Does a Statutory Fiduciary Duty Mean a More Substantive Fiduciary Duty? What the Future May Hold


On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and ushered in the greatest reform of the financial services industry since the dawn of the federal securities laws. Tucked away in section 913 of the Dodd-Frank Act is language authorizing the Securities and Exchange Commission (Commission) to promulgate rules providing that the standard of conduct for investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may provide), is to act in the best interest of the customer without regard to the financial or other interest of the adviser. With the President's signature, investment advisers registered with the Commission are now, for the first time, subject to a federal statutory fiduciary duty. This article discusses some of the possible ramifications of this legislative change for investment advisers.

The principles defining and governing fiduciary duty arose out of the law of equity. As a result of the risks to clients in entrusting their property to fiduciaries, the common law evolved over time to impose certain substantive duties on fiduciaries that limit their freedoms. Courts have imposed two primary duties on fiduciaries: the duty of loyalty and the duty of care. From these overarching duties, various obligations have been imposed on fiduciaries under the common law. The duty of loyalty requires fiduciaries to refrain from converting or misappropriating the entrusted powers and assets and from using them for unauthorized purposes or for personal gain. Based on the duty of loyalty, courts and regulators have required fiduciaries to: (i) segregate and earmark entrusted assets; (ii) avoid conflicts of interest with enentrustors; (iii) avoid competing with customers; and (iv) provide customers with information and accounting. Some of these requirements are today embedded in the Investment Advisers Act of 1940, as amended, (Advisers Act) and the rules promulgated thereunder, such as the various disclosures on conflicts of interest required under Form ADV, the segregation, account statement and notice provisions in rule 206(4)-2 (on custody) and the requirements in rule 204A-1 that advisers' code of ethics include a standard of conduct required of supervised persons that reflects their fiduciary obligations and include provisions requiring all access persons to report (and advisers to review) their personal securities transactions and holdings periodically.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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