Tilden Moschetti: When you are a
syndicator, or a fund manager,

you have certain duties to your
investors, it's not only good

business sense, it's a matter of
law, that you treat your

investors, right, and you have
certain fiduciary duties to

them. So in this video, we're
going to describe what those

duties are, and the best
practices to comply with it. To

keep you out of trouble, keep
your investors happy and help

you be more successful. My name
is Tilden Moschetti. I'm a

syndication attorney with the
Moschetti syndication Law Group.

There are three main duties that
are owed to all of your

investors. They're all members
of the LLC that you're using for

your private equity fund your
syndication, whatever. And these

three duties are always present,
you can't get rid of them

entirely. But you may be able to
establish a way to work with

them. And we'll discuss how that
happens in a minute. Now, it's

important to note that we put an
asterix on this and say, Yes, we

know that you have an operating
agreement that probably says

something like that the manager,
meaning you don't owe a duty to

your to all members, meaning
your investors. Now that is true

in some respect, but it's not
true. In all respect. It's not

true as it relates to these
three duties, which are

sacrosanct. So the first duty is
the duty of care, you, as a

manager, have a duty to
safeguard your investors money

in order to make reasonable
decisions, right, you cannot

just throw your money away their
money away, you cannot be

negligent on the care of their
money. You can't do things that

wouldn't a normal reasonable
person wouldn't do. You must do

be diligent and do your due
diligence and look out for that.

That's one of the most important
duties, if somebody is trusting

you with that amount of money,
they also are expecting to have

that you're at least gonna make
reasonable decisions and not

screw up and just totally be
negligent, right. I mean, that

kind of goes without saying. So
that duty is always there.

Number two is the duty of
disclosure. So that means that

you should be an open book to
your investors. I've had

syndicators ask for, for the
work to create a world that's a

closed book. And I don't
recommend that it certainly is

possible that you could narrowly
tailor these rules, but it's

gonna start to look very fishy.
I've had people ask me before,

well, can we make it so that
they can't ever see the books or

the accounting? Well, we can put
that into an operating

agreement. But I don't think
you'd actually be able to win a

court battle. If an investor was
to say, I just want to see how

my money's being used. And to
make sure that it's following a

good duty of care, or that it's
not being stolen from under me.

So I don't think it's a good
policy, not only for PR reasons

on being transparent. But it's
just also the right thing to do,

to let investors know exactly
how their money is working for

them. And if you're doing a good
job, this is a great thing to be

telling them. Because here are
the books, here are the great

things we're doing for you to
make you more money. So the duty

of transparency is something I
don't think you can just get rid

of. And I don't think that you
should narrowly tailor it. And

at the end of the day, it's just
bad policy to try and do it. The

third duty of care is the duty
of loyalty. So these are

investors who have trusted money
with you, you owe them loyalty

and not can engage in self
dealing. self dealing is where

you're putting your interests
ahead of your investors

interests. Now, it's important
to note that there are many

inherent conflicts of interest
in this very duty, right? If

you're making a large management
fee, and it's time to sell the

property and you don't want to
sell the property, or your

whatever the assets or the
whatever the fund is. And you're

so your own self interest says,
Hey, keep this thing going for

another 10 or 20 years, and I've
seen this happen. I've seen

people syndicating try and do
this and it's wrong. You owe a

duty to your investor to put
their interests first they trust

to do You want this money to do
the right thing to make those

reasonable decisions under the
duty of care, and to be an open

book and the duty of
transparency, but you also have

that important duty of loyalty
to them. Now, like I said,

Before, there is a conflict of
interest inherent here, for

example, you may be trying to do
a, trying to sell the property,

sell a property or sell an
asset, because it's time to exit

and you'll cash out good, right?
Anytime you're making money at

the expense of whatever the acid
is, there's this question about

whether or not there is a self
dealing going on, because you're

about to make some additional
money based on whatever happens

with their asset. Now, why
that's okay, is because it's the

very beginning, at the very
beginning of the investment, you

gave them a private placement
memorandum. Now, let's put it in

a real estate context, because
that's the easiest for given

example. So in the real estate
context, let's say you bought a

building and you say, okay, in
five years, we're gonna sell

this building at a high price,
I'm gonna get an A, not only am

I going to get a disposition fee
of 1%, but I'm also going to be

the selling broker, that's,
that's going to be taking a

commission on it. Now, some time
goes by two and a half years,

three years go by you told them
five years, but three years have

gone by an offer comes in, you
didn't solicit it, it just comes

in hits your table, you
obviously because of the duty of

transparency, have a duty to
report that to your investors.

But you also want that
transaction to occur, because

now you're going to get cash
pretty quick. Right? So you

actually want that transaction
to occur early. So that

automatically is self dealing.
But in your private placement

memorandum, you said, hey, look,
I am a reg, I am a licensed real

estate broker, I am going to be
making this disposition fee

here. And then when it comes
time for that transaction to

occur, you say, hey, I want some
input on this to decide whether

or not this is a good idea. And
whether or not we should go

forward with it. You've let the
investors know that you're going

to let the market dictate when
you actually sell the property.

So you've given them all this
information that says, hey,

there's also this possibility
that I'm going to be self

dealing here, I am going to look
after your interest and I'm not

going to make unreasonable
decisions. And I'm not going to

be non transparent to use a
double negative. And I'm going

to let you know when things are
what things are going on. So

you've complied there. But
you've also acted in a way

that's been loyal, because
you've told them what those

conflicts are. And you should
continue to tell them what those

conflicts are so that people can
make reasonable decision. And

I'll tell you what, if you've
been straightforward with your

investors, up until this point,
they're gonna go along with you

anyway, because they've already
trust you. They already see what

you're trying to do. So you have
nothing to lose. But by being

more transparent, more, do more,
do caring for their money, and

just being loyal to them. They
will allow, they will do what

you want them to do. Anyway,
almost always, unless it's a bad

decision. Unless there's a very
good reason that they that

you're not making a good
decision, they're gonna go along

with you anyway. So those are
the three main duties that are

owed to your investors as a
syndicator, or fund manager.

Now, the key takeaways here are
this. The fiduciary duties

including the duty of care, duty
of disclosure and duty of

loyalty are the foundation of
the financial relationship

between you and your investors.
And breaching these fiduciary

duties can result in severe
consequences, such as legal

implications, reputational
damages, and possible criminal

misconduct. Engaging in separate
deals that do not conflict with

the companies or investors
interests are always going to be

permissible. And understanding
and upholding your fiduciary

duties are crucial to
maintaining that trust. And that

ethical conduct in the financial
relationships is only going to

make your job as a syndicator or
fund manager even easier. My

name is Tilden Moschetti. I am a
syndication attorney. With the

Moschetti syndication Law Group.
We help syndicators and fund

managers organize and set up
their syndications or investment

funds and give them the support
that they need in order to be

successful. If we can help you
don't hesitate to give us a

call.