An investment adviser’s fiduciary obligations can restrict a dually registered investment adviser representative and registered representative ("broker/adviser") from effecting certain brokerage transactions. Section 206(3) of the Investment Advisers Act of 1940 effectively prohibits a dually registered broker/adviser from participating in brokerage transactions without first disclosing to the advisory client the brokerage capacity in which the broker is acting and obtaining consent from the client for the particular transaction. This requirement does not apply to brokerage transactions in which the broker/adviser is not acting as an investment adviser in the relationship.

Generally, a broker/adviser is not acting as an investment adviser when the "client initiates the transaction with its broker/adviser from whom the client has not received advice to buy or sell the security." See SEC No-action letter of December 15, 2005 (emphasis added). Similarly, the broker is not acting as an investment adviser if, within a particular transaction, the broker only provides "generalized, non-specific investment advice to a customer, (e.g., ‘invest a portion of your account in equity securities,’)" and the client then directs the broker to effect a transaction in a particular equity security.

In addition, a broker/adviser can control the fiduciary obligations placed upon advisers by incorporating certain provisions in the client advisory agreement.  The agreement can allow for the termination of the advisory relationship under certain circumstances, for example, following the delivery of a financial plan. It is essential that the client be provided with clear notice about the change in relationship from adviser to broker and the resultant change in obligations that dictate the broker’s relationship to the client.  The SEC has plainly stated that a mere statement to the client that the firm has changed the capacity under which it is acting is inadequate to effectively alter the nature of the adviser relationship thereby relieving the adviser from its fiduciary obligations.

Technorati Tags: : :