Presented by the Securities and Investment Professional Liability Practice Group

Legal Updates for Securities - June 5, 2019

SEC Adopts Interpretation of the Fiduciary Duty Standard and New Disclosure Form for Registered Investment Advisers

by John P. Quinn, Esq.

Since 1963, registered investment advisers have been subject to a fiduciary duty standard as interpreted by the United States Supreme Court’s opinion in the case of SEC v. Capital Gains Research Bureau.   On Wednesday, June 5, the SEC adopted an interpretation intended to clarify the meaning and scope of this duty, which has been the subject of substantial debate for the past half-century. 

Under the SEC’s newly adopted interpretation, an adviser’s fiduciary duty may be defined by its component parts: the duty of care and the duty of loyalty. 

Duty of Care: 

The duty of care requires an adviser to:

(i)         act and provide advice that is in the best interest of the client,

(ii)        seek best execution of a client’s transactions where the adviser has the responsibility to select broker-dealers to execute client trades, and

(iii)       provide advice and monitoring over the course of the relationship. 

As for the first condition – advice that is in the best interest of the client – advisers must, before providing any personalized investment advice and as appropriate thereafter, make a reasonable inquiry into the client’s investment profile.  The inquiry into the client’s profile must be reasonable under the circumstances, including the nature and extent of the agreed-upon advisory services, the nature and complexity of the anticipated investment advice, and the investment profile of the client.  For example, if the adviser is preparing a comprehensive financial plan for a client, “reasonable inquiry” would require an adviser to obtain at least the client’s current income, investments, assets and debts, marital status, insurance policies, financial goals, risk tolerance and investment history.  The adviser must also reasonably update a client’s investment profile in order to adjust its advice to reflect any changed circumstances.

The second condition of care – best execution – is an issue that has been the subject of significant evolution as more broker-dealers establish investment adviser platforms and advisory services accounts.  The adopted interpretation requires advisers to maximize the value for the client under the particular circumstances occurring at the time of each rebalancing transaction. Although “maximizing value” is not necessarily defined, this term encompasses more than just minimizing cost: when seeking best execution, an adviser should consider “the full range and quality of a broker’s services . . . including, among other things, the value of research provided as well as execution capability, commission rate, financial responsibility, and responsiveness” to the adviser.  Many advisers now use one or a few brokers to custody and rebalance their customers’ accounts; these brokers provide the adviser with account management, reporting and analytical software to assist in tracking performance and reporting to clients.  Under this interpretation, it will be incumbent upon advisers using one or few broker-dealer platforms to evaluate their arrangements with those platform providers to ensure that their obligation of best execution is satisfied.

Finally, the duty of care obligates advisers to monitor the client’s account, and re-evaluate whether the client’s investments, account and program type (e.g., wrap accounts) remain in the best interest of the client given intervening circumstances.  Throughout the SEC’s interpretation, the agency emphasizes the duty of the adviser to update and re-evaluate advice provided to an investment advisory client throughout the course of the relationship.  This is one of the primary differences between the investment adviser relationship and the broker-dealer relationship – the fiduciary duty obligates the adviser to update and monitor the client’s account.

Duty of Loyalty:

An adviser must subordinate its own interests to the clients’ interests. For example, an adviser may not favor its own interests over those of a client, whether by favoring its own accounts or favoring certain client accounts that pay higher fee rates to the adviser over other client accounts.  This duty applies to allocation of investment opportunities, allocation of pricing and costs in aggregated transactions.  An adviser’s allocation policies with respect to opportunities, prices and costs must be fair and, if they present a conflict, such conflict must be fully and fairly disclosed so the client can provide informed consent.

A client’s informed consent may be explicit (in writing or confirmed in notes) or implicit. Explicit consent will be required where either: (i) the facts and circumstances indicate to the adviser that the client did not understand the nature and import of the conflict, or (ii) the material facts concerning the conflict could not be fully and fairly disclosed.  General conflicts of interest (such as outside business activity, third-party compensation, soft-dollar benefits, etc) must be addressed in the adviser’s ADV Parts 1 and 2A.  However, client-specific conflicts of interest should be addressed individually with the client, and where necessary, memorialized for informed consent.

Written Policies and Procedures:

The investment adviser must adopt policies and procedures to satisfy the fiduciary duty.  These policies and procedures, often found in both the compliance manual and code of ethics, should be updated to reference the SEC’s interpretive standards.


In addition to the above rule and interpretation, the SEC also adopted a new form for registered investment advisers called Form CRS (Client Relationship Summary).  This new form is to be added to the registered investment adviser’s Form ADV as Part 3 and will be filed through the IARD system.  Form CRS must be provided to clients as part of the ADV delivery requirement before or at the time the client executes the investment advisory agreement.  Form CRS must be updated within thirty (30) days of any material changes to the information, and must be delivered to clients within thirty (30) days after material changes to the form are filed. 

New Form CRS (ADV Part 3) will require advisers to provide narrative explanations of: (1) the nature of the firm (broker-dealer, investment adviser, dual-registered, etc.), (2) a graphic description of the relationship and services offered to the client, (3) the standard of conduct owed to the client (e.g., fiduciary duty), (4) a summary of fees and costs; (5) a chart comparing the firm’s services to other types of services (e.g., RIA services versus broker-dealer services), (6) conflicts of interest, and (7) additional information and sample key questions for clients to ask.  Much of this information will be re-statements, in different format, of the information included in advisers’ Form ADV Part 2A brochure.  Nonetheless, this form will require more comprehensive descriptions of the advisory services offered, and the alternative options available to the client.


Form CRS will take effect 60 days after the publication of the rule in the Federal Register (which will usually be completed within a week to 10 days).  The fiduciary duty interpretation will take effect immediately upon publication in the Federal Register, and should be added to RIAs’ compliance manuals as soon as practicable.