Episode 130 – Fiduciary Duties in Syndications: Key Principles

What does it mean to have a fiduciary duty for a syndicator or a fund manager?

It is a principal thing that should be ingrained in your blood. It should be a visceral feeling that you have, that you’ve got this fiduciary duty and you treat your investors appropriately.

Now, what do I mean by this? Let’s talk about it.

A fiduciary duty is simply putting the best interest of your investors before your own. Now that sounds very easy and lofty, but what does it exactly mean?

There are five principles of fiduciary duty: the duty of loyalty, duty of care, duty of confidentiality, and the duty of impartiality, and we’ll go through each of those.

But basically, think about your fiduciary duty this way. This is the way I like to think of it: your investors are giving you an enormous amount of money. They’re giving you $50,000, $100,000—sometimes over a million dollars of their money.

That’s an enormous amount of trust that they’re placing with you. And we have to take that extremely seriously.

And that’s why, when I say you have got to feel it, you’ve got to really feel that level of trust. Because, man, they are putting a lot of trust in you, and you’d better earn it.

And by “earn it,” I don’t mean you have to hit the targets or else. I mean you just have to do your very best for them every single time and in every decision you make.

The duty of loyalty is the first main principle. It’s the duty to act in the best interest of the investors, avoid conflicts of interest, and prioritize the goals of the syndication over your personal gain.

So by this, what we really mean is—I like to think of it as avoiding conflicts of interest.

Now, there may be—there always are—conflicts of interest in a syndication. But taking a kickback or things like that is never in the best interest of your investors.

It’s okay to do that, but I would disclose it up front. Like, for example, “I’m going to be paid, you know, by 10% of the development fee by the developer who’s going to be hiring us for this,” something like that.

Whatever it is, it’s got to be disclosed and made super, super clear. Because we don’t want even the appearance of a breach of the duty of loyalty.

If you’re not going to be 100%, you’ve got to just tell them. Tell them that you’re doing it.

So that’s the number one thing: have this duty of loyalty.

The second key principle of fiduciary duties is the duty of care. Remember, they’ve given you all this money.

How would you want your money manager or your syndicator you’ve given all of your money to, to treat it?

You would want them to do every single thing that they can in order to take good care—nurture it, shepherd it, steward it—whatever words you like, in order to make sure that you get what kind of return is possible.

So really, it’s making all those good decisions, being thorough, conducting good due diligence, really just working hard and being truly, truly professional about every single element of your syndication or your fund.

The third key principle of fiduciary duty is a duty of disclosure. It’s telling your investors about everything that they need to know.

If it’s material, they need to know it. They don’t need to know that the third blade of grass finally grew in. They don’t need to know that level of detail.

But they may need to know that, hey, we had some vandalism that took place on the property and it wiped out a whole section of our thing. And now we’ve got to go find a new gardener in order to do this.

Whatever that is, right? That’s relevant, that’s material. Disclosing that—especially disclosing before they invest, right?

So anything that they might be interested in—conflicts of interest, especially that you’re going to be getting kickbacks, or how you get paid, what your interests are in the property—those sorts of things should be disclosed.

Anything that could change a potential investor from a yes to a no, they need to know about. Very, very clear. That is the duty of disclosure.

The fourth principle of fiduciary duty—and I take this one very seriously, and I’m probably different than a lot of other syndication attorneys as it comes to this—is the duty of confidentiality.

Your investors are trusting you with a lot of money. I’ve done quite a few syndications for myself. I continue to do syndications.

And I have investors in my roster who have invested in my projects who are well-known people, right? So they are people who are sometimes household names or people that you probably have heard of as well.

It is paramount that their confidentiality is maintained.

They don’t want everybody knowing about, “Well, this person invested in this thing and this person invested in that thing.”

It’s not relevant to everybody else. It’s relevant to them, to their investment decision, maybe to their wealth advisor—whatever. But it’s not relevant to every other investor.

I make sure that we have this discussion when I’m putting together a PPM and an operating agreement, because I think that duty of confidentiality is very important.

I know as an investor myself, I don’t want the amount of money that I’ve invested, or even the fact that I’ve invested in a certain project, to be known unless I really make it clear that I want it to be known—which is probably never the case.

So that duty of confidentiality is one of the key fiduciary duties, and it should be a part of your syndication or fund as well.

The last fiduciary duty is the duty of impartiality. Now, this actually comes up a fair amount.

Where it comes up most often is in redemptions. So let’s say you’ve got a fund that has a portfolio of $20 million, and you have decided, “Okay, we’re going to make available $2 million for redemption so people can get their cash out,” because we’re starting to bring down the portfolio size.

You have a choice to make in how you can apportion that redemption availability out to your investors.

You could just go to your favorite investor. But would that be fair to all the other investors? No, it would not be.

We have to be very careful to not favor other investors—and not by dollar amount either.

So it doesn’t matter whether you have somebody who invested $50,000 and somebody who invested $1 million—you need to treat them fairly. But you treat them fairly in proportion to each other.

So you may allow a redemption for both those investors, but it has to be in proportion to their investment.

That way, it is truly impartial on a dollar-for-dollar basis, not on a per-investor basis.

That’s the way I think is most fair. It’s the way nearly everybody wants to put it in their syndication documents as well.

We have to favor things very, very fairly and really think about what is the fairest way to do it for all of those investors at the same time.

My name is Tilden Moschetti. I’m a syndication attorney with the Moschetti Syndication Law Group.

We help syndicators and fund managers just like yourself in order to be compliant with all of the SEC rules and state rules.

And at the same time, we help you through this kind of decision-making on how to be the best fiduciary you can be.

Because it’s not just good business and lawful—but it also makes your investors happy. Which means they stay with you and keep investing with you.

So it’s a good thing to be doing.

If we can help you with your syndication or your fund, give us a call, set up an appointment, and let’s talk about what you’re working on.