5 Common Legal Claims: How RIAs Can Protect Themselves

As fiduciaries, Registered Investment Advisors (RIAs) must, at all times, serve the best interest of their clients and cannot place their own interests ahead of the interests of their clients. These obligations generally fall into two broad categories commonly referred to as the duty of care and duty of loyalty.

The Duty of Care requires an investment adviser to provide investment advice in the best interest of its client, based on the client’s objectives. The Duty of Loyalty requires RIAs to eliminate or disclose any possible conflict of interest involving themselves, their advice or their client.

In one way or another, most legal claims against RIAs stem from these two duties that serve as the underpinning of the profession. The Securities and Exchange Commission (SEC) recovered its largest amount of damages in fiscal year 2022 with RIAs and investment companies targeted for the most actions taken.

Clear communications and concise policies can help your firm prevent and mitigate the five most common legal claims against RIAs:

Breach of Fiduciary Duty

This is what happens when RIAs fail to exercise their responsibility to safeguard a client’s best interests. And it can be career-ending. It could come at the cost of a professional license in addition to financial damages.

The easiest way to mitigate any potential exposure is to be transparent. Make sure you disclose any possible conflicts of interest. Be crystal clear with your investment advice. Translate industry jargon into layman’s terms so your clients understand what is being said.

Working with an attorney on a new policy that prohibits self-dealing would be a good start.

Last year, the SEC ordered a dually registered RIA and broker-dealer to repay more than $800,000 to harmed clients for breach of fiduciary duty.

The SEC found the RIA did not adequately disclose conflicts regarding compensation that it received from the client investments, as well as a breach of its duty to provide best execution when it opted for a more expensive class of mutual funds when classes of more favorable value were available. In addition, the RIA failed to implement compliance policies and procedures designed to prevent such violations.


Simply put, negligence means carelessness, while gross negligence means recklessness on a bigger scale of damages.

As a fiduciary, you have responsibilities. In other words, your clients expect you to perform your duties in a manner that doesn’t harm their financial interests.

Last year, a federal court in Massachusetts ruled against an investment advisor who defrauded two advisory clients when he recommended that they invest in a scam investment abroad. The SEC’s complaint alleged that the investment advisor ignored and failed to disclose warnings from two banks in Turkey that the opportunity was probably a scam. The court ordered the advisor to pay more than $500,000 in damages.

RIAs should work with an attorney to draft disclaimers that can help mitigate errors. Each state has differing laws on negligence and award amounts, so make sure your disclaimers comply with your state’s laws to ensure they are enforceable.

Cyber Security Failures

Protecting your clients from cyber security breaches means being proactive.

The SEC continues to add more consumer protections, which will make your research and planning more valuable to your business. In March, for example, the SEC proposed amending Regulation S-P to require “covered institutions”—including RIAs—to provide notice within 30 days to investors affected by certain types of data breaches. The original regulation, which was adopted in 2000, simply required investment professionals to notify their clients about how they use their financial information.

Creating policies and procedures is the best way to start building the framework for a program that will better protect all stakeholders. Written policies and procedures will ensure your IT team is protected because they will know how to safeguard the data, prepare for possible cyber attacks and how to best respond. Because technology connects all of us, the same standard should be used with all your vendors’ IT programs. Do they have similar polices in place? Ultimately, you will be responsible.

Ongoing stress-testing your systems will provide another layer of protection to your firm. Hire a company that will send fake “scam” emails to your employees and turn it into a teachable moment.

Remember when your bosses sent you emails asking you to buy them gift cards on behalf of the company—with the promise of being reimbursed? (They really didn’t.)

Failure to Disclose

Be transparent with your clients about matters that involve your financial relationships with vendors and investments. More specifically, make sure you state the details about how you are compensated when it involves your client recommendations.

In 2020, the SEC sued an investment advisory firm for defrauding its clients by failing to disclose financial conflicts of interest when recommending investments. The agency alleged the advisory firm recommended their client invest $16 million in four private real estate investment funds without disclosing their fund managers received $1 million from the funds, as well as incentives to keep their money invested. For two of the four funds, the undisclosed financial arrangement resulted in reduced returns.

