Tag: Paul Fenaroli

7 Questions to Ask Potential Business Partners About the Firm

Posted on by Kelly McElroy

Business partnerships can be very successful when they work.

These alliances are utilized to monetize relationships that bring in top-line revenue. They can also serve as a catalyst for more opportunities that will lead to top and bottom lines. Almost half (44%) of companies create alliances for new ideas, according to BPI Network. Harvard Business Review says most of tech’s executives (94%) envision partnerships as a fundamental part of their overall business plan.

Despite the promise, however, research finds that most business partnerships fail.

This type of angst makes the interviewing process even more important. The next time you need a new business partner, make sure a series of questions is asked about how prospective partners expect to play nicely with the existing operations, as well as each existing partner.

Business Partnership Insight: 1. What are your expectations of each owner?

Figuring out how each business partner fits together is an important question that you will need to address sooner rather than later. The topic of gross negligence, when a partner harms another by failing to provide a certain standard of care, is one of the more common reasons why business partnerships fail. Assessing each partner’s motivation, which is closely tied to expectations, should jibe with the business partnership agreement and operations plan to increase chances for success.

Business Partnership Insight: 2. What is your vision for the firm?

This question asks about what the prospective business partner wants from the venture. New business partners can bring new thoughts, ideas and motivation that can propel the company forward. New energy, however, doesn’t always have a positive impact. Are the prospective partner’s goals in line with the other partners? Would the candidate’s management style elevate the firm? Breach of Partnership/Operating Agreement is another common legal problem that can doom a business partnership. The best time to discuss alignment is during the interview process.

Business Partnership Insight: 3. How would you manage the departure of a partner?

This is why you need a comprehensive business partnership agreement. Depending on how many partners you have in the firm, the departure of a business partner can be quite involved in varying degrees. Typically, there are four options. The fastest option is for the remaining partners to buy out the shares of the departing partner. If the departing partner played a large role in the company, then perhaps selling the business would be the best option.

Dissolving the business, on the other hand, could be the best option. This option could also be spelled out in the business partnership agreement to avoid a potentially lengthy legal battle, which is possible when one partner disagrees.

Replacing the departing business partner is another option. Although it would take more time than a buyout, it wouldn’t impact the resources of existing partners and would create an opportunity to bring on someone with a different perspective and skill set.

Business Partnership Insight: 4. What experience do you have with business partnerships?

Being an employee and being a business partner are two different things. Partners, for example, must act in good faith and fairness as part of their fiduciary duty to other partners.

Mismanaging company funds, damaging the firm’s reputation or “goodwill” and putting the company at legal risk due to your own negligence would be examples of a breach of fiduciary duty.

Along with ownership comes more legal responsibilities that must be considered.

Business Partnership Insight: 5. What is your experience with sales and margins?

In sports, it has been said that winning is the best deodorant. Success tends to cover missteps and miscues.

In business, top-line sales and margins are important factors when determining success. When those two items are realized, however, there could be finger-pointing. The setback could also encourage business partners to lose interest as they put their energy behind other entities. Partnership abandonment is a real legal issue for business partnerships, and it is another reason why you need to work with a trusted legal advisor to ensure all possible outcomes are covered in writing before they occur in your business partnership.

Business Partnership Insight: 6. How can this firm take it to the next level in the next 12 months?

This question is about resources and how they will be utilized. When asking about the path forward, a prospective business partner will have to disclose specifics about the “how” as well as the “why” behind the plan.

In the big picture, business partners are very important, in-house resources that should be utilized fully based on areas of expertise. Delegating the work can be a challenging area for partners. Failure to delineate authority is another common legal issue that surfaces with business partnerships. The operating agreement should contain enough detail so partners understand how they can make a meaningful contribution while staying in their own lane.

Business Partnership Insight: 7. Looking ahead 12 months, you believe that you made a great decision by joining this partnership. What are the two reasons?

This question asks, “What do you want?” in a different way, which tends to draw more specifics about the prospective business partner’s intentions. The more insight that the existing partners gather before an offer is made, the better for the entire venture. Making time for due diligence will pay dividends figuratively and literally.

(Paul Fenaroli is an Associate Attorney at Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8470 or pfenaroli@pastore.net.)

 

M&A Success: 4 Ways Companies Sidestep Regulatory, Emotional Challenges

Posted on by Kelly McElroy

On paper, mergers and acquisitions look thrilling.

Diversification. Expansion. Cost savings and larger margins—in less time with fewer dollars.

The promise of M&A can be intoxicating. But here’s a sobering thought: 70% to 90% of mergers fail, according to the Harvard Business Review.

