SEC Nigeria Clarifies and Establishes Fiduciary Standard For Investment Advisers in Nigeria


Monday, April 01, 2019   / 02.37PM / By Olubunmi Abayomi-Olukunle *


The SEC’s latest amendments to the regulations on investment advisory services in Nigeria (the Amendments) are perhaps the most significant amendments that have been made in the history of Capital Market Operator (CMO) regulation in Nigeria. The Amendments are particularly significant because, they clearly establish that the nature of the legal relationship between an Investment Adviser and its clients is that of a fiduciary-client relationship.


Prior to the amendments, Investment Advisers were required to comply with a Code of Ethics For Investment Advisers & Portfolio Managers which stipulates that the best interests of a client must influence the investment decisions of an Investment Adviser at all times.


With the Amendments, the SEC is aiming to improve protection of investors by enhancing the legal obligations flowing from Investment Advisers to their clients. Relative to the previous framework, the Amendments go a long way in clarifying the nature of the standard of conduct which is expected of an Investment Adviser facing its clients.


However, upon a deeper reflection, it does appear that the clarification has thrown up additional questions that may require further clarification.


We expect that the SEC will publish further interpretive guidance of the Amendments in the short term


A copy of the Amendments is available  here.


See also - SEC’s Proposed New Rules and Amendments For E-dividends, Transmission of Shares, DCS etc



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What Do The Amendments Mean for the Investment Advisory Industry 


1.       The Amendments are particularly important because a fiduciary standard is possibly the highest standard of care and attention that can be imposed on Investment Advisers or on any CMO. A fiduciary standard places a relatively higher compliance burden on an Investment Adviser, expanding the scope and nature of securities violations/offences and inevitably compliance risk. Even though there is a sense in which one can say a certain degree of fiduciary responsibility may already exist within the existing legal framework, the Amendments will potentially broaden the expectation of the clients of Investment Advisers and potentially make the landscape more litigious.


2.      It is useful to note that the Amendments apply to not just Investment Advisers but also to all CMOs which provide investment advice.


3.      The primary obligation of a fiduciary is to act in the best interests and for the benefit of his beneficiaries/clients. The fiduciary duty placed on Investment Advisers is rooted in common law principles and generally includes, on the part of the Fiduciary, the duty to avoid conflict of interest, the duty of undivided loyalty, the duty of confidentiality, and the duty not to profit at the expense of the client.


4.      Section 2 of the Amendments titled “Fiduciary Duties to Clients” states that an Investment Adviser shall (a)  avoid conflicts of interest with clients and is prohibited from taking unfair advantage of a client’s trust (b) be sensitive to the conscious and subconscious possibility of providing less than disinterested advice, and may be faulted even when it does not intend to injure a client and even if the client does not suffer a monetary loss (c)  have procedures in place that ensure that all clients are treated fairly and equitably.


5.      This section 2 of the Amendments throws up a number of questions which we imagine should be the subject of interpretive guidance. For instance – Is the provision of Section 2 intended to limit the scope of fiduciary duty under common law to the provisions of section 2? Or otherwise, is the fiduciary duty owed to client limited to section 2? Does an Investment Adviser also have a fiduciary duty to carry out prior client risk assessment; provide suitable advice; disclose certain material facts to clients; keep certain records, in accordance with sections 3, 4, 5 & 6 of the Amendments? Are the provisions of sections 3, 4, 5 & 6 to be considered as non-fiduciary tortious duties or fiduciary duties coming within the purview of section 2? Do the Amendments impose a duty of best execution? The legal distinctions are critical from a standpoint of Investment Adviser liability and should not in our view be left to conjecture. For instance, a duty to provide suitable advice (Section 3) is generally considered to be of a lesser standard relative to a fiduciary standard, because, generally, an Investment Adviser subject to a suitability standard only needs to have a reasonable basis to believe a recommended course of action is suitable for a client.


6.      From a compliance standpoint, the key point for Investment Advisers to note is that a breach of fiduciary duty can occur in a variety of circumstances. Accordingly, it would be important for Investment Advisers and their representatives to understand the operational conduct which the courts have held to give rise to a breach of fiduciary duty. In our view, the proscriptions contained in Amendments must be treated as minimum standards in every practical sense.


7.      In addition to and co-existing with the fiduciary standard, the Amendments also impose on Investment Advisers, a duty to provide suitable advice. In keeping with the duty to ensure that there is adequate and reasonable basis for making recommendations to client, this practically means that merely filing-out of account opening forms may not suffice anymore. Investment advisers must now conduct a risk assessment prior to on-boarding a client, by designing an investor questionnaire, that will help ascertain the risk profile of a prospective client and on the basis of the answers provided by the prospect, generate an IPS for each client. The expectation is that Investment Advisers will conduct investment activities on behalf a client based on an IPS, which is to be updated on a yearly basis.


8.     Additionally, Investment Advisers now have expanded compliance obligations in regard to record keeping, nominee accounts, use of BVN, proprietary trading, confidentiality, disclosure obligations, delegation of investor adviser responsibilities and the professional qualification of Investment Adviser representatives.



For Compliance Officers


a)  Assessment: Compliance officers must reassess compliance obligations in the light of the Amendments and determine the extent to which current operations may amount to an actual or potential breach of fiduciary duty owed to client.


b)    Communication: We think it accords with best practices for Investment Advisers to bring the Amendments to the notice of their clients and to provide information on the improvements being considered in line with the Amendments. Ideally, existing clients shouldn’t learn about the Amendments from third parties.


c)   Engagement & Implement: Compliance officers will need to design a firm-wide fiduciary compliance manual and also provide fiduciary education for employees across board.


Looking Forward


We generally expect a balance. We expect more conversations around the propriety of having blanket fiduciary provisions for Investment Advisers – whether this is good, as blanket, for the industry at this time and whether and to what extent the SEC should consider safe harbour provisions for Investment Advisers in relation to the fiduciary standard.



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About the Author

Olubunmi Abayomi-Olukunle is a partner and Lead Counsel at the Private Equity, Venture Capital & Emerging Companies sector-focused, specialist investment & finance law firm of Balogun Harold - He can be reached by e-mail vide   



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