Any client grievance—written or verbal—should be taken seriously, which would reduce the odds of the complaint becoming a docket item. The matter should be taken directly to your in-house compliance officer or attorney if you have outside counsel. Acknowledge receipt of the complaint to your client and provide a timetable for an outcome.

If the investigation has merit, the compliance officer should immediately contact an attorney, who can draft a legally binding agreement for resolution.

Making Up Unsubstantiated Claims

When it comes to attracting new clients, the truth is your friend.

Research your own investment history to ensure that you can substantiate every claim. If a specific fund has yielded 50% annual returns in the past, then that is something you can talk about—but stay away from what is possible in a perfect world.

Last year, the SEC filed a civil action against former investment advisors for alleged participation in a Ponzi scheme that raised more than $110 million from more than 400 advisors. The defendants received undisclosed compensation from the investment fund, which was recommended based on unsubstantiated claims.

When it comes to the five most common legal claims against RIAs, say what you mean and mean what you say. It will go a long way toward protecting your book of business.

(Paul Fenaroli is an Associate Attorney at Pastore admitted in Connecticut and the District of Connecticut. He provides private companies with a full range of business law services covering formations, mergers, acquisitions, corporate governance, securities offerings and litigation)


Pastore LLC Welcomes Summer Class

On Thursday, May 18th, Pastore LLC welcomed our summer class to the firm.

Garrett Borden has returned to the office as a Summer Associate. He started with Pastore as a Law Clerk in January of 2023. He took a break for his finals at Quinnipiac University School of Law and to relocate to New Haven, Connecticut. He will be full time for the summer.

Dana Gour joined us as a Summer Associate. She completed her first year of law school at the Elisabeth Haub School of Law at Pace University. She graduated from Rutgers University in January 2022. She is involved in multiple organizations at Pace, including the Intellectual Property Student Organization.

Emily DiGiacomo joined us a Summer Associate. Emily completed her first year of law school at the Elisabeth Haub School of Law at Pace University. She graduated from the University of Connecticut in August 2022. She is involved in the National Environmental Moot Court Competition at Pace as well as many other organizations.

Hayley McBryan joined us a Summer Associate. She completed her first year of law school at the Elisabeth Haub School of Law at Pace University. She graduated from the University of South Carolina in August 2022. She is involved in the Environmental Law Society at Pace.

Pastore LLC has also welcomed Ellie Carter, as our Summer Law Intern. She finished the first part of her dual undergraduate program at Sciences Po Paris and obtained a Bachelors of Art in Politics and Government. She will finish her undergraduate career at Columbia University. Ellie looks forward to going to law school upon graduation.


A Track Record of Success: Pastore LLC has Successfully Argued Financial Services Appeals Before Second Circuit, Third Circuit and Eighth Circuit

The Second Circuit affirmed a jury verdict obtained by Pastore in a federal securities fraud case. This concluded a contentious, multi-year litigation, defeating claims of fraudulent inducement and securities fraud brought against two hedge fund executives by a billionaire family office special purpose investment vehicle. The billionaire family office, the heirs to and founders of a well-known apparel store, had invested in the fund’s General Partner limited liability company.


Pastore LLC also won a complex securities and M&A appeal taken to the United States Court of Appeals for the Eighth Circuit arising from a derivative rights holder agreement and related investment banking engagement agreements. This matter was an appeal filed by Plaintiff-Appellant after Pastore LLC successfully defended this case in the United States District Court for the District of Nebraska.


Pastore LLC also represented a large national investment bank at the Third Circuit in a matter arising from a dispute over a $650 million financing. Pastore LLC had previously defeated White & Case in the DE Bankruptcy Court.

Pastore LLC Counsel in Large SDNY Bankruptcy Case Involving Multi-Billion Dollar Development, the Largest in Westchester County History

Pastore LLC has been tapped as counsel in two related bankruptcy matters in the Southern District of New York (formerly presided over by Judge Drain, who also presided over the Purdue Pharma Bankruptcy). The first matter involved a residential development in Bronxville, New York that is the most expensive per square foot development in Westchester. The second matter involves a multi-billion commercial real estate project. Pastore LLC represents a large creditor and owner of the construction management company for both projects. Damages and claims by Pastore LLC’s client exceed $300 million.



