AI Hype vs. Regulatory Reality: What New Managers Must Get Right in 2026
- Feb 24
- 7 min read
AI remains a hot topic for 2026. Below, we discuss different ways it can be used by new and seasoned managers. To start the New Year right, I interviewed funds attorney, Dave Rothschild, on AI, disclosure risk, and why cutting legal corners can end a business before it begins.
Dave Rothschild is a seasoned funds attorney from Cole-Frieman & Mallon LLP, a law
firm whose practice focuses on helping alternative managers structure and launch domestic and offshore investment vehicles. His sweet spot is a manager leaving a bigger shop that is setting up a firm of their own for the first time, and they're launching a new fund somewhere in the $10 to $50 million launch size. Those are also his most frequent new clients. Around half of the new funds that Dave helps launch are new managers and, as he says, they come in all shapes, sizes, and asset classes. His firm has deep experience across traditional asset classes and is among the go-to law firms for digital asset fund strategies.
With regard to issues, what Dave’s seeing now mirrors earlier cycles in the industry—but with a new and more dangerous twist.
As alternative managers move into 2026, one theme keeps resurfacing in conversations with legal counsel: Artificial Intelligence. Not AI as a buzzword, but AI as a growing source of regulatory, disclosure, and liability risk.
The First Problem: Marketing the Idea, Not the Reality
According to Dave, one of the most common issues he sees is not unique to AI at all. It’s a pattern that managers have followed for years.
“Managers want to take advantage of what they perceive as a fad, because it gives them, in their minds, a leg up on marketing efforts.”
He compares today’s AI enthusiasm to earlier waves around ESG. The regulatory issue is not whether ESG—or AI—is good or bad. The issue is accuracy and clarity. People are now focused on headlines about AI, Dave says, so managers want to talk about how they're leveraging AI to create a fund that's better than their competitors’ funds.
If a manager claims to be using AI in their investment process but is not actually doing so in any meaningful way, that is no different from any other materially false statement in marketing materials or offering documents.
The core rule is simple, says Dave: “Do what you say and say what you do.”
If AI is part of the strategy, managers must be precise about:
How it is used
Where it fits in the process
What it does—and what it does not do
There is no universal definition of “AI investing,” just as there is no single definition of ESG. What qualifies for one manager may be unacceptable to another. Vagueness is where liability starts.
The Second Problem: AI Creates New Categories of Risk
The second issue is unique to AI.
Once a manager truly uses AI, the risk universe expands - and must be disclosed appropriately. Dave points out several questions regulators and investors will eventually ask:
Is AI part of the investment decision-making process, or only used for back-office efficiency and productivity?
Is it used for research, portfolio construction, investor onboarding, or compliance support?
Is the AI system built internally or licensed from a third party?
What data sets are used to train it?
How are bias, hallucinations, and data errors addressed?
Are there confidentiality protections when proprietary or client data is input?
“AI tools are incredibly powerful,” Dave noted, “but they also just make things up sometimes.”
Those hallucinations are not merely technical issues; they are disclosure issues. If AI influences investment decisions, the risks associated with that influence must be explained clearly and honestly.
Why Law Firms Are Also Using AI—and What That Means for Clients
Confidentiality concerns are not theoretical. Dave explained that his own firm went through an extensive vetting process before adopting a third-party AI platform, ultimately selecting Harvey AI after detailed technical and security diligence.
That internal adoption matters to clients.
When law firms use AI intelligently, they can reduce time spent on repetitive work—sometimes dramatically. And because a law firm’s product is time, efficiency can translate directly into lower costs for managers. Dave says “What I found with my practice, is that leveraging AI systems intelligently can save me a ton of time, and my business is selling my time. So, if I can do a fund launch in seven hours using AI, that would have taken me 20 hours without AI, I can save the client a significant amount of money, and I can do more funds and service more clients. It’s a win/win for everyone.”
Dave encourages new managers to ask prospective attorneys:
How are you using AI internally?
Does it reduce time—and cost—for clients?
The answers can be revealing.
The Temptation to Replace Lawyers with ChatGPT
Another growing concern Dave sees - especially among new managers - is the belief that AI can replace legal counsel altogether.
Some managers assume they can:
Generate offering documents using ChatGPT
Send them to a lawyer for a “quick review”
Save money in the process
In reality, the opposite often happens.