For enterprise companies, regulatory hurdles can knock down the pending merger. Reuters reports that the U.S. Justice Department and Federal Trade Commission have attempted to stop more than 20 mergers since January 2021.

For small to mid-size firms, lack of preparation and purpose may kill the deal.

In theory, it’s a common belief that integration will decide which acquisitions move forward. But in practice, people are behind the numbers and processes.

Regardless of size, here are four ways to dramatically increase your chances at M&A success:

 

  1. Begin at The End

Clarity is a great place to start.

Why are you pursuing a merger? This answer should serve as the North Star because it will impact everything that follows in the process. While proper planning will be important, anticipation will be mission critical.

To advance the deal, think about the company’s building blocks in terms of resources and processes. Those two elements yield value and profit. Developing a clear understanding of these variables will allow you to promote and defend the deal—or arrive at better terms.

How would the pending merger impact the marketplace? How would the acquisition improve your company’s performance? Asking the tough, specific questions internally about what the end result will look like will help you anticipate opportunities to address. In M&A deals, being strategic means beginning at the end because it will ensure that every step along the way is tied to the desired outcome.

 

  1. Eliminate Emotion

 

Your exit strategy should be mapped out during the prep stage. This scenario represents the bare-minimum that you will accept in a negotiated agreement. Otherwise, you will walk.

This simple tactic removes emotion from the deal. Typically, negotiations that drag on tend to motivate players to hang on to finalize the deal for the wrong reasons, which may not be a logical fit with your original plan.

As part of a more logical approach, you should develop a list of specific commitments that you could offer to regulators, or the other party. These commitments should be specific, measurable, attainable and have a realistic time frame. Creating this list in advance will allow you to run the numbers and determine which items you can concede in the most cost-effective manner.

Game Theory is a normal part of negotiations, which is a dance that revolves around give and take. Make sure you understand the value of each move before you take it.

 

  1. Build Trust

 

Trust is a special kind of currency leveraged during M&A negotiations. So, spend it wisely.

Open communications will go a long way toward building a relationship with the other side. From the very beginning, you will need to provide prompt, purposeful and intelligent responses. Delaying a request could stir skepticism and trigger an unfavorable outcome. It’s not uncommon for parties to walk away at the onset if they have a bad “feeling,” which is often created from poor communications.

Anticipating inquiries is also imperative. As part of your preparation, you will need to envision the possible questions and pain points in advance so you can quickly provide an advantageous solution.

To continue building trust—it’s a process—you will need timely financial statements, including monthly, quarterly and annual statements, to show them that your financial house is in order. The worst thing that can happen is that they see something that surprises them.

Establishing open communications, built on transparency and honesty, is invaluable. In part, that means timely responses and organized financials.

 

  1. Stack the Deck

 

Take it from someone who played in the NFL, the teams with the best players tend to win.

In the M&A game, assemble a winning team of experts to increase your chances for success. A tax advisor and business consultant should be on the list and at least one consultant should be familiar with valuing companies in the target industry.

You will also need internal stakeholders, such as your chief finance officer and controller, to be part of your team. These employees, along with the chief operating officer, will be responsible for telling and supporting the story.

And your attorney will bring it all together and keep it moving along.

Collectively, your team will be accountable for building good faith and goodwill throughout the process. They will amplify the positive and address the challenging items directly to bolster the relationships that get the deal done.

Amid the columns of numbers strewn across spreadsheets, you will always find people.

To close your next M&A deal, start there to seal success.

 

(Paul Fenaroli is an Associate Attorney at Pastore. His practice focuses primarily on corporate law, contract law, employment law and regulatory compliance involving M&A activities.)

 

How the SEC’s New Marketing Rule Affects Investment Advisors’ Advertising Awards and Third-Party Ratings

Posted on by Kelly McElroy

On December 22, 2020, the Securities and Exchange Commission (“SEC”) announced new rules regarding advertising and marketing for investment advisors.[1] The SEC passed the new rules to synthesize and modernize their “Advertising Rule” and “Cash Solicitation Rule” into a new, singular rule designed to regulate investment advisers’ marketing communications.[2] This new rule, 206(4)-1, also known as the “Marketing Rule,” applies to all advertisements. The SEC provided a new definition of what an advertisement is under the Marketing Rule.[3] The revised definition of advertisement has two parts:

First, the definition includes any direct or indirect communication an investment adviser makes that: (i) offers the investment adviser’s investment advisory services with regard to securities to prospective clients or private fund investors, or (ii) offers new investment advisory services with regard to securities to current clients or private fund investors. The first prong of the definition excludes most one-on-one communications and contains certain other exclusions.

