Fiduciary Duties in Syndications: Key Principles

Fiduciary duties form the backbone of trust between syndicators, fund managers, and their investors. For anyone managing investor capital—whether in real estate syndications or private investment funds—understanding and honoring these duties is not just a legal requirement, but a key to long-term success.

This discussion outlines the five essential fiduciary duties every syndicator should embrace: the duty of loyalty, care, disclosure, confidentiality, and impartiality. Each plays a critical role in maintaining investor confidence and regulatory compliance. Loyalty means putting investor interests first and disclosing potential conflicts. Care involves thorough diligence and making responsible decisions with entrusted capital. Disclosure ensures that all material facts are shared transparently with investors, especially before they invest. Confidentiality protects investor identities and investment specifics, building credibility. Impartiality ensures fairness in actions like redemptions, treating all investors equitably based on their proportional contributions.

Grasping these principles not only minimizes legal risks but also strengthens relationships with investors who will be more likely to reinvest, knowing their capital is being handled with integrity and professionalism.

Read more about syndications and funds: https://www.moschettilaw.com/syndications-and-funds/

Read more about real estate syndication: https://www.moschettilaw.com/real-estate-syndication/

Moschetti Syndication Law Group is a boutique syndication law firm, serving small and growth-bound syndicators, as well as private equity firms. Our attorney, Tilden Moschetti, is determined to keep the firm’s ‘boutique’ size so we can tailor the services to each client’s unique needs without turning the firm into a faceless factory churning out private placement memorandums or passing unnecessary overhead expenses onto our clients. (As our client, you’ll only pay a fixed fee, so no surprises.) As for the client experience, we give real-time answers with Tilden Moschetti without making you book an official appointment or get passed along to associates or paralegals. We’ll work with your ambitions and overall vision to help you close the current deal and fill in that ‘missing’ piece – whatever you need – to keep adding more syndications to your portfolio. We keep syndicators syndicating (TM).

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Episode Transcript

Tilden Moschetti (00:00):
What does it mean to have a fiduciary duty

(00:02):
for a syndicator or a fundmanager? It is a principal thing
that should be ingrained in yourblood. It should be a visceral
feeling that you have, thatyou've got this fiduciary duty
and you treat your investorsappropriately. Now, what do I
mean by this, let's talk aboutit in this video.

(00:33):
A fiduciary duty is simplyputting your the best interest
of your investors before yourown. Now that sounds very easy
and lofty, but what does itexactly mean? There are five
principles of fiduciary duty,the duty of loyalty, duty of
care, duty of confidentiality,and the duty of impartiality,

(00:54):
and we'll go through each ofthose. But basically, think
about your fiduciary duty thisway. This is the way I like to
think of it, your investors aregiving you an enormous amount of
money. They're giving you 50,000100,000
sometimes over a million dollarsof their money. That's an
enormous amount of trust thatthey're placing with you. And we

(01:18):
have to take that extremelyseriously, 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,there are putting a lot of trust
in you, and you've better earnit. So it's not and by earn it,
I don't mean you have to hit thetargets or else. I mean you just
got to do your very best forthem every single time and in

(01:41):
every decision you make, theduty of loyalty is the first
main principle. It's the duty toact in the best interest of the
investors, avoid conflicts ofinterest and prioritizing the
goals of the syndication overyour personal gain. So by this,
what we really mean is, I liketo think of it as avoiding

(02:02):
conflicts of interest. Now,there may be, there always are
conflicts of interest in asyndication, but like taking a
kickback or things like that, isnever in your best interest of
your investors. It's okay to dothat, but I would disclose it up
front, like, for example, I'mgoing to be paid, you know, by

(02:24):
10% of the development fee bythe developer who's going to be
hiring us for this, somethinglike that. Whatever it is, it's
got to be disclosed and madesuper, super clear, because we
don't want even the appearanceof a breach of the duty of
loyalty. If you're not going tobe 100% you got to just tell

(02:45):
them, tell them that you'redoing it.
So that's the number one thing,is, have this duty of loyalty.
The second key principle offiduciary duties is the duty of
care. Remember, they've givenyou all this money. How would
you want your money manager oryour syndicator you've given all

