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.

9 — Compliance & Regulatory Guidance

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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.

The SEC's June 2019 interpretation clarified that the IA fiduciary duty comprises two component duties:

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:

The Department of Labor has repeatedly sought to expand the ERISA fiduciary definition:

Several states have enacted or proposed their own fiduciary standards:

Standard III — Duties to Clients includes:

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

Key distinctions:

Firms registered as both IA and BD must clearly disclose which capacity they are acting in for each transaction or relationship:

Scenario: An RIA that also manages proprietary mutual funds recommends those funds to advisory clients. The ADV Part 2A mentions the affiliation in general terms ("we may recommend affiliated products") but does not disclose the specific financial incentive or quantify the conflict. The proprietary funds charge 75 bps while comparable third-party funds charge 40 bps. Compliance Issues: Fiduciary duty of loyalty violation. The disclosure is not "sufficiently specific" under the SEC 2019 Interpretation — a client cannot understand the magnitude of the conflict from boilerplate language. The 35 bps cost differential is a material financial incentive that must be specifically disclosed. Analysis: The firm must: (1) specifically disclose that it receives revenue from proprietary funds, (2) quantify or clearly describe the financial benefit, (3) explain how this creates a conflict (incentive to recommend proprietary over cheaper alternatives), (4) obtain informed consent after meaningful disclosure, and (5) document that the recommendation is in the client's best interest despite the conflict. If the firm cannot demonstrate that the proprietary fund offers value justifying the cost differential, the recommendation may violate the duty of care regardless of disclosure quality.

Scenario: A 401(k) plan adviser recommends a fund lineup that includes revenue-sharing share classes when lower-cost institutional share classes of the same funds are available. The revenue sharing offsets the adviser's fees. Total plan cost is 1.2% when it could be 0.7% with institutional shares and a transparent advisory fee. Compliance Issues: ERISA Section 404 prudent expert violation and potential Section 406 prohibited transaction. The fiduciary is not acting with the required prudence by selecting higher-cost share classes. Revenue sharing arrangements that benefit the adviser create a prohibited transaction unless covered by an exemption (such as PTE 2020-02). Analysis: Under ERISA's exclusive benefit rule, the adviser must select the lowest-cost share class available unless a higher-cost class provides demonstrable additional value. Revenue sharing that reduces the adviser's visible fee while increasing total plan cost is a conflict that ERISA fiduciary duty requires to be resolved in favor of participants. The DOL has brought enforcement actions on this exact pattern. The adviser should use institutional share classes and charge a transparent advisory fee.

Scenario: A dual-registrant firm opens advisory accounts for financial planning clients but executes certain transactions (annuity purchases, insurance products) through the brokerage side. Client communications do not clearly distinguish which capacity the firm is acting in for each transaction. The firm applies Reg BI standards to annuity recommendations rather than fiduciary standards. Compliance Issues: Failure to disclose capacity and potential application of the wrong standard. If the client reasonably believes they are receiving ongoing fiduciary advice across all aspects of the relationship, the firm cannot silently switch to a lower standard for selected transactions. Analysis: The firm must: (1) clearly disclose at the outset which services are advisory (fiduciary) and which are brokerage (Reg BI), (2) provide specific notice when switching capacity for a particular transaction, (3) ensure the client understands the different standards that apply, and (4) document the capacity disclosure and client acknowledgment. The SEC has specifically warned dual registrants against "cherry-picking" the standard that benefits the firm rather than the client.