Cutting-edge technology, from machine learning and AI to new payment pathways, are transforming the world of financial services, including how fintech startups manage investors’ assets, assess the suitability of investments and execute transactions.
However, recent attempts by the Securities and Exchange Commission to expand its definition of investment advisors’ fiduciary duties and broker-dealers’ duty to act in clients’ best interests could create significant regulatory risks for these startups. This change is apparent in recently proposed rules that would significantly limit the use of artificial intelligence and other technologies by broker-dealers and investment advisers.
A History of the Fiduciary Duties of Investment Advisors
Investment advisors have long been viewed as fiduciaries to their clients. Although the Investment Advisers Act of 1940 (the primary federal law governing investment advisers) does not explicitly impose fiduciary duties on advisers, in SEC v. Capital Gains of 1963, the Supreme Court held that the law was fundamentally based on the idea that advisors are fiduciaries.
Investment advisors looking to innovate will need to exercise caution in this area to avoid missteps, which could have significant consequences on their viability.
In this case, the Court focused solely on whether the SEC could insist that an advisor disclose practices raising conflicts of interest. Although the Court recognized a separate argument that potential conflicts of interest involved in the matter should be eliminated rather than simply disclosed, the Court declined to rule on this issue, noting that the SEC had limited its request to disclosure even if the conflict of interest in this matter was significant.
Expansion in recent directions
More than 50 years later, in 2019, the SEC issued an interpretive statement affirming a much broader view of an advisor’s fiduciary duties. This standard encompasses a duty of care which involves the duty to provide advice in the best interests of the client, to seek the best execution of the client’s transactions, as well as to provide advice and monitoring throughout the relationship and a duty of loyalty, which involves either eliminating or providing full and fair disclosure of conflicts of interest.
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