Art by Tim BowerAdvisers who
are registered under the Investment Advisers Act of 1940 are well aware of the
conflict of interest provisions found in the act and the corresponding
procedures required by Securities and Exchange Commission (SEC) regulations and
guidance. When those same advisers act as fiduciaries to plans governed by the
Employee Retirement Income Security Act of 1974 (ERISA), or to individual
retirement accounts (IRAs) or other arrangements subject to the prohibited
transaction (PT) provisions of the Internal Revenue Code of 1986 (IRC), they
are subject to separate conflict of interest provisions under that code and
should not assume that the measures they take to resolve conflicts under the
Advisers Act will be effective under ERISA and the IRC. There are substantial
differences among the conflict mitigation requirements of those three
enactments. The differences will be of even greater significance once the
Department of Labor (DOL) publishes its final “investment advice” regulation,
expected to be at some point this year.
The SEC and
the courts interpret the Advisers Act as imposing a fiduciary duty on advisers.
Accordingly, an adviser may not put himself into a position where his own
interests may come into conflict with those of his client.
situations, the courts and the SEC take the position that an adviser can
fulfill his duties under the Advisers Act by adequately informing a client of a
conflict and receiving the client’s informed consent. Of course, many advisers
take additional steps to mitigate conflicts. For instance, an adviser may be
“walled off” from other professionals in the organization, so that he is less
likely to be put in a position where he will fail to act in his client’s best
On the other
hand, ERISA imposes on fiduciaries—among other duties—duties of prudence and
loyalty. Layered on those are prohibited transaction provisions. Pursuant to
ERISA Section 406(a), a fiduciary is barred from causing the plan to enter into
transactions with “parties in interest” in the absence of a PT exemption. These
transactions are called the “per se” prohibited transactions because one
results regardless of the fiduciary’s motive for entering into the prohibited
a fiduciary may not, in the absence of an exemption: 1) deal with assets of the
plan in his own interest for his own account—i.e., no self-dealing; 2) act in
any transaction involving the plan on behalf of a party whose interests are
adverse to the interests of the plan—i.e., no conflicts of interest; or 3)
receive any consideration for his own personal account from any party dealing
with the plan in connection with a transaction involving plan assets—i.e., no
kickbacks. Generally, these are not per se prohibitions as described above, but
at least one court does not agree.
The IRC does
not impose fiduciary duties on advisers. However, it does prohibit a fiduciary
from entering into transactions with “disqualified
which mirror the parties-in-interest prohibitions in ERISA. The code also
includes self-dealing and kickback prohibitions such as those under ERISA.
prohibited transactions, ERISA and the IRC provide exemptions, as does the
DOL—both class and individual. These set forth specific criteria for how
financial professionals can avoid PTs.
here, ERISA and the IRC are generally more prescriptive than the Advisers Act
regarding how to address conflicts. Notably, the exemptions do not resolve the
aforementioned self-dealing, conflicts of interest and anti-kickback
prohibitions through disclosure alone. In the absence of an exemption, such
conflicts must be addressed via elimination of the prohibited conduct or, at
least, by demonstrating that the facts and circumstances do not otherwise give
rise to a conflict as contemplated under ERISA and the code. Walling off and
other actions commonly taken by advisers under the Advisers Act may be
adequate, but advisers should not automatically assume this is the case.
advisers and their compliance personnel should look to see if their conflict
management efforts are adequate under the Advisers Act, as well as ERISA and
the IRC. Written compliance procedures may have to be revised accordingly.
Advisers should expect that SEC examiners will be looking for compliance under
the two statutes as part of their regular examination process and under the
SEC’s ReTIRE initiative. The inability to substantiate ERISA compliance to an
examiner may lead to referral of the matter to the DOL.
Kaleda is a principal in the Fiduciary Responsibility practice group at the
Groom Law Group in Washington, D.C. He has an extensive background in the
financial services sector. His range of experience includes handling fiduciary
matters affecting investment managers, advisers, broker/dealers, insurers,
banks and service providers. He served on the DOL’s ERISA Advisory Council from
2012 through 2014.