Understanding the Fiduciary Relationship & Effective Conflict Management Presented by: Erika A. Subieta, Esq. National Compliance Services, Inc. Delray Beach, FL ©2013 National Compliance Services, Inc.

Discussion topics 2  Fiduciary Duty  Authority and Scope  Obligations  Conflict Management

Fiduciary Duty: where is the starting Point and how far does it go?  The Investment Advisers Act of 1940, does not provide a comprehensive regulatory regime for advisers, but rather imposes on them a broad fiduciary duty to act in the best interest of their clients. 3

Fiduciary Duty: where is the starting Point and how far does it go? 4  The fiduciary relationship goes far beyond a mere business relationship where dealings and professional services are provided at arm’s length.  A fiduciary must be sensitive to the conscious and unconscious possibility of providing less than disinterested advice, and it may be faulted even when it does not intend to injure a client and even if the client does not suffer a monetary loss. 1 1 SEC v. Capital Gains Research Bureau, Inc., 375 U.S., (1963).

Fiduciary Duty: what obligations Arise ?  Full Disclosure of Material Facts  Section 206 of the Advisers Act establishes “a statutory fiduciary duty for [investment advisers] to act for the benefit of their clients, requiring advisers to exercise the utmost good faith in dealing with clients, to disclose all material facts, and to employ reasonable care to avoid misleading clients.”  “Potential conflicts of interest are always material.” 2 2 Vernazza v. SEC, 327 F.3d 851, 859 (9th Cir. 2003). 5

6 Fiduciary Duty: Full Disclosure of Material Facts  Identifying and Disclosing Conflicts  Conflicts of interest often arise when advisers wear several hats, but can exist even in the absence of such situations.  U.S. federal securities laws do not preclude advisers from having substantial conflicts of interest that might adversely affect the objectivity of the advice they provide. Rather, investors have the responsibility, based on the disclosure they receive, for selecting their own advisers…and evaluating their advisers’ conflicts.  Which means the adviser has an affirmative duty to provide full and fair DISCLOSURE regarding all conflicts or potential conflicts.

7 Fiduciary Duty: Full Disclosure of Material Facts Conflicts of Interest (Continued)  Advisers should conduct an ongoing assessment of any business practices that could present possible conflicts.  As stated in the SEC’s 2013 National Examination Program Priorities, SEC staff will look at the overall risk governance framework that firms have in place to manage conflicts on an ongoing basis.

8 Conflict Management  Areas to Monitor:  Compensation Arrangements  Trading & Brokerage Practices  Allocation of Investment Opportunities  Side-by-Side Management  Outside Business Activities  Political Contributions  Referral Arrangements/Sub-Adviser Arrangements

9 Conflict Management  The SEC’s Conflict Hot List:  Compensation –Related Conflicts & Incentives  Portfolio Management-Related Conflicts  Affiliations between Investment Advisers and Broker-Dealers  Valuation  Transfer Agent Conflicts

10 Thank You! Erika Subieta