Summary: On March 30, 2007, the United States Court of Appeals for the D.C. Circuit vacated Rule 202 (a)(11)-1 under the Investment Advisers Act of 1940 on the grounds that the SEC exceeded its authority in promulgating the rule. Rule 202(a)(11)-1 provides an exemption from investment adviser status for brokers offering customers fee-based brokerage programs. The court held that under a statutory construction analysis of the language of 202 (a)(11)(C) of the Advisers Act, the SEC had no authority to exempt brokers from the definition of an investment adviser if they provide advisory services and receive special compensation.
In adopting the rule, the SEC relied upon its authority under section 202(a)(11)(F), which authorizes the SEC to exempt from the Advisers Act "such other persons not within the intent of this paragraph, as the Commission may designate by rules and regulations or order." The court found that since Congress had specifically carved out an exception for when 'any' broker is not deemed an investment adviser, the SEC surpassed its authority in including brokers as an 'other' party under Section (F). Additionally, the court noted that 'other' parties under Section (F) was also clearly intended to cover parties that had not been previously been addressed under Section 202(a)(11). The court concluded that by adopting the Rule and creating additional exceptions for brokers, the SEC expanded the prescribed rights specifically set out by Congress.
Status: The rule remains in effect until the court issues its mandate. The SEC has yet to make an public comment on the ruling or how brokers offering fee-based programs should proceed. One option available to the SEC is to seek a rehearing.