The purchase, sale or merger of an advisory practice involves a whirlwind of tightly-coordinated efforts by a myriad of different parties. In the shuffle of negotiating the deal terms, settling on a valuation methodology, coordinating with custodians and integrating technological systems, when does the client get a say, if any? In the time-honored tradition of attorneys everywhere, my answer is that it depends.
Section 205(a)(2) of the Investment Advisers Act of 1940 prohibits advisers from entering into an investment advisory contract with a client that “fails to provide, in substance, that no assignment of such contract shall be made by the investment adviser without the consent of the other party by the contract.” This is the baseline requirement that an advisory contract must, without exception, afford the client the opportunity to consent to his or her contract being assigned to another adviser.
That said, the SEC has never explicitly defined what constitutes client consent. Must a client affirmatively take some sort of action to provide consent to an assignment, or is the client’s failure to object to an assignment sufficient? It depends, in large part, in what exactly the signed investment advisory agreement states.
If the signed investment advisory contract requires the client’s written consent to an assignment, the assignment cannot occur until the client physically signs something granting his or her approval (i.e., positive consent). If the investment advisory contract does not require written consent, assignment may automatically occur if the client fails to object within the stated period of time (i.e., negative consent). If the investment advisory contract does not address the assignment consent issue, it does not meet the requirements of the Advisers Act.
The important takeaway for advisors, however, is that negative consent is generally permissible in the context of an assignment. The SEC affirmed this view through a series of no-action letters from the 1980s, which were later reaffirmed in further no-action letters from the 1990s.