Navigating the Gray Zone: Regulatory Ambiguity in Private Markets

As wealth managers push further into private equity, private credit, and private placements, many are discovering that the regulatory lines they once relied on are no longer clearly drawn. Does offering access to a private fund require becoming a registered investment adviser? Does structuring a placement require a broker-dealer license, or both? These aren’t hypothetical questions anymore — they’re live compliance decisions facing firms every day, often without clear regulatory guidance to fall back on.

At the same time, as private markets democratize and retail platforms bring more investors into deals alongside GPs, GP stakeholders, and co-investors, a new question is emerging: are financial advisors actually equipped to assess the conflicts, pricing, and exit risks embedded in these increasingly complex structures?

Lisa Roitman, managing partner at Abide Consulting Group and a former general counsel and chief compliance officer for several SEC-registered investment advisers, has spent her career helping investment managers navigate exactly this kind of regulatory ambiguity.

Roitman discusses where the lines are blurring, what happens when private deals go wrong, and how firms can build compliance frameworks that hold up under scrutiny.

CM: Where are you seeing the greatest regulatory ambiguity as wealth managers expand into private markets?

LR: Much of this depends on whose perspective you are focused on. For example, the seemingly moving goal posts on how you determine accredited investor status has some private fund managers moving from 506(b) to 506(c) for their private fund and co-invest vehicle launches. Some of this may be a reaction to the 2025 no-action relief allowing accredited investor verification through high investment minimums plus written representations or it could be simply a perceived shift in consumer protection focus from a federal perspective.

There is certainly an argument that regulatory ambiguity around consumer protection can also impact the type of disclosures or risk factors firms might require especially when trying to provide information about valuations and liquidity. It may also make it more difficult for firms to build out eligibility/suitability processes. Ultimately, these unanswered questions can leave both private fund managers and wealth managers in the line of fire for litigation. Aggressive state regulators and/or plaintiff attorneys may look to exploit what they perceive as risk of downstream access to private market opportunities.

CM: How should a firm determine whether offering access to private markets triggers the need to register as an RIA, add a broker-dealer, or both?

LR: This is a particularly loaded question. Critical to making these decisions is to analyze the activity the firm is currently engaged in along with the activity it expects to engage in say in the next twelve months. Specifically, firms should ask themselves whether they are giving investment advice, whether they are transacting in securities, or perhaps both. Examine how they are getting paid for the services they are providing. If you are a Wealth Manager who is helping a client build a portfolio of private market fund investments, adjusting allocations, and you receive an advisory fee, then the argument is that you are giving advice, not executing transactions.

If, however, you are receiving formula-based compensation tied to the amount of money you help raise or have some other sort of revenue-based sharing arrangement you need to take a harder look as to whether your activity triggers both investment adviser and broker dealer consideration. The devil is definitely in the detail and chatting with your compliance consultant and/or legal counsel can help firms navigate these decisions and requirements. While registration can seem daunting, it can also be a path to future growth. Given the operational expectations associated with regulated activity, firms definitely need to consider what works best for their ultimate business model.

CM: Is there a clear regulatory framework firms can rely on today, or are they largely operating in a gray area shaped by enforcement actions and informal guidance?

LR: The best answer here is really both. There are fairly clear sets of standards and best practices for most investment adviser activities, but it’s really in the nuance of the product being offered and the audience to whom it’s being offered, which can really make a difference. When you start moving into newer assets classes – not that digital assets are that new anymore but the regulation of digital assets and/or crypto assets in particular has been more difficult from a regulatory ambiguity standpoint, or when you start offering products and services to less sophisticated or more retail like consumers, the traditional regulatory compliance and legal playbook can start to change. Enforcement actions, no action letters and good old networking are always great ways to see what regulatory priorities really are going to look like over the next twelve months.

Networking is also a great way to make sure you know what your peers are doing especially when a regulation or rule may simply be unclear. A good example is the recent SEC proposed rulemaking about pay to play. If the SEC ultimately does away with the rule will firms change their policies and procedures? Remains to be seen but unless you understand how professionals in the industry are viewing the changes in rulemaking your firm may be reacting in a vacuum.

CM: How should a firm structure its compliance program differently when it’s offering private market access compared to traditional advisory services?

LR: If an adviser is looking to shift from traditional public offerings to private market offerings I would first and foremost focus on making sure your firms operational and compliance programs are broad enough to capture and deal with some of the complexities. The process for making decisions around suitability may need to be adjusted; you may need to add processes for dealing with valuations and/or liquidity related issues. Your operations team may need support related to closings and settlements. Your investment committee process may need to change and/or your investment and operational due diligence.

Someone will also need to review your marketing material and make sure you have appropriate disclosures and disclaimers, and you may need to change your process for creating, approving and using such material. Not to be overlooked are your fiduciary obligations to your clients. Firms will need to determine whether their investment professionals have the requisite experience and expertise for the new assets class. Finally, if you do need to make changes to your investment process, compliance and operational procedures, don’t forget to update your annual training!

CM: When a private markets deal goes bad, what typically triggers regulatory scrutiny, and who tends to bear the responsibility?

LR: The short answer is that this is highly dependent on what went wrong. Private market deals can be hard to value, illiquid, and like any asset/transaction can fail. What can be problematic about private transactions is that you may not have access to as much information, and you may not be able to liquidate. Deals under stress may be restructured, and if you are the minority investor, you may not have much input in the process which simply doesn’t feel right. The consequence is that when a deal fails, how you manage both the transaction under stress and your clients definitely matter.

If clients feel that you let them down in your fiduciary obligations, mis-marketed, or are unfairly treating some investors differently from others, a firm increases the risk for a regulatory exam and or client legal action. Discipline around your investment due diligence process, communication and disclosures to your clients and adherence to your core compliance principles will all help a firm weather a storm. The truth is that sometimes deals just fail. The key to being resilient is making sure your clients understood the risks they were taking and your determination that given the totality of circumstances it was a suitable investment for them to be making. Making sure you understand your clients’ rights if an investment starts to go under and taking appropriate action swiftly to preserve value can move you from villain to hero.

CM: As retail access to private markets continues to expand, what regulatory changes do you expect, or would you like to see, to protect both advisors and investors?

LR: This has been an interesting evolution. While on the one hand it’s exciting to open up platforms that provide retail investors with access to new types of investments, there can definitely be a gap in understanding the asset class or appreciating the differences in the valuations and/or liquidity and event time horizons for performance expectations. Understandably, the regulators may continue to focus on stronger suitability and best interest standards. What will be interesting to watch will be the interplay between federal and state regulatory regimes. Where the federal government has changed its consumer protection focus, states may look to step in. Bifurcated rulemaking is likely to make compliance programs more complex in the long run.