fiduciary-standards

What this skill does

# Fiduciary Standards

## Purpose
Guide the understanding and application of fiduciary duties across the investment advisory landscape. This skill covers the Investment Advisers Act fiduciary duty, ERISA fiduciary standards, DOL rules, state-level developments, and CFA Institute standards — enabling a user or agent to identify fiduciary obligations and distinguish them from Reg BI and suitability standards.

## Layer
9 — Compliance & Regulatory Guidance

## Direction
prospective

## When to Use
- Determining whether a fiduciary standard applies to a given relationship or transaction
- Designing compliance programs for registered investment advisers
- Evaluating ERISA fiduciary obligations for retirement plan advisers
- Comparing fiduciary duty to Reg BI or FINRA suitability
- Assessing dual-registrant obligations (when wearing IA hat vs BD hat)
- Understanding DOL fiduciary rules and prohibited transaction exemptions
- Evaluating state-level fiduciary standards
- Designing conflict disclosure and mitigation frameworks under fiduciary duty

## Core Concepts

### Investment Advisers Act Section 206
Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 are anti-fraud provisions that the Supreme Court (in *SEC v. Capital Gains Research Bureau*, 1963) interpreted as establishing a federal fiduciary duty for investment advisers. Section 206(1) prohibits employing any device, scheme, or artifice to defraud a client. Section 206(2) prohibits any transaction, practice, or course of business that operates as a fraud or deceit on a client. Together, they impose an affirmative duty of utmost good faith, full and fair disclosure, and an obligation to act in the client's best interest.

### SEC 2019 Fiduciary Interpretation (Release IA-5248)
The SEC's June 2019 interpretation clarified that the IA fiduciary duty comprises two component duties:

**Duty of Care:**
- **Duty to provide advice in the client's best interest** — the adviser must have a reasonable understanding of the client's objectives and provide advice that is in the client's best interest in light of those objectives. This includes the duty to provide advice about whether to invest in a particular type, strategy, or security at all.
- **Duty to seek best execution** — when the adviser has authority to select broker-dealers, it must seek to obtain the most favorable terms reasonably available under the circumstances for client transactions.
- **Duty to provide advice and monitoring over the course of the relationship** — this is an ongoing duty that continues throughout the advisory relationship, not just at the point of recommendation. The frequency of monitoring depends on the scope of the advisory relationship.

**Duty of Loyalty:**
- The adviser must not place its own interests ahead of the client's interests.
- Must provide **full and fair disclosure** of all material conflicts of interest that might incline the adviser to render advice that is not disinterested.
- Disclosure must be **sufficiently specific** that a client can understand the conflict and provide **informed consent**. Generic or boilerplate disclosure is insufficient.
- Even with disclosure and consent, the adviser cannot act in a manner inconsistent with the client's best interest.

### ERISA Section 404 Fiduciary Standard
ERISA imposes a fiduciary duty on persons who exercise discretionary authority or control over a retirement plan or its assets, or who provide investment advice for a fee:

- **Prudent expert rule** — a fiduciary must act with the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use (higher than the "prudent person" standard — requires subject matter expertise)
- **Exclusive benefit rule** — act solely in the interest of plan participants and beneficiaries
- **Diversification** — diversify plan investments to minimize the risk of large losses unless it is clearly prudent not to
- **Plan document compliance** — act in accordance with plan documents to the extent consistent with ERISA
- **Prohibited transactions (Section 406)** — fiduciaries may not engage in certain transactions with parties in interest, including lending, furnishing services for unreasonable compensation, or transferring plan assets for the fiduciary's own interest

### DOL Fiduciary Rule and PTE 2020-02
The Department of Labor has repeatedly sought to expand the ERISA fiduciary definition:

- **2016 DOL Fiduciary Rule** — broadly defined "investment advice fiduciary" to include one-time rollover recommendations. Vacated by the Fifth Circuit in 2018 (*Chamber of Commerce v. DOL*).
- **Current regulatory posture** — the DOL has proposed and re-proposed expanded fiduciary definitions. As of the latest guidance, the 1975 five-part test remains the baseline for determining ERISA fiduciary status.
- **PTE 2020-02 (Prohibited Transaction Exemption)** — provides a pathway for investment advice fiduciaries to receive compensation that would otherwise be a prohibited transaction (e.g., commissions, 12b-1 fees, revenue sharing) from rollover and other recommendations. Conditions include: acting in the customer's best interest, providing balanced disclosure, charging only reasonable compensation, adopting anti-conflict policies, and conducting retrospective compliance reviews.
- **Rollover recommendations** — PTE 2020-02 explicitly covers rollover recommendations from plans to IRAs. Firms must document that the rollover is in the customer's best interest considering plan fees, investment options, services, and penalties.

### State-Level Fiduciary Standards
Several states have enacted or proposed their own fiduciary standards:

- **Massachusetts** — 950 CMR 12.207 (effective March 2020, later enjoined and revised) imposed a fiduciary duty on broker-dealers and agents making recommendations to customers in Massachusetts. Though challenged legally, it signals state-level regulatory momentum.
- **Nevada** — enacted a fiduciary duty statute for financial planners and broker-dealers, though implementing regulations have been limited.
- Other states have considered similar legislation. Firms operating across state lines must monitor evolving state-level requirements.

### CFA Institute Standards of Professional Conduct
Standard III — Duties to Clients includes:
- **III(A) Loyalty, Prudence, and Care** — act for the benefit of clients, place client interests before employer or own interests, act with reasonable care and prudent judgment
- **III(B) Fair Dealing** — deal fairly and objectively with all clients when providing investment analysis, making recommendations, or taking investment action
- **III(C) Suitability** — make reasonable inquiry into a client's investment experience, risk and return objectives, and financial constraints prior to making recommendations

While CFA standards are not regulatory requirements, they represent industry best practices and are often referenced in enforcement actions and regulatory guidance.

### Fiduciary Duty vs Reg BI
Key distinctions:

| Dimension | IA Fiduciary Duty | Reg BI |
|-----------|------------------|--------|
| Applies to | Registered investment advisers | Broker-dealers (retail customers) |
| Duration | Ongoing throughout the relationship | At the time of recommendation |
| Standard | Best interest (continuous) | Best interest (at point of recommendation) |
| Conflicts | Must eliminate or fully disclose and obtain informed consent | Must disclose, mitigate, and in some cases eliminate |
| Monitoring | Ongoing duty to monitor (scope depends on relationship) | No ongoing monitoring obligation |
| Account types | All advisory accounts | Only when making recommendations |
| Source of law | IA Act §206 (judicial interpretation) | SEC Rule (17 CFR 240.15l-1) |

### Dual-Registrant Considerations
Firms registered as both IA and BD must clearly disclose which capacity they are acting in for each transaction or relationship:
- When