The Roles of Legal Counsel and Fund Administration

It's critical to understand the distinct roles that legal counsel and fund administrators play in the process of fund formation and management.

When it comes to fund formation, legal counsel specializes in providing advice on fund structuring, creating fund documents, and addressing legal and regulatory issues. This role requires an in-depth understanding of securities laws, tax laws, and other relevant regulations.

Fund administrators, on the other hand, are responsible for a broad range of tasks such as financial reporting, NAV calculations, and regulatory compliance. Their main objective is to safeguard the assets of the fund and ensure accurate fund valuation. In order to execute these tasks, a fund administrator must fully understand the fund documents and all interpretations. With their broad range and in-depth knowledge of a variety of different fund setups and structures, fund administrators can provide clients with valuable guidance by dissecting legal language and converting it into an actionable and executable framework.

Mixing is Risking: Conflicts of Interest and Beyond

A critical risk that fund administrators face when handling legal fund formation is the potential for conflicts of interest. The potential exists that a manager's particular strategy or approach and the risks to investors may not be disclosed properly in the pro-forma documents used by administrators in fund formation. Fund administrators might also lack the expertise to provide legal and regulatory advice, which could lead to crucial details being overlooked and exposure to significant additional risk.

A Better Way: Network Building, Making Connections, and Best Practices

There is, however, a better way of handling the needs of your clients. It starts by understanding the importance of the specialized roles in fund administration and legal fund formation and keeping them separate. If you offer fund administration services, don’t provide legal fund formation services. Focus on your core competency and provide your clients with the best possible service.

Serve your client's legal counsel needs by creating a network of on and off-shore legal firms. This way, after assessing your client’s budget and specific requirements, you can provide them with referrals to the legal experts they need for fund formation. Using this approach gives you the best of both worlds, you get to provide clients with expert fund administration and referrals to expert legal advice from your network of legal firms. As an added bonus, the legal firms that you refer business to will probably send you clients in need of fund administration services.

While fund administrators shouldn’t write fund formation language, they should thoroughly read through the language using their experience to provide clients with best practice guidance on various topics such as management fees, investor equitableness, NAV calculations, re-balance clauses, unitization, organization costs, etc.

Conclusion: Separation Equals Success

Successful fund management doesn’t come from cutting corners, it’s about having the right expertise for each role. While having an all-in-one solution for fund administration and legal fund formation is becoming more popular and might seem appealing, the benefits of specialized roles far outweigh the perceived cost savings. By separating the roles of legal counsel and fund administration, you get the peace of mind of knowing that you are providing clients with the best fund administration services and best practice expertise while serving their fund formation needs through your network of legal experts.

Hopefully, this exploration of legal counsel and fund administration services has been valuable for you. If you’d like to discuss more about making informed decisions that lead to successful funds, we’d love to talk to you.

About Formidium

Formidium, based in Downers Grove, Illinois, is a leading global fund administrator and investment back-office technology provider. Its innovative platform combines Seamless (a web-based fund accounting application) and CommonSubDocTM (an investor onboarding portal). With over 1000 professionals and offices worldwide, Formidium serves 1000+ investment funds and is audited for SOC 1, SOC 2, and SOC 3 compliance.

About the author : Shalin Madan , Co-Founder & CGO

Shalin Madan is the Co-Founder of Formidium, He has held senior roles with investment management firms including a registered investment adviser for a major family office. Shalin has personally supported multiple highly successful Silicon Valley-based tech startups as an investor and board advisor.

shalin.madan@formidium.com