In a 2 to 1 decision, in Financial Planning Association v. Securities and Exchange Commission, the D.C. Circuit Court of Appeals vacated Rule 202(a)(11)-1 under the Investment Advisers Act of 1940 (Advisers Act and Rule). The Rule excluded from the definition of investment adviser broker-dealers receiving fee-based compensation as a fixed amount or percentage of assets in an account for execution, clearance, settlement, custody and provision of research reports. The Rule also excluded from the definition broker-dealers that charged customers different fees for brokerage services - e.g., a full service account versus a discount brokerage account. The Rule also excluded broker dealers exercising temporary discretion over an account.
The Rule was adopted under Adviser Act, Section 202(a)(11) (F) ((now 202(a)(11)(G)) that authorizes the Securities and Exchange Commission to exempt from the definition of investment adviser “such other persons not within the intent of this paragraph …” The Court noted the exemption from the definition in Section 202(a)(11)(C) for broker-dealers who perform research and advisory services solely incidental to the conduct of their business and who receive no special compensation therefor. The court held that this specific exclusion precludes the SEC from adopting a rule under Section 202(a)(F) (now 202(a)(11)(G)), expanding or going beyond Section 202(a)(11)(C) in the case of broker-dealers. Unless the SEC appeals the decision or requests reconsideration the mandate ordering the opinion into effect will be issued about May 14.