On June 5, 2019, the Securities and Exchange Commission (SEC) adopted a comprehensive interpretation (the Interpretation)1 of the fiduciary duties that investment advisers owe to their clients under the Investment Advisers Act of 1940, as amended (the Advisers Act).2 The Interpretation is part of a package of new interpretations, forms and rules of conduct for investment advisers and broker-dealers that focus on the relationship between financial professionals and their clients, which were originally proposed in April 2018.3
While several Supreme Court rulings have recognized that the Advisers Act reflects the existence of a federal fiduciary standard for investment advisers,4 neither the cases that addressed fiduciary duty nor subsequent SEC pronouncements or enforcement actions clearly articulated the practical definition of fiduciary duties.5 The Interpretation defines investment advisers' fiduciary duties under the Advisers Act to comprise both the duty of care and the duty of loyalty.6 The Interpretation provides guidance as to the SEC's view of the components of those duties and regarding an investment adviser's ability to vary or modify the fiduciary duty.7 Unlike in the proposed interpretation, the Interpretation acknowledges that differing applications of the fiduciary duties are appropriate for retail versus institutional clients.
Duty of Loyalty
The duty of loyalty requires that an adviser not subordinate its client interests to its own. The SEC interprets the duty of loyalty to require an investment adviser to eliminate or make full and fair disclosure of all conflicts of interest which might incline an investment adviserconsciously or unconsciouslyto render advice which is not disinterested such that a client can provide informed consent to the conflict.8
Full and Fair Disclosure
The SEC believes that an investment adviser must seek to avoid conflicts or at least must make full and fair disclosure of all material conflicts of interest that could affect the advisory relationship in a sufficiently specific manner so that a client is able to decide whether to provide informed consent to the conflicts.9 In order for disclosure to be full and fair, it should be sufficiently specific so that a client is able to understand the material fact or conflict of interest and make an informed decision whether to provide consent. For example,it would be inadequate to disclose that the adviser has 'other clients' without describing how the adviser will manage conflicts between clients if and when they arise, or to disclose that the adviser has 'conflicts' without further description.10 Additionally, the SEC notes that stating that an advisermay have a particular conflict when the conflict actually exists, or simply listing all possible or potential conflicts regardless of likelihood, is not adequate. However, the wordmay could be appropriate to disclose a potential conflict that does not currently exist but might reasonably arise in the future. The SEC believes that full and fair disclosure is likely to differ for institutional clients because of their sophistication and familiarity with financial markets,11 but...