Second, the definition generally includes any endorsement or testimonial for which an adviser provides cash and non-cash compensation directly or indirectly (e.g., directed brokerage, awards or other prizes, and reduced advisory fees).[4]

Following the definition, which now includes endorsements or testimonials that promote awards won by the investment advisor, the SEC lists prohibitions.[5] The Marketing Rule prohibits advertisements, “including or excluding performance results, or presenting performance time periods, in a manner that is not fair and balanced.”[6] SEC-registered investment advisors (“RIAs”) must follow the standards set by the Marketing Rule and transition their advertisement of awards won and their performance results. The SEC provided an 18-month transitional period for SEC-registered investment advisors to conform to the new Marketing Rule.[7] The 18-month window closed on November 4, 2022, and the SEC now requires full adherence to the rules.[8]

RIAs seeking to promote third-party ratings, rankings, awards, and performance results through advertisements and social media are directly impacted by this new rule. The SEC dedicated an entire section to third-party ratings in its issuing release, so it is essential for RIAs to be in compliance. The SEC states Rule 206(4)-1(c) will “prohibit an investment adviser from including a third-party rating in an advertisement unless certain conditions are met.”[9] Because of the SEC’s consideration of third-party ratings and awards as advertisements, the advertisement must follow general prohibitions.[10]

The Marketing Rule prohibits making untrue statements of material fact. If the third-party rating entity is credible and the advisor does not use the rating inappropriately, then the prohibitions can be avoided.[11] If the RIC plans to advertise one kind of service when the rating is for another kind of service, the Marketing Rule prohibitions apply.[12]

Additionally, a third-party rating agency providing the rating or award must generate ratings as part of their normal course of business.[13] The RIA also must fulfill two requirements to show the third-party rating or award is presented equally. First, they must show due diligence. The RIA must “have a reasonable basis that any questionnaire or survey used in the preparation of the third-party rating is structured to make it equally easy for a participant to provide favorable and unfavorable responses, and is not designed or prepared to produce any predetermined result.”[14] To comply with the due diligence requirements, RIAs can look at the rating methodology and show the rating is not one-sided or seek representations from the third-party rating agency regarding general aspects of how the survey or questionnaire is designed, structured, and administered. Alternatively, a third party rating provider may publicly disclose similar information about its survey or questionnaire methodology.

The second requirement is disclosure.[15] The RIA must disclose, or ensure the third-party rater has disclosed the date the rating was given, the identity of the third-party that created and tabulated the rating, and if compensation has been provided directly or indirectly by the adviser in connection with obtaining or using the third-party rating.[16] When presenting the rating, the RIA must ensure these disclosures are presented with equal prominence as the rating itself.[17] With the additional attention of the due diligence and disclosure requirements of the Marketing Rule, promoting ratings and awards continue to be possible as long as they are credible.[18]

With the SEC’s focus on solicitation activity regarding awards and ratings, it is imperative of RIAs to review and update their policies and procedures for the publication of awards on their websites, communications, and social media. Given the complexity of the Marketing Rule and the scrutiny of advertising practices, investment advisers should be fully engaged in implementing new policies for their advertisements in compliance with the Marketing Rule.

[1] SEC Adopts Modernized Marketing Rule for Investment Advisers, U.S. Securities and Exchange Commission, (Dec. 22, 2020), https://www.sec.gov/news/press-release/2020-334.

[2] Scott L. Beal, Kerry Potter McCormick, Scott Budlong, Travis Ortiz, Paige McHugh, Compliance Date Approaching For New Marketing Rule For Investment Advisers, Vol. XII, The National Law Review, 319 (2022)

[3] Id.

[4] SEC Adopts Modernized Marketing Rule for Investment Advisers, supra note 1.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] 17 CFR Part 275 and 279.

[10] Benjamin Bishop, SEC Marketing Rule: Implications for news releases that promote third-party ratings and rankings, Lowe Group Financial Communications, (Aug. 3, 2022), https://lowecom.com/2022/08/03/sec-marketing-rule-implications-for-news-releases-that-promote-third-party-ratings-and-rankings/.

[11] Id.

[12] Id.

[13] Id.

[14] 17 CFR Part 275 and 279.

[15] Id.

[16] Id.

[17] Id.

[18] Benjamin Bishop, supra note 10.

