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SEC Adopts New Interpretation of fiduciary Duty

On June 5, 2019, the Securities and Exchange Commission (SEC) adopted a comprehensive interpretation (the “Interpretation”)1 of the fiduciary duties that investment advisers owe to their clients under the Investment Advisers Act of 1940, as amended (the “Advisers Act”).2 The Interpretation is part of a package of new interpretations, forms and rules of conduct for investment advisers and broker-dealers that focus on the relationship between financial professionals and their clients, which were originally proposed in April 2018.3

Fiduciary duty

While several Supreme Court rulings have recognised that the Advisers Act reflects the existence of a federal fiduciary standard for investment advisers,4 neither the cases that addressed fiduciary duty nor subsequent SEC pronouncements or enforcement actions clearly articulated the practical definition of fiduciary duties.5 The Interpretation defines investment advisers’ fiduciary duties under the Advisers Act to comprise both the duty of care and the duty of loyalty.6 The Interpretation provides guidance as to the SEC’s view of the components of those duties and regarding an investment adviser’s ability to vary or modify the fiduciary duty.7 Unlike in the proposed interpretation, the Interpretation acknowledges that differing applications of the fiduciary duties are appropriate for retail versus institutional clients.

The duty of loyalty requires that an adviser not subordinate its client interests to its own. The SEC interprets the duty of loyalty to require an investment adviser to eliminate or make full and fair disclosure of all conflicts of interest which might incline an investment adviser—consciously or unconsciously—to render advice which is not disinterested such that a client can provide informed consent to the conlict.8

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Informing the Hedge Fund Community. With access to some of the industry’s biggest names and an astute and talented group of writers and contributors, The Hedge Fund Journal has established itself as a trusted source of information on the hedge fund industry.