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A Matter of Trust: Standards of Conduct under ERISA, the Exchange Act, and the Advisers Act: Part 2 of 2

The Investment Lawyer
April 2013

While most broker-dealers and investment advisers know whether they are supposed to be registered under the Securities Exchange Act of 1934 (Exchange Act) or the Investment Advisers Act of 1940 (Advisers Act), they are not likely to be aware of their fiduciary status under the Employee Retirement Income Security Act of 1974 (ERISA). Or, even if they do know that they are fiduciaries for purposes of ERISA, they are unaware that there are substantial differences between how the securities laws and ERISA govern transactions involving employee benefit plan assets and the assets of an entity that are deemed to be employee benefit plan assets for purposes of ERISA.

The purpose of this article is to help a broker or dealer registered under the Exchange Act (BD) and an investment adviser registered under the Advisers Act (RIA) better determine at what point he or she is acting as a fiduciary for purposes of ERISA and the applicable standards of conduct under ERISA by comparing and contrasting the corresponding requirements under the Exchange Act and the Advisers Act. The importance of understanding the differences will grow in the near future as the Department of Labor (DOL) works to revise its regulations identifying fiduciaries that provide investment advice and the Securities Exchange Commission (SEC) looks to coordinate the standards of conduct under the Exchange Act and Advisers Act.

Part 1 of this article, which was published in the February 2013 issue of The Investment Lawyer (see http://www.groom.com/resources-742.html), focused on determining when a BD or RIA was covered by the Exchange Act or Advisers Act, as applicable, versus whether the BD or RIA was a fiduciary for purposes of ERISA. Part 1 also reviewed the standards of conduct applicable to BDs and RIAs. This Part 2 addresses the standard of conduct applicable to ERISA fiduciaries, including BDs and RIAs who are fiduciaries pursuant to the functional definition found in section 3(21) of ERISA or designated as fiduciaries pursuant to sections 405(c)(1)(B) and 3(38) of ERISA (as described in Part 1 of this article), and how that standard compares to the standards of conduct under the Exchange Act and Advisers Act.