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Fiduciary Duties of Directors of Registered Investment Companies

May 1, 2017
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The standards of conduct applicable to investment professionals under federal law have been under scrutiny in recent years. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 empowered the Securities and Exchange Commission (SEC) to review the effectiveness of existing legal and regulatory standards of care for brokers, dealers, and investment advisers and to adopt a uniform fiduciary standard for brokerdealers. Last year, the Department of Labor adopted a fiduciary rule under the Employee Retirement Income Security Act (ERISA) for broker-dealers and others who provide advice to retirement investors. While the standards of care under the Investment Advisers Act of 1940, the Securities Exchange Act of 1934, and ERISA have been much debated, the fiduciary duties applicable to directors and trustees (directors) of registered investment companies (funds) under state law and the Investment Company Act of 1940 (1940 Act or Act) have remained largely the same. Although the standard of care has not changed, fund directors have seen increased responsibilities in light of SEC rulemaking, enforcement actions, and shareholder litigation. In this article, we will examine the fiduciary duties of fund directors under state and federal law as well as risk mitigation considerations.

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