Fiduciary Standards

Fiduciary Standards

Regulatory status current as of June 2026 — verify effective dates, dollar thresholds, and pending rulemakings against current SEC/FINRA/FinCEN sources before advising.

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).
• 2024 Retirement Security Rule — adopted April 2024, it would again have treated one-time rollover recommendations as fiduciary advice. Two Texas federal district courts stayed the rule nationwide in July 2024 before its September 2024 effective date (Federation of Americans for Consumer Choice v. DOL; ACLI v. DOL). The DOL subsequently abandoned its defense, and the Fifth Circuit dismissed the appeals in late 2025 — the rule never took effect. The DOL has signaled new rulemaking in this area (2026 regulatory agenda); verify the current status before advising.
• Current regulatory posture — with the 2024 rule stayed and undefended, the 1975 five-part test remains the operative baseline for determining ERISA investment-advice fiduciary status (verify current status given pending rulemaking).
• 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) imposes a fiduciary duty on broker-dealers and agents making recommendations to Massachusetts customers. A trial court initially invalidated the rule in Robinhood's challenge, but the Massachusetts Supreme Judicial Court reversed and upheld the rule in Robinhood Financial LLC v. Secretary of the Commonwealth (August 2023). The rule is in effect.
• 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

The headline distinction: the IA fiduciary duty is a relationship-level, ongoing obligation (care, loyalty, monitoring), while Reg BI is a point-of-recommendation standard for broker-dealers serving retail customers. For the canonical side-by-side comparison table of the two standards, see the reg-bi skill ("Reg BI vs IA Fiduciary Duty").

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 acting as an IA: full fiduciary duty applies
• When acting as a BD: Reg BI applies (for retail customers)
• Form CRS must explain both relationships and their differences
• "Hat switching" — changing capacity mid-relationship — requires clear notice and documentation
• The SEC has warned that dual registrants cannot choose the lower standard to avoid obligations

Practical Compliance Implications

• Documentation — fiduciary duty requires thorough documentation of advice rationale, conflict disclosures, and client consent
• Conflict mitigation vs elimination — unlike Reg BI (which allows mitigation), fiduciary duty may require elimination of conflicts that cannot be adequately disclosed or consented to
• Fee reasonableness — fiduciaries must ensure fees are reasonable relative to the services provided
• Compliance programs — SEC Rule 206(4)-7 requires every registered IA to adopt and implement written compliance policies and procedures, designate a Chief Compliance Officer, and conduct annual compliance reviews