On October 14th, Financial Recovery Technologies’ CEO Rob Adler virtually “sat down” with Conway Dodge, Managing Director and Deputy Head of the Americas at Promontory Financial Group and former Assistant Director in the Securities and Exchange Commission’s Division of Enforcement, to discuss being a fiduciary, trends impacting fiduciaries such as ESG, and provided unique perspectives into the SEC and how it looks at fiduciary responsibility.

If you missed the webinar, don’t worry. Below we recap some of the top questions and takeaways and you can watch the full on-demand here.

To what extent is the SEC impacted by political wins?

There is a direct impact. The chair of the SEC is appointed by the president and will usually carry an agenda that is consistent with the President’s or the administration’s views on regulation and the financial marketplace. Additionally, the commission consists of five commissioners and no more than three can be from the same political party.

Describe fiduciary duty and your (Conway Dodge) perspective on what it means.

Being a fiduciary means that you owe a duty of care, loyalty and good faith to your beneficiaries. It’s one of the highest standards of care that you’ll find under the securities laws. Fundamentally, you must:

• Put someone else’s interests ahead of your own (There is a beneficiary whose interest is paramount).
• Avoid or disclose conflicts, and ensure that you’re operating at all times in the best interests of the beneficiaries.

> Watch our 90-second clip.

Are there separate groups inside of the SEC that focus on the issuers vs. focusing on the regulatory and compliance oversight of the investment manager sector?

Both. For a bit of background, the SEC has oversight on investment managers and their fiduciary duty to their beneficiaries and also of issuers of securities, listed companies, bonds, equities and other financial instruments. Within the division of enforcement, there are some specialized units, which focus on some of the areas described. For example, there is an asset management unit with teams within it that focus their primary day-to-day activities and investigations on asset managers, investment advisors, investment managers and the like. However, there are other groups in the SEC that work across all domains.

What is an investment manager or an asset owner’s responsibility to litigation?

From an SEC perspective, an investment manager or an asset owner’s responsibility to litigation is a tricky question, because they are investors, not litigators. As investors, they occupy the fiduciary role to make sure that they’re operating in the best interest of the underlying shareholders. And what that includes, by virtue of the fiduciary duty, is to be aware of what is happening with the underlying institutions in which they’re investing.

In most instances, they’re investing in a class of securities and the value of those securities can be impacted by the activities engaged in by the issuer, its board or its executive management. There certainly are instances where, in order to meet their fiduciary duty, they must think about bringing shareholder litigation to protect the interests of the beneficiaries. It comes down to a facts and circumstances analysis, where you have to determine what is in the best interest of beneficiaries, what is in the best interest of shareholders and is it to pursue litigation, which may result in some reward, but at a cost.

Can you (Conway Dodge) talk a bit about the SEC’s role as an enforcer and how it plays a part in private markets and shareholder litigation privately?

I would say there’s little question about the SEC’s role as an enforcer. The issue becomes how much enforcing it can do, which comes down to resources. There’s always a debate happening within the walls of the SEC about where it should allocate those scarce resources. The three hallmark prongs of the SEC’s mission are:

• Investor protection
• Maintain fair, orderly and efficient markets
• Facilitate capital formation

The SEC has an obligation to protect all investors. However, if retail investors are in greater need of protection from manipulative schemes or misdeeds by entities, corporations or investment managers, there can be conversations within the SEC like, “Maybe we should focus more resources on retail investors,” because they don’t have the means to protect themselves.

How do you view the SEC’s role when it comes to investor protection?

My own personal view is that you really have to think about investor protection from two angles. First, when you bring in enforcement action, it has to have a specific deterrent effect: the entity against which the action is brought will not want to do it again. Second, you want to send a message, because you can’t bring every case forward or investigate every issuer. The message should signal to others in a similar industry or adjacent industry, “I better not engage in that type of conduct or this could happen to me.”

Stay tuned next week for Part 2 of our FRT Insights Webinar Recap – Dialogue with Conway Dodge, Managing Director and Deputy Head of the Americas at Promontory Financial Group.

Learn More about our FRT Insights Series

FRT Insights provides an unbiased and comprehensive overview of what is impacting shareholder litigation and how institutions can prepare, monitor, and maximize this unique asset, exclusively for asset owners and asset managers. If you are interested in being a potential speaker in future FRT Insights, email us at learnmore@frtservices.com.

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