Brokerage customer agreements
It is important to review the seller’s form of brokerage customer agreements to determine whether an assignment of the agreement is permissible. For a stock deal, this will not be an immediate issue because the deal will not trigger an assignment of the underlying customer agreement. For an asset deal (and for a stock deal in the post-closing integration period), the assignment of customer agreements will require advance written customer notice. For most asset deals, the NYSE or NASD will closely scrutinize these customer notices and related disclosures in the approval process.
Investment-advisory contracts
For a transaction involving advisory agreements, regardless of whether it is structured as a stock deal or an asset purchase, the acquisition of an adviser or its agreements generally triggers an “assignment” under the Investment Advisers Act of 1940 and the Investment Company Act of 1940 (known as the 1940 Act).
The Advisers Act requires nonregistered-fund advisory contracts to require client consent to an assignment, and the 1940 Act provides that the contracts of the fund’s adviser and principal underwriter automatically terminate upon their assignment. The Advisers Act and the 1940 Act broadly define an “assignment” to include a transfer of a controlling block (that is, 25 percent or more) of the assignor’s outstanding voting securities, and “control” as the power to exercise a controlling influence over the management or policies of a company. As a result, a purchase of an investment adviser or a financial-services company that owns or controls any investment adviser, or the purchase of the principal underwriter to a registered fund, usually results in an assignment of the contract.
The buyer of a nonregistered-fund adviser should check client contracts to determine if the contract can be assigned through a negative-consent process (that is, failure to object after receiving notice, thus authorizing the assigning firm to continue to manage the client’s account). Even if using negative consents, buyers should anticipate that the consent process will typically involve a 45-day period that, if possible, should be completed before closing.
If the consent process straddles the closing date, the purchase agreement should contemplate that some advisory agreements may not transfer, resulting in an accompanying reduction in the assets that will be ultimately transferred. The buyer of a registered-fund adviser should ensure that it has obtained fund board and shareholder approval before the closing — or risk having no advisory or underwriting contracts in place upon closing.
Broker-dealer/investment-adviser interrelationships
Securities-industry combinations involving broker-dealers often reveal interrelationships between broker-dealers and affiliated or unaffiliated investment advisers. For example, a buyer may want to develop or expand its mutual-fund or variable-annuities business and thus wish to acquire not only the broker-dealer acting as the product’s underwriter and distributor, but also the adviser to the funds and the fund or contract assets themselves. Each of these acquisitions will trigger additional regulatory notification requirements and issues in valuing the deal, not to mention further review by the primary regulator of the broker-dealer.
