Introduction

While the Securities and Exchange Commission (SEC) brought several enforcement actions in 2018-19, the most significant new developments were published interpretations and alerts. Other agencies, such as the Commodity Futures Trading Commission (CFTC), also provided new guidance and brought significant enforcement actions.

Fiduciary Interpretation

In June of 2019, the SEC adopted a new interpretation (the "Fiduciary Interpretation") defining fiduciary duties for investment advisers as consisting of a duty of loyalty and a duty of care, requiring investment advisers to provide advice that is in the best interests of the relevant client without putting the adviser's interests ahead of the client's. The Fiduciary Interpretation specifically defines the duty of loyalty, requires precise disclosure regarding conflicts and establishes a duty of care. For private fund and institutional clients, the Fiduciary Interpretation acknowledges a difference between retail and institutional clients.

The Fiduciary Interpretation further defines the duty of loyalty as an obligation not to subordinate the relevant client's interests to its own. Advisers must try to eliminate conflicts of interest1 if possible or obtain informed consent after full and fair disclosure.2 Because of the difference in the ability of retail versus institutional clients, it may be difficult to obtain effective informed consent from retail clients for complicated conflicts of interest under the Fiduciary Interpretation.

As part of the duty of care, the Fiduciary Interpretation requires that advice be in the best interest of the client, based on a reasonable understanding of the client's interests, seeking best execution and provide advice and monitoring over the course of the relationship. The duty of care can be varied by contract.

However, while the duties can be shaped through disclosure and through contractual language, the fiduciary duties cannot be waived or wholly disclosed away. The Fiduciary Interpretation also clarifies that any use of hedge clauses, especially with retail clients, is inconsistent with the antifraud prohibitions if they create the impression of waiver.

For further information, see our alert at https://www.akingump.com/en/news-insights/sec-adopts-new-interpretation-of-fiduciary-duty.html.

Voting Interpretation

The SEC adopted a new interpretation (the "Voting Interpretation") in August of 2019, determining that voting obligations apply by default if the investment adviser has investment discretion and applying the concepts of the Fiduciary Interpretation to investment advisers' obligations to vote securities. The Voting Interpretation requires investment advisers to adopt written policies that are reasonably designed to ensure that (i) votes are cast in the best interests of clients in light of the client needs and (ii) the investment adviser does not place the adviser's interests ahead of the client's interests. Investment advisers should also ensure that they are making investment decisions with complete and accurate information. While the voting obligation can be structured through agreement, the costs involved in voting decisions may also, depending on the strategy of the client, favor not voting. The Voting Interpretation applies similar requirements and supervision obligations for investment advisers in their retention of proxy advisory firms.

For further information, see our alert at https://www.akingump.com/en/news-insights/sec-applies-fiduciary-duties-analysis-to-voting-obligations.html.

Footnotes

1 A conflict of interest is defined as an interest of the adviser that could incline the investment adviser, consciously or unconsciously, to favor its own interests over those of the client.

Disclosure must be made in a manner that provides adequate notice to the client that a conflict is currently occurring (i.e., "may" is not effective disclosure), and the consent must be delivered in an effective manner.

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