Managing the complexities of fund distribution in the United States can be challenging for investment advisers, with nuances that are often misunderstood or overlooked. A critical component of this process involves establishing a relationship with a broker-dealer, which serves as the distributor or legal underwriter for registered funds. This step is not only essential for regulatory compliance, including FINRA registrations like Series 6 or 7—but also plays a pivotal role in ensuring efficient fund distribution, mitigating risks, and optimizing costs.
This blog explores the dual responsibilities of a distributor, the regulatory landscape of registered funds, and strategic considerations for leveraging an outsourced fund distributor to streamline operations and enhance compliance, offering a reliable path to success in this intricate terrain.
Distribution: Dual Track of Responsibilities
Many people often associate the term “distributor” as the selling or marketing of registered funds to investors, institutions, and/or financial advisers. Usually, this type of distribution is done by fund wholesalers, national accounts, or marketing personnel, whose primary responsibility is to engage, inform, and educate investors on the investment strategies utilized by investment advisers in the form of registered funds.
It is also important, however, to recognize that, in the context of distributing registered open-end funds, there are strict regulatory requirements. These rules mandate that the fund distributor must involve a broker-dealer to comply with legal underwriting obligations.
Registered Fund Landscape
First, let us broadly define the registered fund landscape that represents the distribution space. According to the 2025 Investment Company Institute, ICI Factbook, as of year-end 2024, approximately $39.2 trillion were invested in US-registered investment company total net assets. To break this down, let’s look at additional defined classifications that are representative of registered funds. Presently, the largest categorization of registered funds, based on assets, are US open-end mutual funds, which total assets under management rounded out at $28.5 trillion as of year-end 2024. This is followed by US exchange-traded funds, which continue to narrow the gap in assets under distribution with open-end mutual funds each year, with a 2024-year-end total of $10.3 trillion. These two classifications of registered funds present the lion’s share of fund assets yet there are other well-known fund classifications including traditional closed-end funds and Unit Investment Trusts (UITs), each managing $249 billion and $90 billion, respectively. Equally noteworthy is the burgeoning retail alternative space, which is, in some ways reintroducing interval funds and Business Development Companies (BDCs). While these investment vehicles have long been available to investors, they are now gaining popularity as registered products that provide retail investors with access to alternative investments- opportunities that were previously reserved for high net worth and accredited investors.
Regulations and Compliance
Investments in registered funds continue to represent a significant market for investment advisers to apply their investment strategies in an accessible format for investors. However, as with most opportunities, there also comes a tremendous amount of responsibility, including governance and compliance with regulatory requirements related to operating and offering open-end funds to investors. Many of these requirements were created following the Great Depression of the late 1920s and early 1930s, in the form of a series of “acts” or laws designed to provide protections to investors in these various fund classifications.
One such act, the Investment Company Act of 1940, governed by the Securities Exchange Commission (SEC), contains a comprehensive series of requirements, regulations and oversight governing such things as fund structure, prohibition of certain types of investments, restricted transactions with affiliates, and regulation of investment advisory and distribution arrangements. One aspect of these requirements is that funds registered under the 1940 Act must be distributed through a broker-dealer. The vast majority of the broker-dealers fall within the regulatory realm of the Financial Industry Regulatory Authority, or FINRA.
Who is FINRA, and what is a FINRA broker-dealer? FINRA is a private American corporation, authorized by the U.S. government to oversee and regulate member brokerage firms. A FINRA broker-dealer is a firm in the business of buying or selling securities on behalf of its customers, its own account, or both. A FINRA-regulated broker-dealer is required for the distribution of registered funds.
Outsourcing Broker-Dealer Operations
For many years, asset managers managed their broker-dealer operations in-house, primarily to distribute their registered funds. In some limited circumstances, these operations also supported other retail activities, such as maintaining client accounts. However, over the past 10 to 15 years, there has been a notable shift toward outsourcing broker-dealer operations to a specialized partner. This trend gained momentum as many large commercial banks and asset managers began to recognize the risks associated with operating broker-dealers and the potential impact on their core business activities.
Outsourcing broker-dealer operations to a trusted external partner offers investment advisers significant advantages. It streamlines an investment manager’s operations, enhances efficiency, and allows advisers to focus on their core expertise while relying on the partner’s specialized knowledge to manage compliance, processes, and support seamlessly.
Two key reasons to consider outsourcing legal underwriting/distribution:
- Expense reduction
- Reputational and/or risk mitigation
Expense reduction: To operate a broker-dealer requires a significant amount of regulatory expertise. For most investment advisers, their core competencies are specific to the management of investor assets and increasing assets under management. The operation of a broker-dealer requires a named President, as well as a Chief Compliance Officer (CCO), a treasurer or financial operations principal (PFO), and potentially other compliance focused individuals. While not required, it would be wise for these individuals to have experience and operational and regulatory knowledge associated with maintaining a broker-dealer. That business acumen generally carries a high price tag for one or more of these individuals. Outsourcing to an established broker-dealer can allow advisers to scale their operations, avoiding the need for additional internal resources.
