NASAA Investment Adviser Training Workshop August 9, 2009 Breach of Fiduciary Duty Brian S....

NASAA Investment Adviser Training WorkshopAugust 9, 2009

Breach of Fiduciary DutyBrian S. Hamburger, JD, AIFA®, CRCP

Managing Director

Farther from Fiduciary Duty

2

Please Please download video file separately


$50 billion $7 billion $1.2 billion

$400 million$15 million (in 1920s dollars)


5


6

“Only when the tide goes out do you discover who’s been

swimming naked.”

Warren Buffet


7

“breach”[breech]: (noun): a failure to perform some promised act or obligation(verb): break or act contrary to (a law, promise, etc.)

Your Honor, he stole control in violation of his fiduciary duty. I should get to drive,or be compensated for the loss of control.

Defining the Fiduciary Duty

Fiduciary duty is the first principle of the investment adviser — because the duty comes not from the SEC or another regulator, but from common law. Some people think "fiduciary" is a vague word that's hard to define, but it's really not difficult to define or to understand. Fiduciary comes from the Latin word for "trust." A fiduciary must act for the benefit of the person to whom he owes fiduciary duties, to the exclusion of any contrary interest.

Remarks of Lori RichardsFormer Director of OCIEU.S. Securities and Exchange Commission


Essential Elements Duty of Care Duty of Loyalty

This “fiduciary” thingy really complicates pillaging a corporation.


10

SEC. v. Capital Gains Bureau, 375 U.S. 180 (1963) “The Investment Advisers Act of 1940 thus reflects a congressional

recognition "of the delicate fiduciary nature of an investment advisory relationship," as well as a congressional intent 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.”

“Nor is it necessary in a suit against a fiduciary, which Congress recognized the investment adviser to be, ...”

“Courts have imposed on a fiduciary an affirmative duty of "utmost good faith, and full and fair disclosure of all material facts," as well as an affirmative obligation "to employ reasonable care to avoid misleading“ [its] clients.”


11

What about state-registered investment advisers? NASAA Model Rules do not mention fiduciary. State regulators must look to their local securities act and rules

thereunder as well as state case law to determine the scope of an adviser’s fiduciary duty under state law.

Example: Code of Maryland Regulations 02.02.02.03B states: An investment adviser is a fiduciary and has a duty to act primarily for

the benefit of its clients. While the extent and nature of this duty varies according to the nature of the relationship between an investment adviser and its clients and the circumstances of each case, an investment adviser may not engage in unethical business practices.


12

PROHIBITED PRACTICES UNDER CERTAIN STATE STATUTES Lending money to or borrowing money from certain clients Inducing trading in a client’s account that is excessive in size or frequency

in view of the financial resources and character of the account Charging excessive or unreasonable fees Circulating advertising that is (1) misleading or (2) fails to comply with the

Rule 206(4)-1 of the Advisers Act Guaranteeing a client that a specific result will be achieved (gain or no

loss) as a result of advice that will be rendered Trading between the adviser’s (or representative’s) account and the

client’s account without getting client consent.

Scope of the Fiduciary Duty

13

LEGAL STANDARD OF CARE Commissioner Walter: universal fiduciary standard for all financial

professionals Commissioner Aguilar: Congress should mandate that all providers of

investment advice should be fiduciaries Chairman Schapiro: duty that exists on the investment advisory side does

not exist, clearly, on the broker-dealer side, and Congress needs to pass a law to make this a uniform fiduciary duty

SIFMA: develop a standard between fiduciary and suitability Financial Planning Coalition: establish a universal fiduciary standard Richard Ketchum, Chairman and Chief Executive Officer of FINRA:

establish a fiduciary standard that will fit with a variety of business models

Scope of the Fiduciary Duty

14

DODD-FRANK BILL House version: Would have imposed a fiduciary duty towards customers

on every financial intermediary who provides advice. Senate version: Requested a study to determine the impact on applying a

fiduciary standard to broker-dealers. Final Bill (signed into law): Went with the Senate’s version and instructed

the SEC to conduct a study regarding broader applicability of a fiduciary standard.

The SEC has opened a comment period to receive feedback; it will last 30 days from publication in the Federal Register. The SEC then has to submit its fiduciary report to Congress by January 21, 2011 and will then have the authority to promulgate a rule establishing a universal fiduciary standard.

Applying the Fiduciary Duty

15

HYPOTHETICAL #1: DUE DILIGENCE 2010: Firm A and Firm B are considering purchasing Fund #1, which only has a

track record of one year and one of its managers has a disciplinary event on his U4. Firm A relied primarily on industry reputation of the managers and a brochure it received in the mail. Firm B relies on the same information, but does some additional due diligence into the firm’s track record. Firm B is unsure about investing in a Fund with such a short track record and instead opts to invest client assets in Fund #2, which has a longer track record.

2015: Fund #1 has given Firm A’s clients a 100% return; Fund #2 has only given Firm B’s clients a 10% return, and it’s lagging the market.

2016: Firm B moves clients from Fund #2 to Fund #1, satisfied with the performance track.

2017: Fund #1 turns out to be a Ponzi scheme.


16


17

HYPOTHETICAL #2: CHERRY PICKING IA traded in an omnibus account and allocated the trades once he could

determine their profitability. Profitable trades were generally directed to an account where the IA

took a performance allocation; and away from a hedge fund the IA managed.

