Author Archives: thesecuritieslitigator

About thesecuritieslitigator

I am a securities and commercial litigation attorney located in Boston with years of experience representing companies and individuals in securities, white collar, and civil litigation.

Investment Advisers Should Review Their Codes of Ethics For Conformity with SEC Fiduciary Interpretation

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.

Click to access ia-5248.pdf



New One-Page Fee Table Required For Massachusetts Investment Advisers

On June 14, 2019, the Massachusetts Securities Division upped the fee disclosure requirement for state-registered advisers (i.e., advisers with less than $100 million in assets under management). Starting January 1, 2020, state advisers will be required to provide a one-page, fee table in addition to the usual narrative fee disclosures in Form ADV Part 2A. Advisers will be required to update and deliver the table consistent with existing updating and delivery requirements for Form ADV. Firms are also required to put a link to the table on their websites.

What does this mean?

Massachusetts registered advisers will need to churn out a one-page fee table containing three sections: one for fees charged by the adviser, another for fees charged by third party advisers, and a final one for additional/costs and fees, such as mutual fund expenses. The first section breaks out AUM fees, hourly fees, subscription fees, fixed fees, commissions paid to the adviser, performance based fees, and a space for “other” fees. The table requires inputting the amount (with tiers if applicable), frequency of charging, and a column to identify the services provided. There are identical columns for the third party fees section, which addresses third-party money manager and robo fees. Finally, to the extent that other fees might apply, e.g., mark-ups, custodian fees, commissions not paid to the adviser, etc., the table requires a binary Y/N and, where applicable, that the adviser identify to which firm the money is paid.

Opportunity or Burden?

While the initial set up for the table and updates will entail additional work, it is likely that Massachusetts-registered investment advisers will have a leg up should the SEC and/or other states ultimately decide to impose their own fee “distillation” requirements. Given recent changes under Regulation BI, and consistent pressure across the industry to simplify disclosures around fees and other items, Massachusetts firms may well be ahead of the curve.

Here is a link to the Rule: