Legal glossary

Representations of sub-adviser: Overview, definition, and example

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TL;DR

Defines representations of a sub-adviser in investment management agreements, detailing the statements and assurances required to confirm qualifications and compliance with legal and ethical standards. Investment firms use these representations to protect their interests and ensure that sub-advisers meet fiduciary responsibilities, reducing compliance risks and establishing clear expectations.

What are representations of a sub-adviser?

Representations of a sub-adviser refer to the statements, assurances, and commitments made by a sub-adviser in an investment management agreement. These representations confirm that the sub-adviser meets specific legal, financial, and professional qualifications and will perform their duties in compliance with applicable laws and fiduciary responsibilities.

For example, a sub-adviser managing a mutual fund’s assets may be required to represent that they are properly licensed, have no conflicts of interest, and will act in the best interests of investors.

Why are representations of a sub-adviser important?

These representations are crucial for protecting the interests of the primary investment adviser, fund managers, and investors. They help ensure that the sub-adviser is legally qualified, operates ethically, and follows industry regulations.

For investment firms, including representations of a sub-adviser in contracts provides legal protection, reduces compliance risks, and establishes clear expectations regarding the sub-adviser’s duties and professional standards.

Understanding representations of a sub-adviser through an example

A hedge fund hires a sub-adviser to manage a portion of its investment portfolio. In the contract, the sub-adviser represents that:

  • They are registered with the SEC as an investment adviser.
  • They have no disciplinary actions or regulatory violations.
  • They will follow the fund’s investment guidelines and comply with applicable securities laws.

If the sub-adviser fails to uphold these representations—such as engaging in unethical trading practices—the hedge fund may have legal grounds to terminate the agreement or seek damages.

In another scenario, a wealth management firm contracts a sub-adviser for specialized investments in emerging markets. The sub-adviser must represent that they have experience in the sector, access to proprietary research, and adequate risk management policies in place. These assurances help the firm mitigate risks when entrusting client funds to the sub-adviser.

An example of a representations of sub-adviser clause

Here’s how this type of clause might appear in an investment management agreement:

“The Sub-Adviser represents and warrants that: (a) it is duly registered as an investment adviser with the Securities and Exchange Commission and remains in good standing; (b) it has the necessary expertise, experience, and resources to provide the advisory services contemplated under this Agreement; (c) it shall comply with all applicable laws, rules, and fiduciary duties in performing its services; and (d) it has no conflicts of interest that would impair its ability to act in the best interests of the Client.”

Conclusion

Representations of a sub-adviser help ensure that investment managers and fund advisers work with qualified, ethical, and compliant professionals. These clauses protect investment firms and clients by setting clear expectations regarding the sub-adviser’s qualifications, legal standing, and fiduciary responsibilities.


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