SEC Adopts Interpretive Guidance On Investment Adviser Fiduciary Duty

Author:Mr John Adams, Jay Baris, Lorna Xin Chen, Laura S. Friedrich, Nathan J. Greene, Andrew (Buddy) J. Donohue, Paul S. Schreiber, Thomas M. Majewski, Ted Randolph, John W. Finley, III and Sean Murphy
Profession:Shearman & Sterling LLP

On June 5, 2019, the Securities and Exchange Commission (the “SEC”) released a long-anticipated interpretation of investment adviser fiduciary duty under Section 206 of the US Investment Advisers Act of 1940 (“the Advisers Act”), a provision applicable to both SEC and state-registered investment advisers, as well as other investment advisers that are subject to the territorial jurisdiction of the Advisers Act but are not required to be registered under it. The Release is intended to benefit market participants by “reaffirming and clarifying” the nature and scope of the duty in one place. As a restatement of an existing body of law, the SEC says its interpretation should create no new duties.

The Release is a companion to three other releases announced by the SEC on the same day, one establishing a “best interest” conduct standard for broker-dealers when acting for retail customers, another establishing Form CRS as an additional mandatory disclosure document for use by broker-dealers with retail customers and registered investment advisers with retail clients, and the third providing interpretive guidance on the conditions under which a broker-dealer may rely on the Adviser Act's exclusion from the definition of the term “investment adviser” for investment advisory services that are “solely incidental” to the conduct of a broker-dealer business. Read our previous alert on these three releases.

Investment advisers with retail clients or who are dually registered or have affiliated broker-dealers will need to review this package of releases as a whole. The two interpretive releases (one addressing an investment adviser's fiduciary duty and the subject of this alert, and the other addressing the “solely incidental” definition) are effective upon their publication in the Federal Register. The two rulemaking releases (establishing Regulation Best Interest and Form CRS, respectively) are effective 60 days after publication in the Federal Register and have delayed compliance dates of June 30, 2020.

Components of the federal fiduciary duty under the Advisers Act

The Advisers Act is often described as establishing a federal fiduciary duty for investment advisers, made enforceable by the Act's antifraud provisions. Perhaps surprisingly, however, that duty does not explicitly appear in the language of the statute and has never been defined by rule. It thuseven after publication of this Release exists only in a series of court and SEC cases and...

To continue reading