I always thought they did.  But on Friday I read this sentence: “An investment advisor-client relationship is not a de jure fiduciary relationship.”  It sort of jumped out at me, because for a long time I’ve assumed that an investment adviser was a fiduciary to its clients.  But I was directed to a case, William L. Thorp Revocable Trust v. Ameritas Inv. Corp., 57 F. Supp. 3d 508, 524 (E.D.N.C. 2014), and there it was in black and white.

Judge Dever, the opinion’s author, is widely regarded as a very careful judge, so I was eager to see where he found authority for this flat statement.  He cited a North Carolina Business Court case, Silverdeer, LLC v. Berton, 2013 NCBC 24 (N.C. Super. Ct. 2013), which struggled a bit with the question.  The plaintiffs in Silverdeer, which wanted to demonstrate a fiduciary relationship between themselves and one of the defendants, didn’t cite any cases supporting the notion that there was one.  Instead, they merely cited “N.C. Gen. Stat. § 78C et seq. for the proposition that an investment advisor owes a duty of disclosure to his clients, which they argue in turn creates a de jure fiduciary relationship.”

Of course, if they’d wanted to cite a case in support of such a relationship, they didn’t need to go any farther than the U.S. Supreme Court.  Fifty-two years ago the Court held in SEC v. Capital Gains Research, Inc., 375 U.S. 180, 191-92 (1963), that Section 206 of the Advisers Act imposes fiduciary duties on investment advisers by operation of law.  The relevant provisions of Section 206 read:

“It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly – (1) to employ any device, scheme, or artifice to defraud any client or prospective client; (2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.”

As the Court put it:

The broad proscription against “any . . . practice . . . which operates . . . as a fraud or deceit upon any client or prospective client” remained in the bill from beginning to end. And the Committee Reports indicate a desire to preserve “the personalized character of the services of investment advisers,” and to eliminate conflicts of interest between the investment adviser and the clients as safeguards both to “unsophisticated investors” and to “bona fide investment counsel.”  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.

Thorp Revocable Trust and Silverdeer allow for the possibility that an investment adviser may have a fiduciary relationship with its client “when one party figuratively holds all the cards — all the financial power or technical information, for example . . . .”  Thorp Revocable Trust, 57 F. Supp. 3d at 524.

Those two cases are focused on North Carolina law, and investment advisers are subject to a dual federal-state regulatory structure in which larger advisers register with the SEC, and the smaller ones with the states (generally).  I suppose it’s possible that federally-registered advisers might bear fiduciary duties to their clients while state-registered ones do not necessarily.  But I have never even considered that possibility and have never read about such a distinction.

Here’s how a leading treatise puts it:

These fiduciary duties apply to all advisers, including both those that provide individualized discretionary management and those that provide impersonal advice through publications or otherwise. The SEC has held that an investment adviser owed a fiduciary duty to its client when the client agreement required the adviser “to act as an investment adviser” even though the client did not in fact expect to receive investment advice from the adviser.

James E. Anderson, Robert G. Bagnall & Marianne K. Smythe, Investment Advisers: Law and Compliance § 9.02[1] (2015).

UPDATE: June 29 — Belmont v. MB Investment Partners, Inc., 708 F.3d 470 (3d Cir. 2013), digs into this issue pretty deeply, including the federal-state distinctions.