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The Uncooperative Client

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I own a small RIA firm and mostly manage the portfolios of individuals. One of my clients owns a small company and several months back asked if I could help him set up a simple IRA for his company/employees. I gave him the necessary forms for the employee participants to complete and when I didn't hear back from him I reminded him about it and he said he'd forgotten about it. Recently, I was contacted by a representative of the owner who was complaining that I hadn't done anything about setting up the IRA and claiming that, as a fiduciary, I should have taken care of this. While the owner of the company never signed any agreement with me regarding the IRA, do I still have some fiduciary responsibilities concerning the plan?

R.M., San Diego

As a registered investment adviser your firm (and by extension, you) have a fiduciary duty to your clients. However, in this situation the "client" would be (or rather would have been) the company and not the individual. Just because you manage the individual account of the owner, doesn't mean that you are also responsible for the accounts of the company since it is a separate legal entity.

Since the owner never signed an agreement with you on behalf of his company, it was never officially your client. Also keep in mind that, when it comes to employer-sponsored retirement plans, the fiduciary is the person or persons who exercise discretionary authority or control over the management of the plan assets. Initially, that means the plan sponsor or, in other words, the owner of the company or an officer, director or a named trustee of the plan. In addition, keep in mind that there are different duties which fiduciaries can assume with respect to the plan. The individual or individuals who initially have total responsibility can delegate some of those duties to other fiduciaries. However, those other fiduciaries are only responsible for the duties that they voluntarily assume. Even if a client signs an agreement with you, make sure everyone knows exactly what they're responsible for.

I'm forming a new registered investment adviser. The name I was thinking of using for the new entity is somewhat similar to that of a local county college. Will there be any trademark problems?

T.W., via e-mail

While I'm not a trademark attorney, I can tell you that a trademark is a word, phrase, symbol, or design or a combination thereof, that identifies and distinguishes the source of the goods of one party from those of others. A service mark is the same as a trademark, except that it identifies and distinguishes the source of a service rather than goods. The terms are often used interchangeably. You can establish rights in a mark simply by being the first one to use it in commerce, without having to register it with the U.S. Patent and Trademark Office (USPTO).

But registering the mark does provide several advantages, including: public notice of your claim of ownership of the mark; and a legal presumption of your ownership and exclusive right to use the mark nationwide. It is advisable to conduct a search of the USPTO database before filing an application to determine if there is a registered or pending mark that is similar to yours.

If someone were to sue for trademark infringement, the standard the courts look at is "likelihood of confusion." In other words, the use of a trademark constitutes infringement if it is likely to cause consumer confusion as to the source of the goods or service or that the other owner approves or sponsors the goods or service.

In deciding whether consumers are likely to be confused, the courts look at: (1) the strength of the mark; (2) the proximity of the goods or service; (3) similarity of the marks; (4) evidence of actual confusion; (5) similarity of marketing channels used; (6) degree of caution exercised by the typical purchaser; and (7) the defendant's intent.

I have my own registered investment adviser firm. We're switching email archiving companies and the previous company I was using said that the new company is not "FINRA compliant with section 17a-3." Can you tell me what that means?

T.M., Georgia

Section 17a-3 is an SEC rule under the Securities Exchange Act of 1934. It pertains to broker-dealers and not investment advisers. The books and records rule that applies to you is Rule 204-2 of the Investment Advisers Act of 1940. In particular, as it pertains to electronic storage, the rule states that: "The records required to be maintained and preserved pursuant to this part may be maintained and preserved for the required time by an investment adviser on: (i) Micrographic media, including microfilm, microfiche, or any similar medium; or (ii) Electronic storage media, including any digital storage medium or system that meets the terms of this section."

In particular, your email archiving system must allow you to: (i) arrange and index the records in a way that permits easy location, access, and retrieval of any particular record; (ii) provide copies of the records to the Commission upon request; and, finally, (iii) separately store, for the time required for preservation of the original record, a duplicate copy of the record on any medium allowed by this section. Additionally, you must establish and maintain procedures to: (i) maintain and preserve the records, to safeguard them from loss, alteration, or destruction; (ii) limit access to the records to properly authorized personnel; and (iii) ensure that any scanned records are complete, true, and legible when retrieved.

As an investment adviser we charge our fees monthly in advance. Our contract and our ADV says we will refund any unearned fees upon termination, prorating fees for a portion of any month. Our agreements and our ADV also require 30 days advance written notice to terminate a relationship. Our fee schedule also allows us to charge a termination fee of as much as one month's advisory fee. We had a client terminate in the middle of the month. They gave us one-week notice of their intent to terminate after we had already processed their fee for the month. Assuming the notice of termination was valid (even though it was not in writing) we'd still be entitled to our fee for all of the month and part of the next. Even if that doesn't cover us for not refunding the fee, we could treat the fee for the latter portion of the month as a termination fee. Do you think we need to refund any of the fee?

B.T., Michigan

As far as whether you "must" refund the fee, that depends on the specific language of your contract with the client and calls for a legal opinion that you'd be better served asking your attorney. From a compliance perspective, I think the main issue would be consistency. How have you treated other clients in the past (assuming a similar situation has occurred previously).

If this is the first time this issue has arisen, I'd recommend that you document your reasons for whichever approach you take and I'd suggest you use those reasons as a basis for making similar decisions in the future. The bottom line is, if an examiner comes in, you want to have a rational basis for whatever course of action you pursue. You should also be careful to consider whether the failure to impose a termination fee or charge what you're entitled to under the contract could be seen as indicative of resolving a customer complaint and, therefore, whether that "complaint" should have been reported.


Alan J.Foxman is an attorney in private practice in Boca Raton, Fla.
He also works as an independent contractor for National Compliance Services, Inc.
in Delray Beach, Fla. He can be contacted at this email address.

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