On June 5, 2019, the SEC approved a package of rule-making and interpretations designed to harmonize (or bring closer) the standards of conduct for brokers (BDs) and investment advisers (RIAs). The lion share of attention has been focused on the elimination, effective June 30, 2020, of the “suitability” standard governing retail brokerage accounts in favor of a version of the “best interests” standard. There has been less attention, however, paid to the SEC’s explicit guidance and parsing of RIAs’ fiduciary duties to clients, set forth in the SEC’s Fiduciary Interpretation. Because that interpretation went into effect on July 12, 2019, Advisers who have not reviewed their internal and disclosure documents for conformity should do so immediately or risk OCIE deficiencies or worse.
SEC Rule 204A-1 requires every RIA to establish, maintain and enforce a written code of ethics that contains a minimum set of standards, including “[a] standard (or standards) of business conduct that the adviser requires of each supervised person, which standard must reflect the adviser’s fiduciary obligations and those of its supervised persons.” Under the SEC’s Fiduciary Interpretation (and case law), all RIAs have the following duties: (1) a duty of care, and (2) a duty of loyalty.
The Interpretation goes on to detail those duties. For example, the duty of care requires the adviser to: (1) provide advice that is in the best interest of the client, (2) seek best execution of a client’s transactions, and (3) provide advice and monitoring over the course of the relationship. To act in the client’s best interest, an adviser must have both: (a) a reasonable understanding of the client’s objectives, and (b) a reasonable belief that the advice it provides is in the best interest of the client based on the client’s objectives.
The above items are just a small part of the important interpretive guidance in the Fiduciary Interpretation. RIAs should review their existing codes of ethics and other documents, and, where appropriate, make changes to conform to the new guidance.
Here is a link to the June 5, 2019 SEC Release.
The Securities Litigator 