Regulation Could Pave the Way for Blockchain Settlement of Securities Transactions

While the U.S. ponders crypto and blockchain regulation, large institutional investors are building the infrastructure necessary to handle the possible private and sub-chain transaction methods likely coming with Web 3.0. Legislation is desperately needed to give certainty to entrepreneurs and large institutions planning for the block sub-chain and to the crypto industry generally. One likely outcome is the movement towards using blockchain technology to “settle” securities transactions. This is occurring now but may become widespread in the near future. With a traditional securities trade, settlement can take days, creating market and operational risk. With blockchain settlement, the settlement is instantaneous. For securities trades to be settled, the transaction information (transfer of ownership or payment) needs to be recorded in the blockchain. Investors communicate information to a peer-to-peer network. Thus, much of the risk is eliminated. Many large institutions are working on systems that would allow for such settlement techniques.

Regulation of blockchain would do a great deal to accelerate the growth of the industry, and provide legal security for its use. An article published by the DTCC titled “Will Blockchain Revolutionize Clearance and Settlement” provides a succinct overview of the history of the current clearing and settlement system.[1] Regulation is particularly needed to overcome some of the hurdles of blockchain settlement. The current clearing and settlement system for securities trading can be traced back to the 14th century when double-entry ledgers were invented.[2] The creation of the double-entry ledger revolutionized trading in Europe due to the ability to record multi-party transactions occurring over a span of time and across countries in a central location.[3] Decentralized, multilateral clearing continued for more than 300 years and was utilized by groups such as the London Clearing Club, the London and Amsterdam stock exchanges, and the Chicago Board of Trade.[4] As the trading volume and the number of counterparties increased, clearing started to become centralized.[5]

Moreover, prior to 1892, every exchange of cash for shares on the New York Stock Exchange (“NYSE”) had to be paid in full, with cash or a loan secured by the shares acquired in the transaction.[6] However, this system did not provide enough security to money markets and the banking system, which could be severely stressed during market volatility and surging trade volumes.[7] Thus, in 1892 the NYSE created the New York Stock Exchange Clearing House (“NYSE Clearing House”), which was later replaced by the Stock Clearing Corporation in 1920.[8] The NYSE Clearing House net down obligations on a member-by-member and security-by-security basis.[9] To resolve this, regulators and the U.S. securities industry created The Depository Trust Corporation (“DTC”), a central securities depository for storing all stock certificates traded in the U.S. market.[10] Over time, nearly all certificates were converted into electronic form, greatly streamlining the trading process and reducing the burden on the clearing and settlement system.[11] Moreover, the NYSE Clearing House was merged with Amex and NASDAQ clearing functions, culminating in the National Securities Clearing Corporation (“NSCC”).[12] This integration further reduced payment and transfer activity volume by enabling multilateral netting across the entire U.S. equity market.[13] In an effort to streamline the clearing process further, the DTC and NSCC were consolidated into The Depository Trust & Clearing Corporation.[14] Thus, clearing and settlement were able to take place in a single, vertically integrated entity.[15]

Blockchain can bring significant record-keeping improvements to the securities industry, but blockchain settlement only works if the settlement process is better regulated. Thanks to the self-enforcing contracts, blockchain technology could be the next step in the evolution of the clearing and settlement. As stated above, this would make settlement instantaneous, negating the need to post collateral, which would free up capital.[16] However, without regulation, this technology could require the U.S. market to be funded on a transaction-by-transaction basis, which would significantly hinder the liquidity and risk-mitigating benefits of the current system.[17] Further, the instantaneous settlement would prevent the ability to fund a trade on a secured basis because traders could only pledge transacted shares as collateral.[18] What this means is that all trades using blockchain must be prefunded and on an unsecured basis. This would severely limit market liquidity. Thus, regulation is necessary to allow the benefits of instantaneous blockchain settlement not to be overshadowed by the illiquidity effects of such settlement. If such creative regulation could be implemented, then blockchain for securities settlement can become widespread, creating the next evolution of securities trading.


[1] Will Blockchain Revolutionize Clearance and Settlement, DTCC (Mar. 10, 2021), https://www.dtcc.com/dtcc-connection/galleries/2021/march/10/will-blockchain-revolutionize-clearance-and-settlement.

[2] Id.

[3] DTCC, supra note 1.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] DTCC, supra note 1.

[14] Id.

[15] Id.

[16] Id.

[17] Id.

[18] Id.