The Securities and Exchange Commission recently issued a rule proposal reinstating three Investment Advisers Act of 1940 interpretive positions applicable to certain broker-dealer activities that had been previously vacated by a federal court. The SEC previously adopted Rule 202(a)(11)-1 to deem broker-dealers offering “fee-based brokerage accounts” as not subject to the Advisers Act. However, that rule was vacated in March 2007 by the Court of Appeals for the D.C. Circuit in Financial Planning Association v. SEC (FPA).
Newly proposed Rule 202(a)(11)-1 interprets the phrases “solely incidental” and “special compensation” in Section 202(a)(11)(C) of the Advisers Act. This proposed rule codifies the SEC’s positions that (i) the exercise of investment discretion (other than on a temporary or limited basis), the charging of a separate advisory fee, or separately contracting for advisory services are not “solely incidental to” the conduct of a broker-dealer’s business, (ii) a broker-dealer does not receive “special compensation” solely because it charges different rates for its full-service brokerage services and discount brokerage services, and (iii) a broker-dealer dually registered as an investment adviser is considered an investment adviser only with respect to those accounts for which it provides services that subject it to the Advisers Act. Since the FPA decision, a brokerage account charging an asset-based fee would be deemed an advisory account subject to the Advisers Act.
The SEC is accepting comments on the proposed rule until November 2.