This browser is not actively supported anymore. For the best passle experience, we strongly recommend you upgrade your browser.
| 1 minute read

Regulation and Compliance in the Alternative Asset Space

As the SEC has issued a number of final or proposed rules affecting broadly the conduct of broker dealers and investment advisers in the past few years, I have received a lot of questions about new compliance concerns.  Market participants who are outside traditional securities investments or who deal only with institutional investors suddenly have a lot of uncertainty regarding their own compliance needs.  And, today, I read this article reporting on new surveys within the registered investment adviser and wealth management community about how alternative asset classes may become less accessible to retail investors, not more accessible, because of compliance risk from the advisers' perspective.

I had not thought of that before.

I had been focused on the asset managers' compliance needs.  But, one of the duties that the SEC has outlined and reinforced for registered investment advisers and broker-dealers in recent years is the need to screen potential investment options for their own clients, the investors, and recommend only suitable investments.  

Through the rules imposed on asset managers, the SEC is telegraphing to advisers and wealth management professionals what is “suitable."  Brokerage firms may not be willing to work with alternative asset managers unless those managers are registered with the SEC and subject to all of the SEC's rules on the conduct of registered investment advisers, which may not be possible for some asset classes that cannot be classified as “securities.”    

This area of law, compliance, and business relationships will continue to evolve in the coming years, and it may have a much deeper implication in the alternative investment space than we are currently thinking about.  

Getting approval from their compliance department is already one of the top challenges facing RIAs investing in illiquid alternatives, second only to lack of liquidity, according to a recent survey by market research firm Fuse Research Network. Thirty-eight percent of respondents, including 30% of RIAs and 40% of independent broker-dealers, listed it as a challenge.