Keeping Client Secrets
I have a husband and wife who are both clients of mine. Recently, the wife inherited some money and doesn't want her husband to know what she's doing with it. She asked me to open a separate account for her to deposit the money in and to not tell her husband about it. I'm uncomfortable with that since I do not want to lie to him if he asks me about it. However, I'm concerned about my privacy obligations to the wife. Any suggestions?
— C.H., via e-mail
One issue that comes to mind is whether the state the clients live in is a community property state. In that case, it's possible that the inheritance could be considered a marital asset and technically belongs to both spouses, and therefore you could argue that there's no privacy right between them.
Also, Rule 203(b)(3)-1 of the Investment Adviser's Act of 1940 defines "a client" as including the spouse. Assuming that the husband and wife signed one joint agreement, then technically both of them are considered one client so, again, you could say that there's no privacy right between them. On the other hand, if the wife opened a separate account in her own name, she may have an argument that you had a fiduciary duty not to disclose her private information to someone else.
Nevertheless, the fact that the someone else was her husband would, I think, work against that argument. Additionally, I would be concerned about how the husband would react if he found out you were keeping this information from him. It's likely you'd lose him as a client. I would suggest that you advise the wife that you will not make any promises to keep this secret, and that you will not lie to her husband if you're asked about the inheritance. You should remind her that monthly or quarterly statements will go to the home address unless she gives you another address to send them to.
There may also be tax issues that might cause him to find out about the account.
Ultimately, I'd suggest that she take that money and open an account somewhere else, and you tell her you don't want to know anything about it.
When I was with a broker-dealer, I had to update my outside business activities periodically and disclose when I was volunteering for various charities and non-profit organizations. I get a lot of clients through these activities. Now that I have my own registered investment advisory firm, do I need to include this information on my disclosure brochure?
— G.M., California
There are two areas where disclosures concerning outside business activities arise in connection with registered investment advisers.
The first is Item 10 of the Form ADV Part 2A Disclosure Brochure. The relevant part of that item says that you should describe any relationship that's material to your business, or to your clients, that you (i.e., your firm) or any management person has with any of certain related persons. There are 11 types of related persons listed in the instructions including, but not limited to, broker-dealers, pooled investment vehicles, other investment advisors, banks, accounting firms, law firms, insurance companies, real estate brokers, and sponsors or syndicators of limited partnerships. See the Form ADV instructions for the complete list.
I assume that your volunteer activities don't fall into one of those categories, and therefore this section wouldn't apply. The other area where this issue could arise would be in the Form ADV Part 2B Supplement, Item 4. That item says that if a supervised person is actively engaged in any investment-related business it should be disclosed.
In addition, if the supervised person is actively engaged in any business for compensation, and that business provides a substantial source of income or involves a substantial amount of time (i.e., more than 10% of either), then it should be disclosed. Again, I assume that the volunteer activities are not investment related and, since they are volunteer activities, you don't receive any compensation. Therefore, this item would not apply either. Of course other investment advisor representatives who work for you should still disclosure their outside business activities to you so you can make the determination as to whether they need to be disclosed.
Alan J. Foxman is an attorney with The Law Offices of Rita G. Dew, P.A.
and a Senior Consultant with National Compliance Services, Inc.
in Delray Beach, Fla. He can be contacted at this email address.