Special from Jay B. Gould and David A. Goldstein, White & Case LLP<\/p>\n
SAN FRANCISCO, CA (www.whitecase.com) – On April 12, 2005, the U.S. Securities and Exchange Commission (the “SEC”) adopted Rule 202(a)(11)-1 under the Investment Advisers Act of 1940 (the “Advisers Act”) to address the application of the Advisers Act to certain broker-dealers.<\/p>\n
The rule was originally proposed in 1999, however, the SEC did not take final action on the rule until just recently, coincidentally enough, soon after the Financial Planning Association (the “FPA”) brought suit against the SEC challenging the legality of the proposed rule. The FPA alleged that the proposed rule, which was being relied upon by broker-dealers, improperly permitted broker-dealers to act as investment advisers without complying with the fiduciary and disclosure standards under the Advisers Act. Shortly after the FPA filed its lawsuit, the SEC re-proposed the rule, with a relatively short comment period, and quickly adopted the rule once the comment period had closed. The SEC has provided further guidance clarifying when broker-dealers are subject to the Advisers Act, and the rule as adopted includes an additional disclosure requirement.<\/p>\n
Under Rule 202(a)(11)-1 as adopted, a broker-dealer receiving special compensation, such as an asset-based or fixed fee, for nondiscretionary investment advice, is not subject to the Advisers Act if such advice is “solely incidental” to its business of brokerage services. The rule states that advice is not “solely incidental” to a broker-dealer’s business of brokerage services if the broker-dealer:<\/p>\n
– charges a separate fee or enters into a separate contract for advisory services;<\/p>\n
– provides investment advice in connection with a financial plan or its financial planning services, and<\/p>\n
– holds itself out to the public as a financial planner or entity that provides financial planning services,<\/p>\n
– delivers a financial plan to the customer, or<\/p>\n
– represents to the customer that the investment advice is provided in connection with a financial plan or financial planning services; or<\/p>\n
– exercises investment discretion over any customer accounts.<\/p>\n
The rule further states that to avoid application of the Advisers Act, any contracts, agreements, or other governing documents, or advertisements for accounts in which a broker-dealer receives special compensation must include the following statement:<\/p>\n
” Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.”<\/p>\n
This prominent statement must identify whom the customer should contact to ask any questions or discuss any issues, like what the difference is between brokerage and advice.<\/p>\n
The rule further provides that a broker-dealer is not deemed to have received special compensation merely because it charges a commission, mark-up, mark-down or similar fee for its services that is more than or less than the fee it charges another customer. In addition, the rule clarifies that a broker-dealer is an investment adviser only with respect to the accounts that it provides services to and receives compensation that subject the broker-dealer to the Advisers Act. The rule is effective as of April 15, 2005, however, the prominent statement disclosure requirement is effective as of May 23, 2005.<\/p>\n
While Rule 202(a)(11)-1 does impose a new disclosure requirement and clarifies what advice is not “solely incidental” to a broker-dealer’s business, the SEC’s adoption of the rule appears to be a victory for broker-dealers. As long as broker-dealers comply with the rule, they can provide investment advice and maintain fee-based or discount brokerage services without being subject to the Advisers Act.<\/p>\n
Note:<\/p>\n
White & Case LLP represents hedge fund and private equity fund sponsors and advisers, prime brokers, and administrators through its 38 offices in 25 countries around the world. For further information on the White & Case investment funds practice, contact:<\/p>\n
Jay B. Gould, Esq.
White & Case LLP
Three Embarcadero Center, Suite 2210
San Francisco, California 94111
415-544-1112 (O)
310-800-6500 (C)
jgould@whitecase.com<\/p>\n
David A. Goldstein, Esq.
White & Case LLP
1155 Avenue of the Americas
New York, New York
212-819-8757 (O)
dgoldstein@whitecase.com<\/p>\n","protected":false},"excerpt":{"rendered":"
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