3(c)(7) | PPM, LPA, subscription agreement | Accurate disclosure, investor qualification, fund registration exemption |
| ERISA-Subject Fund | ERISA Section 3(38); DOL plan asset regulations | Side letter; LPA ERISA addendum | ERISA fiduciary standard; plan asset rule compliance; prohibited transaction exemptions |
| Custody and Prime Brokerage | IAA Rule 206(4)-2; SEC Regulation | Custody agreement; prime brokerage agreement | Qualified custodian requirement; rehypothecation limits; counterparty risk management |
Asset management and asset management law counsel can evaluate the regulatory and contractual obligations applicable to the firm's advisory and fund activities, assess whether existing agreements satisfy IAA, ICA, and ERISA requirements, and advise on the most effective integrated compliance and documentation strategy.
2. Investment Advisory Agreements and Sub-Advisory Arrangements
The investment advisory agreement is the foundational contract between the adviser and the client. Sub-advisory arrangements add a delegation layer that requires separate documentation and creates ongoing supervisory liability for the primary adviser.
What Must an Investment Advisory Agreement Include to Satisfy Iaa Requirements?
A compliant investment advisory agreement must contain the adviser's compensation structure, a description of services, the adviser's investment authority, the standard of care, termination conditions, and disclosure of all material conflicts of interest. IAA Section 205(a) prohibits performance fees for SEC-registered advisers unless the client meets the qualified client definition, currently requiring a net worth of at least two million two hundred thousand dollars or assets under management of at least one million one hundred thousand dollars.
RIA compliance and investment advisory services counsel can advise on the IAA provisions that must be addressed in the investment advisory agreement, assess whether the fee structure and performance allocation comply with the compensation restrictions, and develop the advisory agreement drafting and compliance strategy.
What Legal Risks Does a Sub-Advisory Arrangement Create for the Primary Adviser?
A sub-advisory arrangement creates legal risk for the primary adviser because the primary adviser remains responsible to the client for the sub-adviser's performance and compliance, and must disclose the relationship and the sub-adviser's compensation in the Form ADV and in the advisory agreement. A failure to supervise a sub-adviser that commits fraud or mismanages client assets exposes the primary adviser to direct client liability and to SEC enforcement for failure to supervise.
Investment management and wealth management law counsel can advise on the delegation and liability provisions a sub-advisory agreement must contain, assess whether the sub-adviser's registration and compensation comply with applicable IAA requirements, and develop the sub-advisory arrangement documentation strategy.
3. Private Fund Formation: Ppm, Lpa, and Side Letter Negotiation
Private fund formation requires a PPM, an LPA, and subscription agreements that work together to disclose strategy and risks, establish economic and governance terms, and qualify investors. Side letters grant institutional LPs rights not available to others and must be managed to avoid triggering MFN obligations.
What Must a Private Placement Memorandum Disclose to Protect the Fund Manager from Liability?
A PPM must disclose all material information a reasonable investor would consider significant, including the fund's strategy, risk factors, fee structure, conflicts of interest, the general partner's track record, termination terms, and any material legal proceedings. An omission or misstatement exposes the fund manager to civil liability under Securities Act Section 12(a)(2) and to SEC enforcement under Rule 10b-5, and risk factor disclosures do not immunize the manager from liability for specific misrepresentations made in the context of those disclosed risks.
Investment fund regulation and investment funds law counsel can advise on the PPM disclosure obligations and LPA economic and governance terms, assess whether the fund structure satisfies applicable securities law and CFTC registration requirements, and develop the fund formation documentation strategy.
How Do Side Letters and Mfn Clauses Create Legal Obligations to Other Fund Investors?
A side letter is a bilateral agreement granting a specific LP rights not available to others, such as reduced fees, co-investment rights, enhanced reporting, or governance protections, and it binds only the parties who sign it. An MFN clause requires the general partner to offer all MFN-holding LPs the benefit of any more favorable terms granted in a new side letter, so a concession to one large LP may automatically become available to every LP with a standing MFN right.
Private equity financing and private equity funds counsel can advise on the side letter provisions that institutional LPs require, assess whether MFN obligations to other LPs are triggered by new side letter concessions, and develop the side letter negotiation and consistency management strategy.
4. Erisa Compliance, Custody Rules, and Prime Brokerage Arrangements
ERISA applies when pension plan assets exceed twenty-five percent of any class of fund equity, imposing its full fiduciary standard on the entire fund. Custody and prime brokerage arrangements create separate compliance obligations that must be satisfied to protect client assets from adviser insolvency and counterparty risk.
When Does Erisa Apply to a Private Fund and What Obligations Does It Impose?
ERISA applies to a private fund when benefit plan investors hold twenty-five percent or more of any class of equity interests, making all fund assets plan assets subject to the ERISA fiduciary standard, prohibited transaction rules, and DOL reporting requirements. A fund manager with plan asset status must act solely in the interest of plan participants, satisfy ERISA's bonding requirement, and continuously monitor the twenty-five percent threshold as investors redeem or transfer.
Employee benefits and SEC compliance counsel can advise on the ERISA fiduciary obligations triggered when pension plan assets are invested in the fund, assess whether the fund qualifies for plan asset regulation exemptions, and develop the ERISA compliance and DOL reporting strategy.
What Are the Sec Custody Rule Requirements and How Do Prime Brokerage Agreements Affect Them?
Under SEC Rule 206(4)-2, an investment adviser must maintain client assets with a qualified custodian and arrange for an independent accountant to conduct a surprise examination at least annually. A prime brokerage agreement typically grants the broker rehypothecation rights to use the fund's securities as collateral for the broker's own borrowing, and a fund manager that does not contractually limit rehypothecation or require asset segregation risks losing access to its positions if the prime broker becomes insolvent.
Fund finance and investment transactions counsel can advise on the SEC custody rule obligations and prime brokerage agreement terms, assess whether the prime broker's rehypothecation rights create counterparty risk that should be limited, and develop the custody and prime brokerage documentation strategy.
26 Mar, 2026
