- Usage and content guidelines and restrictions on IAR use of social media whether on behalf of the firm or for personal use
- Mechanisms for approval of social media use and content;
- Monitoring of social media use by the firm and IARs and the frequency of monitoring;
- Consideration of the function or risk exposure of specific social media sites;
- Establishing training and requiring IAR certification;
- Whether access to social media poses information security risks; and
- Firm resources that can be dedicated to implementation of social media policies.
Tuesday, August 12, 2014
Tuesday, July 29, 2014
Sunday, March 2, 2014
- A standard of business conduct which reflects the fiduciary obligations to clients;
- Provisions requiring all advisers’ and supervised persons’ compliance with applicable federal securities laws;
- Protection of material non-public information of both the adviser’s securities recommendations, and client securities holdings and transactions;
- Periodic reporting and reviewing of access persons’ personal securities transactions and holdings;
- Advisor’s approval before an access person can invest in an IPO or private placement;
- Duty to report violations of the code of ethics;
- A written acknowledgment that all supervised persons received the code of ethics; and
- Recordkeeping provisions.
- Prior written approval before access persons can place a personal securities transaction (“pre-clearance”);
- Maintenance of lists of issuers of securities that the advisory firm is analyzing or recommending for client transactions, and prohibitions on personal trading in securities of those issuers;
- Maintenance of “restricted lists” of issuers about which the advisory firm has inside information, and prohibitions on any trading (personal or for clients) in securities of those issuers;
- “Blackout periods” when client securities trades are being placed or recommendations are being made and access persons are not permitted to place personal securities transactions.
- Reminders that investment opportunities must be offered first to clients before the adviser or its employees may act on them, and procedures to implement this principle.
- Prohibitions or restrictions on “short-swing” trading and market timing.
- Requirements to trade only through certain brokers, or limitations on the number of brokerage accounts permitted;
- Requirements to provide the adviser with duplicate trade confirmations and account statements; and
- Procedures for assigning new securities analyses to employees whose personal holdings do not present apparent conflicts of interest.
Tuesday, January 7, 2014
Wednesday, December 18, 2013
The Securities and Exchange Commission regulates investment advisers under the Investment Advisers Act of 1940 (the “Act”). Perhaps the most significant provision of the Act is Section 206, which prohibits advisers from defrauding their clients. The Supreme Court has interpreted this provision as imposing on advisers a fiduciary obligation to their clients. See Transamerica Mortgage Advisors, Inc. (TAMA) v. Lewis, 444 U.S. 11, 17 (1979) (“[T]he Act’s legislative history leaves no doubt that Congress intended to impose enforceable fiduciary obligations.”).
The federal fiduciary standard requires that an investment adviser act in the “best interest” of its advisory client. Belmont v. MB Inv. Partners, Inc., 708 F.3d 470, 503 (3d Cir. 2013) (citing SEC v. Tambone, 550 F.3d 106, 146 (1st Cir.2008) (“[15 U.S.C. § 80b–6] imposes a fiduciary duty on investment advisers to act at all times in the best interest of the fund and its investors.”). Under a “best interest” test, an adviser may benefit from a transaction with or by a client, but the details of the transaction must be fully disclosed. See SEC v. Capital Gains Research Bureau, 375 U.S. 180, 191-92 (1963) (stating that Advisers Act was meant to “eliminate, or at least to expose, all conflicts of interest which might incline as investment adviser–consciously or unconsciously–to render advice which was not disinterested”).
A number of obligations to clients flow from the fiduciary duty imposed by the Act, including the duty to fully disclose any material conflicts the adviser has with its clients, to seek best execution for client transactions, to provide only suitable investment advice, and to have a reasonable basis for client recommendations. See Registration Under the Advisers Act of Certain Hedge Fund Advisers, SEC Release No. IA-2333; Status of Investment Advisory Programs under the Investment Company Act of 1940, SEC Release No. IA-1623.
As noted by the Third Circuit in Belmont, even when a private litigant brings a cause of action for common law breach of fiduciary duty “the evolution of duties governing investment advisers as fiduciaries appears to have been shaped exclusively by the Advisers Act and federal common law.” 708 F.3d at 500-01. The Belmont court noted that one might reasonably wonder why the cause of action is presented as springing from state law if one looks to federal law for the statement of the duty and the standard to which investment advisers are to be held. 708 F.3d at 502. However, the court found that the answer was straightforward: no federal cause of action is permitted. Id. The court found that while “[t]hat reality ought to call into serious question whether a limitation in federal law can be circumvented simply by hanging the label ‘state law’ on an otherwise forbidden federal claim, that is the labeling game that has been played in this corner of the securities field, and the confusion it engenders may explain why there has been little development in either state or federal law on the applicable standards.” Id.
Based on the foregoing, a common law breach of fiduciary duty claim can in all likelihood be based on an investment adviser’s failure to have a “reasonable basis” for making a client recommendation. The question then becomes what constitutes a “reasonable basis” in the context of making such recommendations? This is not an issue that has been faced by many courts in the context of private causes of action brought by clients against investment advisers. For example, no Missouri case has addressed the issue.
