More On Legal & Compliancefrom The Advisor's Professional Library
- Recent Changes in the Regulatory Landscape 2011 marked a major shift in the regulatory environment, as the SEC adopted rules for implementing the Dodd-Frank Act. Many changes to Investment Advisers Act were authorized by Title IV of the Dodd-Frank Act.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
In 1963, the United States Supreme Court held in SEC v. Capital Gains Research Bureau Inc. that Section 206 of the Investment Advisers Act of 1940 imposes a fiduciary duty on investment advisors by operation of law. Section 206 of the Act (generally referred to as the “antifraud” provision) makes it unlawful for an advisor to engage in fraudulent, deceptive or manipulative conduct. The general purpose of an advisor’s fiduciary duty is to eliminate conflicts of interest and prevent an advisor from taking advantage of a client’s trust. In order to fulfill this duty, an advisor is required to always act in his clients’ best interests and to make full and fair disclosure of all material facts, especially when the advisor’s interests may conflict with those of his clients.
An advisor’s fiduciary responsibility permeates his entire business operations and client relationships. It requires more than a mere attempt at compliance; it requires that the advisor undertake ongoing and continuous efforts to comply with his obligations under the Advisers Act.
Although neither the Act nor SEC rules currently impose an express suitability requirement on investment advisors, the SEC maintains that advisors have a fiduciary duty to reasonably determine that the investment advice or services they provide are suitable, taking into consideration a client’s financial situation, investment experience and investment objectives. Accordingly, each firm should be prepared to demonstrate that it has a policy to obtain (and maintain) sufficient information regarding the client’s circumstances. Examples of documents that advisors may use to determine suitability include client questionnaires, fact sheets, investment objectives confirmation letters and investment policy statements.
Some written confirmations should be obtained and maintained by an investment advisor. However, longer does not mean better. Too many times, especially when defending advisory firms in litigation or arbitration proceedings, we see advisors falling victim to their own sloppy documents (a “canned” questionnaire or ambiguous form that is a minefield for conflicting responses). If the client indicates on page two that her objective is a 10% annual return, but on page five (clearly, in our view, too long a document already) that she can only tolerate a principal loss of 5%, we have a conflict. Therefore, the advisor, as a fiduciary, should not begin the investment management process until the client’s objectives and risk parameters are clarified and consistent and written confirmation thereof has been obtained.
Our general recommendation is to keep the client intake process simple. Require the client to indicate, in her own handwriting, risk parameters, investment objectives and, most importantly, any reasonable restrictions that she desires to impose on your investment management services. Have the client complete and execute the document, including a written indication of any reasonable restrictions. If there are none, have the client, in her own handwriting, indicate “none.”
Before commencing the investment management process, confirm the information obtained in a written statement. The confirming document should advise the client to immediately notify you if there are any changes in her financial situation or objectives, or if she desires to impose, add or modify any reasonable restrictions to the management of the account.
The advisor should annually send a letter to the client confirming that accounts are still managed in accordance with her previously designated objectives. The letter should also remind the client that it is her responsibility to inform the advisor of any changes in her financial situation or objectives, or if she desires to impose, add or modify reasonable restrictions to the management of the accounts.