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Regulation and Compliance > Federal Regulation

The Best Defense

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An advisor named John posted the following question to my April 20th “Definition of Character” blog: “In your scenario, does it preclude the RIA from talking paid trips to due diligence conferences, market support from suppliers, and a host of other incentives as long as they are disclosed? I am never sure, so I thought that I would call upon your expert knowledge of this complex situation.”

Much as I appreciate John’s confidence, my expertise in compliance law was well described by the preeminent columnist Will Rogers when he said: “All I know is what I read in the newspapers.” But one of the best things about being a journalist is that I do know many people who really are experts. One of them is Brian Hamburger, a seasoned investment advisory compliance attorney who’s also the founder and managing director of MarketCounsel, LLC, a firm that provides RIAs with start-up and ongoing guidance and advice.

Here’s what Brian had to say in response to John’s query and to other RIAs who wrestle with the same issue: “There are no rules or regulations that speak specifically to an investment advisor or its representatives being allowed to accept the types of benefits you have mentioned. There are, however, other regulations and general principles that must be considered. First and foremost, an adviser has a fiduciary duty to its clients under the Investment Advisers Act. In its simplest form, the fiduciary duty requires the adviser to act in the best interest of its clients. Accepting the benefits you mention would most likely be deemed a conflict of interest because you have an incentive to recommend the services or products of those giving you the benefits.

“The fiduciary duty does not require that an adviser be conflict-free, but does require that any material conflicts be must be disclosed to clients. So, at a minimum, clear and concise disclosure should be made to actual and prospective clients. In addition to the regulatory compliance concerns, this issue also raises concerns from a risk management (client liability) perspective. But for both sets of analyses, an RIA should expect scrutiny in determining (often with the benefit of 20/20 hindsight) whether the conflict resulted in a breach of the RIA fulfilling its fiduciary obligation to its clients.”

What’s Brian’s so eloquently suggesting here is that as a litmus test, RIAs should imagine themselves sitting in front of a jury, defending their activities on a portfolio that declined in value. If an advisor honestly feels good about what they’ve done, chances are the jury will, too. Due diligence is an essential duty of managing client portfolios: If Thornburg Investment Management flies you to meet with their fund manages here in beautiful Santa Fe, well, somebody’s gotta do it.

An all-expenses-paid two-week cruise every year on the Sea Goddess, to attend a two-hour workshop on the emerging market funds that comprise half your AUM? Might not look so good in court. A fiduciary duty is about acting responsibly. Use your judgment. As I’ve heard Brian counsel his audiences many times over the years the years: “There’s no down side to choosing the conservative alternative whenever potential conflicts of interest arise.”


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