A Pure Heart and an Empty Head Is No Defense

Unbeknownst to many investment advisers, it is their responsibility to educate themselves as to applicable legal standards for their advisory practices.  Investment advisers affiliated with a broker-dealer often assume that the broker-dealer will keep them updated as to any compliance and/or legal information they need to know.  However, under NASD Notice to Members 94-44, broker-dealers are only required to review the trading activity of their registered representatives that are members independent investment advisory firms.  Broker-dealers have absolutely no legal obligation to provide compliance or legal support services to independent advisory firms.

Investment advisory firms that discover that they have violated one of the Prudent Investment Adviser Rules or another applicable legal standard often argue that they meant well and they simply were unaware of the applicable legal standards.  This “pure heart, empty head” defense has been consistently rejected by the courts and the regulatory bodies, based primarily on the fiduciary relationship that exists between an investment adviser and their clients.  Investment advisers must be proactive and assume responsibility for learning the applicable legal standards and continuing to monitor future rulings and decisions that may impact their practices.

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