(03:06):
of your money to to treat it?You would want them to do every
single thing that they can inorder to take good care, nurture
it, Shepherd it, steward it,whatever words you like, in
order to make sure that you getwhat kind of return is possible.
So really it's making all thosegood decisions, being thorough,

(03:27):
conducting good due diligence,really just working hard and
being truly, truly professionalabout every single element of
your syndication or your fund.The third key principle of
fiduciary duty is a duty ofdisclosure. It's telling your
investors about everything thatthey need to know. If it's

(03:47):
material, they need to know it.They don't need to know that the
third blade of grass finallycame, grew in. They don't need
to know that level of detail,but they may need to know that,
hey, we had some vandalism thattook place on the property, and
it wiped out a whole section ofour thing. And now we've got to
go find a new gardener in orderto do this. Whatever that is

(04:07):
right, that's relevant, that'smaterial, disclosing that,
especially disclosing beforethey invest right? So anything
that they might be interestedin, conflicts of interest,
especially that you're going tobe getting kickbacks, or how you
get paid, how what yourinterests are in the property,

(04:28):
those sort of things should bedisclosed. Anything that could
change a potential investor froma yes to a no, they need to know
about very, very clear, that isthe duty of disclosure, the
fourth principle of fiduciaryduty. And I take this one very
seriously, and I'm probablydifferent than a lot of other

(04:49):
syndication attorneys as itcomes to this, is the duty of
confidentiality. Your investorsare trusting you with a lot of
money. I've done quite.
Few syndications for myself. Icontinue to do syndications, and
I have investors in my rosterwho have invested in my
projects, who are well knownpeople, right? So they are

(05:12):
people who are sometimeshousehold names or people that
you probably have heard of aswell. It is paramount that their
their confidentiality ismaintained. They don't want
everybody knowing about well, wethis person invested in this
thing and this person investedin that thing. It's not relevant

(05:34):
to everybody else. It's relevantto them, to their investment
decision, maybe to their wealthadvisor, whatever. But it's not
relevant to every otherinvestor. I make sure that we
have this discussion when I'mputting together a PPM and an
operating agreement, because Ithink that duty of
confidentiality is veryimportant. I know as a as an

(05:57):
investor myself, I don't want myhow the amount of money that
I've invested, or even the factthat I've invested in a certain
project, to be known unless Ireally make it clear that I want
it to be known, which isprobably never the case. So that
duty of confidentiality is oneof the key

(06:18):
fiduciary duties, and it shouldbe a part of your syndication or
fund as well. The last fiduciaryduty is the duty of
impartiality. Now this actuallycomes up a fair amount so, and
where it comes up most often isin redemptions. So let's say
you've got a fund that has aportfolio of $20 million and you

(06:43):
have decided, okay, we're goingto make available $2 million
that for redemption so peoplecan get their cash out. Because
we're shrink, starting to bringdown the portfolio size.
You have a choice to make, andhow you can apportion that, that

(07:03):
redemption availability, out toyour investors? You could just
go to your favorite investor,but would that be fair to all
the other investors? No, itwould not be. We have to be very
careful to not favor otherinvestors, and not by dollar
amount either. So it doesn'tmatter whether the you have

(07:24):
somebody who invested $50,000
and a million dollars, you needto treat them fairly, but you
treat them fairly in proportionto each other. So you may allow
a redemption for both thoseinvestors, but it has to be in
proportion to their investment.So that way it is truly
important, impartial on $1 fordollar basis, not on a per

(07:49):
investor per investor basis.That's the way I think is most
fair. It's the way nearlyeverybody wants to put it in
their syndication documents aswell.
We have to favor things very,very fairly and really think
about what is the fairest way todo it for all of those investors

(08:10):
at the same time. My name isTilden Moschetti. I'm a
syndication attorney with theMoschetti syndication Law Group.
We help invest syndicators andfund managers just like
yourself, in order to becompliant with all of the SEC
rules and state rules, and atthe same time, we help you
through this kind of decisionmaking on how to be the best

(08:32):
fiduciary you can be, because itnot isn't not just good business
and lawful, but it also makesyour investors happy, Which
means they stay with you andkeep investing with you. So it's
a good thing to be doing if wecan help you with your
syndication or your fun, give usa call, set up an appointment,
and let's talk about what you'reworking on.

(09:01):
You.