Profitable trades were allocated to the adviser’s personal accounts and the remainder to client accounts.

Portfolio manager placed orders for securities, but changed or delayed making allocations of the purchases and sales until after the order had been filled and the price of the security had been obtained, allocating more favorable trades to the proprietary hedge fund accounts. COO ignored red flags.


18

HYPOTHETICAL #3: DUALLY-REGISTERED REPRESENTATIVES IA representative is dually registered as an IAR and a registered

representative of a broker-dealer. IA representative may receive both advisory fee and commission or 12b-1

fee for making a trade.


19

You should search for those business practices that have the potential to sacrifice the interests on one set of customers in favor of the interest of another.

You should also identify any situations in which the firm could place its or its employees’ interest ahead of the firm’s customers.

Remarks of Stephen M. Cutler

Former Director of Enforcement

U.S. Securities and Exchange Commission

Brian Hamburger is the Founder and Managing Member of the Hamburger Law Firm. Brian is also the Founder and Managing Director of MarketCounsel, an

affiliated business, regulatory, and compliance consulting firm for entrepreneurial investment advisory firms nationwide. MarketCounsel and the Hamburger

Law Firm are the result of an incessant entrepreneurial spirit and genuine desire to provide an unexpected level of value and service. Together, the

consulting and law firms represent an unparalleled combination of preeminent counsel and uncompromising service to the retail securities industry.

Previously, Mr. Hamburger was an attorney with the securities practice group of a large New Jersey law firm. While there, he practiced in the area of

securities law, concentrating in investment adviser and broker-dealer registration and compliance matters as well as broker transition and practice

management issues. Prior to that post, Brian served as a law clerk in the Enforcement Division of the U.S. Securities & Exchange Commission. He was

also a judicial intern at the U.S. District Court for the Southern District of Florida and then, the State of Florida Third District Court of Appeal. Earlier, Brian was

the chief compliance officer of an SEC-registered investment adviser. In addition to his father's lifelong influence, Brian’s involvement in the securities industry started before he

could even drive a car. Since then, he has been involved in a myriad of areas within the industry, posting a rich diversity of experiences with investment adviser and financial

planning firms.

Mr. Hamburger is admitted to the bars of New Jersey, New York, Pennsylvania, Massachusetts, the District of Columbia, as well as the U.S. Supreme Court. He is a member of

the American Bar Association (Business Law Section) and other bar associations; the Securities Industry and Financial Markets Association, Compliance & Legal Division;

National Society of Compliance Professionals; Financial Planning Association; and Society of Financial Service Professionals. Brian has been appointed to the American Bar

Association’s Committees on Federal Regulation of Securities; State Regulation of Securities; and Professional Conduct; and is a Platinum and Gold Key Member of the New

York Chapter of the Investment Management Consultants Association and New Jersey Financial Planning Association, respectively. He has also heeded the call of the

Certified Financial Planner Board of Standards to sit on various task forces to shape industry-wide initiatives.

Brian is a frequent lecturer to regional and national groups in the securities industry including members of the wealth management, investment management, financial planning,

accounting, and insurance professions. His forums have ranged from delivering the keynote address to the country's state securities regulators to addressing school-age

children on career and entrepreneurial issues. For the past several years, he has been engaged by the North American Securities Administrators Association (NASAA) to train

state securities examiners on the intricacies of Form ADV and investment adviser client contracts. Mr. Hamburger proudly sits on several boards of directors and advisory

boards. He maintains his FINRA securities licenses (Series 7, 63 and 65), is a member of the FINRA Dispute Resolution Board of Arbitrators and served as an arbitrator for the

New York Stock Exchange.

A graduate of Quinnipiac College, Mr. Hamburger received his B.S. with the school's first dual major in Economics and Financial Management. He went on to earn his Juris

Doctor from the University of Miami School of Law where he was the recipient of a Dean’s Service Scholarship and the President's Pinnacle Award for his role as Editor-in-

Chief of the Res Ipsa Loquitur, the Bi-Weekly Journal of the University of Miami School of Law. Brian was among the first to earn the designation of Certified Regulatory and

Compliance Professional (CRCP) by the Wharton School and the FINRA Institute after completing his residency at the Wharton School of the University of Pennsylvania. He

was recently awarded the Accredited Investment Fiduciary Analyst™ (AIFA®) designation by the Center for Fiduciary Studies. AIFA designees have the knowledge necessary

to understand and implement a prudent investment process for investment advisers, investment managers, and investment stewards and can perform a fiduciary assessment

to verify or certify an entity's conformity to a "global fiduciary standard of excellence.“Brian is an active member of the US Coast Guard Auxiliary. He lives with his daughter,

Ella, and sons, Jacob and Sidney, in New Jersey.

Brian S. Hamburger, JD, CRCP, AIFA®

20

© 2010 MarketCounsel, LLC. All rights reserved.

No portion of this presentation may be reproduced without the express written consent of the author. MarketCounsel is a consulting firm, is not affiliated with any government entity, and does not render legal or investment advice.

MarketCounsel is affiliated with the Hamburger Law Firm, LLC.

ContributorsSpeaker

Alyssa M. Kolber, JDBrian S. Hamburger, JD, AIFA®, CRCP

NASAA Investment Adviser Training Workshop August 9, 2009 Breach of Fiduciary Duty Brian S....

Documents

Transcript of NASAA Investment Adviser Training Workshop August 9, 2009 Breach of Fiduciary Duty Brian S....