When an attorney receives AI-generated documents, they must
Review every word for accuracy,
Identify what is missing, not just what is wrong
Rebuild provisions that fail to reflect the manager’s specific facts and circumstances
That second step—finding what isn’t there—is often the most time-consuming and expensive part. “If the AI gets 80% right,” Dave explained, “you’re still leaving a 20% chance that you’ve violated a regulatory obligation. And that 20% can be business-ending.”
People get in their heads that everything a lawyer does is templatized, so they tell the lawyer they’re now a registered investment advisor and they need a set of policies and procedures that's appropriate for an investment advisor and ask the lawyer to just send them something off the shelf. They believe they can just fill in their specific details and will be good to go. That's it, like, funds-in-a- box. Makes sense in a box, exactly. Ultimately, it's the same thing as wanting ChatGPT to draft their document. They’re probably going to miss a regulatory obligation or do something that is not in line with their regulatory obligations, and that will eventually get them into trouble.
What Dave says to clients who ask him for off-the-shelf documents when they're raising a real fund, is:
There's a broad ecosystem of legal service, law firms, lawyers, legal service providers that can help launch a fund. They don’t have to pay big law firm rates to get a fund properly launched.
When launching a fund, you are dealing with an intersection of at least three - and possibly many more - federal and state regulations that are extremely nuanced, and the facts and circumstances of your business matter with respect to how you comply with those laws.
Liability and Accountability: The Human Difference
Dave framed this distinction simply: If you were on trial, which would you want representing you:
A human being who understands your business and your risk tolerance and can shepherd you through the regulatory maze?
Or a robot trained by everything (good and bad) on the Internet?
Launching a fund is not about filling in templates. It is about anticipating future liability and either structuring around it or understanding and accepting it.
Practical Guidance for New Managers
For managers with $1–3 million under management, Dave’s advice is pragmatic:
Educate yourself using AI, so you can ask better questions when seeking a lawyer.
Engage a lawyer early, especially in regulated businesses like investment advisory or commodity/futures trading.
Use AI to prepare, not to replace professional advice.
If you want to use AI for drafting, discuss it with your lawyer first and hold them accountable for cost expectations.
What Should Legal Costs Look Like?
Costs vary widely depending on the size and type of assets and even the fund structures, themselves:
For Fund launches Dave usually quotes between $30,000–$40,000, though costs vary widely depending on a number of factors, including the manager firm, the size of the fund, its asset class, and the complexity of offering terms.
SMAs (single managed accounts): While it may seem that SMAs should be less expensive, and drafting an investment management agreement may only be $5,000–$10,000, if the firm has to register as an Investment Advisor, registration, putting together a set of policies and procedures and ongoing compliance often dwarf that over time and can actually be more expensive than a Fund.
For investment adviser registration and ongoing compliance, Dave recommends specialized compliance firms rather than large law firms, particularly those focused on emerging managers and CTAs (Commodity Trading Advisors), he suggests firms like Silver Regulatory Associates, headquartered in NY, Cartesian Digital for digital asset vehicles (crypto, blockchain), located in Stamford, CT and London, and V17 Advisors, located in San Francisco, CA..
The Bottom Line
AI is not the problem. Misrepresentation and liability exposure are.
Used thoughtfully, AI can improve efficiency, education, and execution. Used carelessly, it can create undisclosed risks, false marketing claims, and regulatory exposure that no new manager can afford.
As Dave emphasized throughout the conversation, the principle remains unchanged—even as the tools evolve:
“Say what you do. Do what you say. And never cut corners where liability lives.”
Was this topic of interest to you? Dave also hosts “Tokens of Wisdom”, a free, bite-sized podcast discussing the legal issues in forming, launching, and running private investment funds, including considerations unique to digital asset/crypto funds. A link to his most recent AI episode can be found here: https://open.spotify.com/episode/4MCb3Ls7eZHPEFO5ymlyD2
Till next month!
Carol R. Kaufman, Founder/CEO of Alternatives TLC, LLC has been consulting to emerging and seasoned alternatives managers and various types of industry businesses since 2005. She performs operational and organizational due diligence using her Emerging Manager Roadmap, helping firms find the resources they need to successfully scale. Her first product,
InvesTier®, was acquired by SunGard in 2002. An entrepreneur for over 40 years, Ms. Kaufman’s specialties include public speaking, training, and software/service-based solutions to organizational problems. She resides in Hawthorne, NJ.