Additionally, a limited purpose broker-dealer, serving solely for the purpose of distribution of registered funds, is required to maintain net capital requirements for the broker-dealer. These assets must remain on the books and records and cannot be allocated to other operations of the investment adviser. Although the dollar amount is typically in the range of $25,000 – $50,000, it can stretch significantly higher, depending on several variables, such as the fund structure, investment strategies, and portfolio allocations. Outsourcing statutory distribution can help advisers by allowing them to put their revenue and reserves towards critical projects and investments rather than retaining it to satisfy a regulatory requirement. Also for consideration is the cost of FINRA filing requirements for funds, and possibly registered individuals, as well as legal expenses associated with the operation of the broker-dealer. Much of the exposure to these expenses can be significantly reduced or possibly eliminated by outsourcing these vital functions to a well-resourced partner.
Reputational and/or risk mitigation: Every broker-dealer/distributor is subject to the regulatory oversight and rulemaking of FINRA and the SEC. With this comes the responsibility to ensure that associates of the broker-dealer and their activities align with the stated rules and regulations of each unique entity. One way to help ensure the broker-dealer meets the regulatory requirements of each body is to have an extensive set of compliance policies and procedures and maintain activities on a quarterly and annual basis to ensure that personnel remain in compliance with these operating procedures.
Most of an investment adviser’s personnel and their related work do not fall under the requirements of FINRA, as they are not directly related to the marketing or distribution of the registered funds. However, any individual engaged in activities associated with the marketing of registered funds falls squarely within these rules and requirements. Potentially one of the easiest areas to fall short of, both from a regulatory perspective, as well as investor expectations, is for one of these individuals, registered people or otherwise, to stray outside the scope of the firm’s policies and procedures, as well as those rules and requirements which are related to the distribution of registered funds.
Very little strikes greater fear in the heart of an investment adviser than that of a registered representative participating in nefarious or unfair marketing activities. Not to mention those things which are inadvertent, yet perhaps unknown, due to the fast-changing rules of the regulatory agencies. If a firm does not maintain the proper policies and procedures, as well as the necessary staff to monitor employees’ activities, it creates potential for significant reputation risk, or worse, in the form of fines and censure from one of the regulatory bodies.
One way to potentially reduce and solve for such risk is partnering with a well-resourced firm that offers the necessary expertise, personnel, and technology solutions to reduce or potentially eliminate the multitude of risks associated with the distribution of registered funds. This allows the investment adviser to focus their attention and efforts on their core competencies.
Why outsource to an established distributor
Fund administration firms with deep experience in distribution, such as Ultimus, understand the challenges advisers face when distributing ’40 Act registered funds. Utilizing high-touch, high-quality service, coupled with a well-established network of relationships with financial intermediaries and industry partners, assists investment management firms with optimizing their distribution plans. Ultimus, with over 20 years of experience serving as a legal underwriter for all fund types, continues to expand its expertise and capabilities while maintaining a boutique service model.
To further support investment advisers, distribution firms typically employ an experienced team of professionals to help simplify the complexities associated with registered fund distribution. Thus, allowing the adviser to focus their energy and attention on their core competencies, which is primarily managing investor assets and creating and enhancing new and existing investor relationships.
Additionally, outsourcing to a firm like Ultimus, which is well equipped to remove a large portion of the regulatory burden associated with the distribution of registered funds, can provide increased risk management and regulatory guidance. Whether it is executing selling agreements with intermediaries, processing 12b-1 payments, providing the mechanism to trade your funds via the NSCC, maintaining representatives’ registrations, including the requisite compliance supervision and regulatory oversight associated with these fund marketing personnel, established distributors can also provide principal review and possible submission to FINRA of fund marketing materials, when required.
Ultimus is a trusted partner, offering expert guidance, a consultative approach, and regulatory support to help investment advisers with their distribution strategies. We simplify operations, improve efficiency, enhance compliance, and reduce risk, so you can focus on growing your business, achieving strategic goals, and building strong investor relationships. While other firms may provide similar services, few offer the comprehensive combination of legal underwriting services, coupled with a full suite of fund administration, fund accounting, and transfer agency solutions. These are essential components for effectively managing registered fund operations. What sets Ultimus apart is the ability to deliver these services with best-in-class technology and a team of highly experienced service professionals.
Ready to simplify and streamline your broker-dealer activities? Let’s discuss how Ultimus can help you achieve your distribution goals. Contact Us to learn more.
Ultimus Fund Solutions, LLC provides fund distribution services through its affiliated broker-dealers: Ultimus Fund Distributors, LLC, and Northern Lights Distributors, LLC. Each of which is a registered broker-dealer and member of FINRA.
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