SEC Proposes New Interpretation Of Fiduciary Duty

On April 18, 2018, the Securities and Exchange Commission (SEC) proposed a new interpretation (the "Proposed Interpretation")1 of the fiduciary duties of investment advisers under the Investment Advisers Act of 1940, as amended (the "Advisers Act"). The Proposed Interpretation is part of a package of new interpretations, forms and rules of conduct for investment advisers and broker-dealers who make recommendations to retail clients. The Proposed Interpretation also requests comments as to whether investment advisers should be subject to additional requirements that are currently applicable to broker-dealers, such as licensing and examination, continuing education, account statements, and capital or bonding requirements.

FIDUCIARY DUTY

The Proposed Interpretation sets forth the SEC's views of investment advisers' fiduciary duties under the Advisers Act, including the duties of care and loyalty,2 and the SEC's views on an investment adviser's ability to vary or modify the fiduciary duty. Such an interpretive proposal of an existing obligation, unlike a rule or form proposal, could have some legal effect from the date of its publication and could be cited in SEC enforcement proceedings.3

Duty of Care

The Proposed Interpretation states that investment advisers have a duty of care to their clients, which includes the duty to protect against nonfeasance, such as neglect. As part of the duty of care, the Proposed Interpretation highlights the duties to (i) provide advice that is in the client's best interest, (ii) seek best execution, and (iii) act and provide advice and monitoring over the course of the relationship.

Duty to Provide Advice in the Client's Best Interest

The SEC interprets the duty of care to require investment advisers to ensure that the advice is suitable (through inquiry of the financial sophistication and situation, risk tolerance and investment objectives) and otherwise in the best interest of the client.4 The investment adviser must also update its advice if there are changed circumstances, such as events that occur to the investor or changes in law that impact the investment decisions. The investment adviser must also have independently and reasonably investigated the securities before recommending them to clients.

Duty to Seek Best Execution

The SEC interprets the duty of care to require investment advisers to "seek to obtain the execution of transactions for each of its clients such that the client's total cost or proceeds in each transaction are most favorable under the circumstances."5...