However, in other situations where a reasonableness standard is employed, Missouri courts utilize an objective standard. See Graham v. McGrath, 243 S.W.3d 459, 463 (Mo. Ct. App. 2007) (noting that when damages are capable of ascertainment for purposes of statutes of limitations, Missouri utilizes an objective reasonable person standard); Robin Farms, Inc. v. Bartholome, 989 S.W.2d 238, 247 (Mo. Ct. App. 1999) (noting that the test for determining disqualification of a judge based on bias is whether a reasonable person would have factual grounds to doubt the impartiality of the court, “which is an objective standard[.].”).
As such, in Missouri and other jurisdictions that utilize the objective standard for reasonableness in other situations, the determination of whether an investment adviser had a “reasonable basis” for making a particular recommendation will likely be measured by an objective standard. This means that the fact finder will have to determine whether a reasonable person in the investment adviser’s circumstances might have made the same recommendation as the investment adviser, and need not consider what the adviser may have honestly -- but perhaps mistakenly -- believed.
Thursday, June 28, 2012
Investment Adviser agreements typically contain provisions which require all disputes between the Registered Investment Adviser (“RIA”) and Investment Adviser Representative (“IAR”) to be determined in a final and binding arbitration. These agreements also preclude class claims from being brought to arbitration. In effect, RIAs have thereby evaded being the subject of class actions brought by IARs, at least for now.
At the beginning of the year, the National Labor Relations Board (“NLRB”) decided a case which outlaws contract provisions in which the employer conditions employment upon signing an agreement that precludes employees from filing joint, class, or collective claims in any forum. However, the claims must address issues such as wages, hours, or other working conditions.
D.R. Horton v. Michael Cuda involved an employment contract where the employee was required to submit all claims to arbitration. The agreement also prevented employees from consolidating or bringing class claims. The NLRB determined that these agreements prohibit the exercise of substantive rights that are protected under Section 7 of the National Labor Relations Act (“NLRA”). The NLRB’s decision specifically outlines certain limitations to its holding. In particular, the decision is only applicable to “employees” as defined in the NLRA. This definition specifically excludes independent contractors.
It should be noted that the US Supreme Court recently ruled in AT&T Mobility LLC v. Conception that the Federal Arbitrations Act (“FAA”) permits companies to require customers to arbitrate their complaints individually, precluding class action claims. D.R. Horton differs in that it involved employee class actions, which is protected by statute, versus customer or consumer class actions. However, since D.R. Horton has been appealed to the 5th Circuit Court of Appeals, it will be interesting to see the outcome, and whether or not the Supreme Court will grant certiorari. My guess is that it will.
That being said, the hurdle for IARs is that they are often classified as “independent contractors” rather than employees. Not only is this usually set forth in their investment advisor agreements, but the type of relationship between the employer and the IAR has some characteristics of an independent contractor. However, they also have employer-employee characteristics that could be crucial in determining the type of employment relationship.
There are various factors that determine whether one is considered an employee versus an independent contractor. These factors include but are not limited to the following: (1) the level of control the employer has over the work performed by the individual; (2) whether the employer or worker furnishes the tools, materials, supplies, or equipment needed to perform the job; (3) whether the worker provides services for more than one firm or company at a time; (4) whether the worker can realize a profit or loss as a result of his services; (5) whether the employer set the work schedule; and (6) whether the employer hires, supervises, or pays assistants of the worker.
Perhaps one of the more determinative factors in defining an employment relationship is the level of control and supervision the employer has over an individual. By design, RIAs are required to supervise the conduct and activities of any IAR that represents it, whether the IAR is an employee or an individual that provides investment advice on behalf of the RIA. An RIA’s legal duty to supervise its IARs emanates from a number of sources. For instance, Section 203(e)(6) of the Investment Advisers Act of 1940 permits the SEC to take action against an RIA for failing to supervise its IARs. Pursuant to SEC Rule 206(4)-7 under the Advisers Act, RIAs are required to adopt policies and procedures that are reasonably designed to prevent violations of securities laws by the adviser and its supervised persons. Furthermore, SEC Rule 204A-1 requires RIAs to adopt a code of ethics which sets forth the standard of business conduct to be exhibited by IARs.
Generally, investment advisory agreements authorize RIAs to monitor and evaluate the IAR and subject the IAR to the supervision of the adviser. Moreover, the duty to supervise an IAR may also stem from the fiduciary duty the RIA owes to its clients. This supervisory duty and level of control is often implemented with periodic or annual compliance audits of each IAR. Despite this level of control, the IAR is often contractually defined as an independent contractor.
Therefore, as it stands, IARs could face a substantial but perhaps surmountable hurdle in bringing class arbitration claims if the investment advisor agreement defines the representative as an independent contract and precludes class actions. Since the NLRA definition of employee precludes traditional independent contractors, there may be no statutory protection granted to some IARs.