SEC ad rule may affect use of interactive analysis tools

Posted on by Luke Daigle

The new SEC advertising rule 206(4)-1 addresses the use of “interactive analysis tools” commonly used by investment advisers. In a recent article appearing in Regulatory Compliance Watch, Pastore associate attorney Paul Fenaroli weighs in on how this rule may affect the way advisers use these tools with their clients.

Read the article here

Source: Regulatory Compliance Watch, October 3, 2022. (www.regcompliancewatch.com)

The Modernized Marketing Rule for Financial Advisers

Posted on by Kelly Somers

On November 4, 2022, compliance with the amendments to the advertising and cash solicitation rules in Rule 206(4)‑1 under the Investment Advisers Act of 1940 (Marketing Rule), which the Commission issued on December 22, 2020 will become mandatory.

Since the advertising and cash solicitation rules were adopted (Rule 206(4)-1 in 1961 and Rule 206(4)-3 in 1979, respectively) the advent of the internet and social media, among other things, has dramatically changed the landscape of marketing professional services. The Marketing Rule is designed to modernize rules that govern investment adviser advertisements and payments to solicitors, replacing the broadly drawn limitations and prescriptive or duplicative elements in the previous rules with more principles-based provisions, as described below.

Definition of Advertisement. The amended definition of “advertisement” contains two prongs:

  • The first prong captures communications traditionally covered by the advertising and includes any direct or indirect communication an investment adviser makes that: (i) offers the investment adviser’s investment advisory services with regard to securities to prospective clients or private fund investors, or (ii) offers new investment advisory services with regard to securities to current clients or private fund investors. The first prong of the definition excludes most one-on-one communications.
  • The second governs solicitation activities previously covered by the cash solicitation rule and includes any endorsement or testimonial for which an adviser provides cash and non-cash compensation directly or indirectly (e.g., directed brokerage, awards or other prizes, and reduced advisory fees).

General Prohibitions. Under the Marketing Rule, the following advertising practices are prohibited:

  • making an untrue statement of a material fact, or omitting a material fact necessary to prevent making the statement misleading;
  • making a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate;
  • including information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the adviser;
  • discussing potential benefits without providing fair and balanced treatment of any associated material risks or limitations;
  • referencing specific investment advice provided by the adviser that is not presented in a fair and balanced manner;
  • including or excluding performance results, or presenting performance time periods, in a manner that is not fair and balanced; and
  • including information that is otherwise materially misleading.

Testimonials and Endorsements. The Marketing Rule prohibits the use of testimonials and endorsements in an advertisement, unless the adviser satisfies certain disclosure, oversight, and disqualification provisions:

  • Disclosure. Advertisements must CLEARLY and PROMINENTLY disclose whether the person giving the testimonial or endorsement (the “promoter”) is a client and whether the promoter is compensated. Additional disclosures are required regarding compensation and conflicts of interest. There are exceptions from the disclosure requirements for SEC-registered broker-dealers under certain circumstances. Advisers will no longer need to obtain from each investor acknowledgements of receipt of the disclosures.
  • Oversight and Written Agreement.An adviser that uses testimonials or endorsements in an advertisement must oversee compliance with the marketing rule. An adviser also must enter into a written agreement with promoters, except where the promoter is an affiliate of the adviser or the promoter receives de minimis compensation (i.e., $1,000 or less, or the equivalent value in non-cash compensation, during the preceding twelve months).
  • Disqualification. Subject to certain exceptions, “bad actors” may not serve as promoters.

Third-Party Ratings. The rule prohibits the use of third-party ratings in an advertisement, unless the adviser provides disclosures and satisfies certain criteria pertaining to how the rating was prepared.

Performance Information Generally.  In order to deter the provision of misleading information, the rule prohibits including in any advertisement:

  • gross performance, unless the advertisement also presents net performance;
  • performance results, unless they are provided for specific time periods in most circumstances;
  • any statement that the Commission has approved or reviewed any calculation or presentation of performance results;
  • performance results from fewer than all portfolios with substantially similar investment policies, objectives, and strategies as those being offered in the advertisement, with limited exceptions;
  • performance results of a subset of investments extracted from a portfolio, unless the advertisement provides, or offers to provide promptly, the performance results of the total portfolio;
  • hypothetical performance (which does not include performance generated by interactive analysis tools), unless the adviser adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience and the adviser provides certain information underlying the hypothetical performance; and
  • predecessor performance, unless there is appropriate similarity with regard to the personnel and accounts at the predecessor adviser and the personnel and accounts at the advertising adviser. In addition, the advertising adviser must include all relevant disclosures clearly and prominently in the advertisement.

If you are an investment adviser, now is the time to ensure your marketing materials comply with the modernized Marketing Rule.