Many in the financial services industry thought we had settled on the Department of Labor’s fiduciary standard and were planning accordingly. Then, in a ruling on March 15, 2018, the 5th Circuit Court of Appeals nullified the Fiduciary Rule on the grounds that the agency had overstepped its authority in redefining “fiduciary.” The 5th Circuit made its ruling final on June 21, 2018 when it issued a mandate vacating the Fiduciary Rule in its entirety.

But now, the U.S. Securities and Exchange Commission (SEC) plans to create a fiduciary rule of their own. On April 18, 2018, the SEC opened a comment period for a proposed package of regulations that clarify, among other things, the contours of a registered investment adviser’s fiduciary duty and when a broker-dealer may use the term “investment adviser.” The comment period for these proposed regulations closes on August 7, 2018, and SEC chairman Jay Clayton has indicated that the agency is “not going to take forever” to issue the final regulations. So, where do we go from here?

Putting the Client First
The overarching theme of the SEC’s new proposed regulations is that fiduciary duty requires advisers to put their clients’ interests first and avoid situations where their interests conflict. Simply avoiding immediate material loss for a client will not be enough for an RIA to comply with its fiduciary duty.

Under the SEC’s proposed regulations, an investment adviser’s fiduciary duty consists of a duty of care and a duty of loyalty. The duty of care includes:

  1. Duty to provide advice that is in the client’s best interest;
  2. Duty to seek best execution of securities transactions; and
  3. Duty to act and to provide advice and monitoring over the course of the relationship.

The duty of loyalty requires an RIA to:

  1. Put its clients’ interests first;
  2. Avoid unfairly favoring one client over another;
  3. Make full and fair disclosure of all material facts relating to the advisory relationship; and
  4. Try to avoid conflicts of interest and disclose them if they do arise.

Compliance with these duties may look different across the spectrum of advisers, but the end result must be the same: the client’s interests come first. What is a registered investment adviser (RIA) to do with this news?

Get Down to Business: Read the Proposed Regulation
The best place for RIAs to begin is with the proposed rule itself. The package of proposed regulations has some elements that are specific only to broker-dealers and others that are specific only to RIAs. Here we discuss only those regulations pertaining to RIAs since Black Cypress is an RIA and not a broker-dealer.

The proposed regulations provide guidance on the source and shape of the fiduciary duty. As with so many other regulations in the investment advice industry, the source of the fiduciary duty in the proposed regulations is the Investment Advisers Act of 1940 (The Act). Specifically, an RIA’s fiduciary duty to clients “is imposed under the Advisers Act” and “made enforceable by [its] antifraud provisions.” One of these antifraud provisions prohibits any conduct “which operates as a fraud or deceit upon any client or prospective client.” 15 U.S.C. § 80b-6(2). Both the courts and the SEC have used this antifraud provision as the basis for rulings and regulations regarding an RIA’s fiduciary duty.

It’s Not Like the Old Days
When deciphering how we arrived at a particular destination in the regulatory landscape, it is often helpful to look back at the milestones along the way. Such a retrospective view can shed light on why a regulation is drafted the way it is.

One of the seminal cases in shaping fiduciary duty, cited in the SEC’s proposed regulations, is the 1963 case of SEC v. Capital Gains Research Bureau, Inc, 375 U.S. 180. In that case, Capital Gains Research Bureau, Inc. (CGRB) was an RIA that sent a monthly investment report recommending certain securities to a group of approximately 5,000 fee-paying subscribers. On several occasions, CGRB purchased a particular security shortly before recommending it in the investment report. This practice is commonly referred to as “front-running,” because in the old days of securities trading, a person with advance knowledge of an imminent trade could literally run in front of the other trader, placing his order first. Each time CGRB engaged in this practice, the market price and volume of trading of the recommended security increased, and CGRB would immediately sell their shares of this security at a profit.

CGRB argued that their front-running did not fall under The Act’s antifraud provision (see above) because “fraud” required “an intent to injure clients or an actual loss of money to clients.” Since the clients got the same price for the recommended security regardless of whether CGRB had previously purchased a position in the same security, CGRB argued the clients suffered no loss.

Upon learning of this practice, the SEC filed an action in court to require CGRB to disclose this practice to all clients and potential clients, and the case eventually landed before the Supreme Court of the United States. The Supreme Court held that CGRB’s practice of front-running was in contravention of The Act’s prohibition of deceptive or fraudulent conduct. In reaching this decision, the court relied on Congressional intent in passing The Act to “eliminate, or at least to expose, all conflicts of interest which might incline [an] investment adviser – consciously or unconsciously – to render advice which was not disinterested.” Thus, although the CGRB’s clients suffered no immediate material harm, they were still adversely affected by CGRB’s contrary interest., which was a violation of CGRB’s fiduciary duty. Imagine the erosion of trust that would take place if advisers could be secretly profiting from the recommendations they made to their clients.

Our View
The relationship between investment advisers and investor ought to be one of trust, and the fiduciary duties promote this trust. In our opinion, the outcome of the Capital Gains Research Bureau case, and subsequent cases and regulations describing fiduciary duty, are a win for investors.

Here at Black Cypress, we strive to put our clients ahead of ourselves and to align our interests. We accomplish this goal in several ways, including our fee-only model and our team’s investments in our own strategies. Our fee-only approach means we avoid any interest in selling our clients particular products. We sell no products and we make no commissions. Our interest is the same as that of our clients: to grow their assets. Second, all of our team members have invested in one or more of the firm’s investment strategies. We feel that investing in the same strategies we offer to our clients further aligns our interests and shows our confidence in our investment decisions.

If you have any questions about our programs, our fee-only approach, or how we put our clients first, please contact us at or (843) 259-2009.