In April 2018, the SEC proposed an Interpretation Regarding Standard of Conduct for Investment Advisers. In that proposal, the SEC has proposed to interpret the duty of loyalty (which, combined with the duty of care, constitutes fiduciary duty) as requiring advisers to put client interests ahead of their own and make full and fair disclosure of all material facts of the relationship. More particularly, the SEC stated that advisers must seek to avoid conflicts of interest and make full and fair disclosure of material conflicts that could affect the relationship. If you stopped reading the release at this point, you might think this is a clear articulation of what the duty means and how we practice in the area of conflicts. You might say that this description fully comports with the Restatement of Trust 3rd that describes the duty of loyalty as: (1) to administer the trust solely in the interest of the beneficiaries; and (2) in dealing with the trust on the trustee’s own account, the trustee has a duty to deal fairly and to communicate all material facts regarding the transaction to the beneficiary.
But the SEC proposed a new view on this subject, specifically that “disclosure of a conflict alone is not always sufficient to satisfy the adviser’s duty of loyalty and section 206 of the Advisers Act.” For example, the SEC stated that in some cases, “conflicts may be of a nature and extent that it would be difficult to provide disclosure that adequately conveys the material facts or the nature, magnitude and potential effect of the conflict necessary to obtain informed consent and satisfy an adviser’s fiduciary duty.” The SEC continues that, in other cases, the disclosure may not be specific enough for clients to understand whether and how much the conflict will affect the advice clients receive, resulting in the adviser’s disclosure not being full or fair.
Is the SEC establishing a basis for a new enforcement position — that there could be some conflicts that no amount of disclosure can cure? Or is the SEC stating the obvious: if the disclosure is not sufficient, or the specific client cannot intellectually grasp the impact of the conflict – then it is not full or fair and any consent given, tacit or implied, cannot be viewed to have been informed? To me, these points simply challenge the drafters of conflict disclosure. However, I don’t interpret these statements as creating an unseen, looming specter of a conflict that is so great that disclosure and consent cannot cure. Instead, my view is to keep at it and stand behind the fullness and fairness of our disclosures, even at the risk of incurring the wrath of marketers.