United StatesCommission Interpretation Regarding Standard of Conduct for Investment Advisers
Guidance, not a law: the Securities and Exchange Commission's reading of Investment Advisers Act of 1940 section 206, prohibited transactions by investment advisers. It binds nobody by itself; the law it reads does.
Guidance on an AI sector rules rule, addressed to private bodies.
- Enforcement body
- Securities and Exchange Commission
- Instrument type
- guidance published by a regulator
- Obligation class
- Governance, Disclosure
- Audit expectation
- none
As of .
What the regulator expects
- It reaches you if you are an investment adviser under the Advisers Act, including an automated adviser: the Commission interprets the federal fiduciary duty you owe your client, which comprises a duty of care and a duty of loyalty, to require you to act in the best interest of your client and not to place your own interest ahead of the client's.
- The Commission says the duty of care includes a duty to provide advice that is in the best interest of the client based on a reasonable understanding of the client's objectives; for a retail client you should, at a minimum, make a reasonable inquiry into the client's financial situation, level of financial sophistication, investment experience, and financial goals.
- The Commission says the duty of care includes a duty to seek best execution of a client's transactions where you have the responsibility to select broker-dealers to execute client trades.
- The Commission says the duty of care also covers providing advice and monitoring at a frequency that is in the best interest of the client, taking into account the scope of the agreed relationship.
- The Commission says that, under the duty of loyalty, you must eliminate, or make full and fair disclosure of, all conflicts of interest which might incline you, consciously or unconsciously, to render advice which is not disinterested, so that a client can provide informed consent to the conflict.
- The Commission says the federal fiduciary duty may not be waived, though it will apply in a manner that reflects the agreed-upon scope of the relationship.
What this law does
The Commission published release IA-5248 as an interpretation of the standard of conduct for investment advisers under the Investment Advisers Act of 1940. The interpretation states that under federal law an investment adviser is a fiduciary, and that the fiduciary duty an adviser owes its client under the Advisers Act comprises a duty of care and a duty of loyalty.
It states that it is intended to reaffirm, and in some cases clarify, certain aspects of an investment adviser's fiduciary duty and that it does not itself create any new legal obligations for advisers. It says an adviser's federal fiduciary obligations are enforceable through section 206 of the Advisers Act.
It says the duty of care includes the duty to provide advice that is in the best interest of the client, the duty to seek best execution of a client's transactions where the adviser has the responsibility to select broker-dealers to execute client trades, and the duty to provide advice and monitoring over the course of the relationship.
For a retail client, it says an adviser should, at a minimum, make a reasonable inquiry into the client's financial situation, level of financial sophistication, investment experience, and financial goals. It says the duty of care also encompasses the duty to provide advice and monitoring at a frequency that is in the best interest of the client, taking into account the scope of the agreed relationship.
It says that under its duty of loyalty an investment adviser must eliminate or make full and fair disclosure of all conflicts of interest which might incline the adviser, consciously or unconsciously, to render advice which is not disinterested, such that a client can provide informed consent to the conflict. It says an adviser's federal fiduciary duty may not be waived, though it will apply in a manner that reflects the agreed-upon scope of the relationship.
It says the interpretation also applies to automated advisers, often called robo-advisers, which like all Securities and Exchange Commission (SEC)-registered investment advisers are subject to all of the requirements of the Advisers Act, including the requirement that they provide advice consistent with the fiduciary duty they owe to their clients. The interpretation took effect on .