Friday, 16 December 2005 08:00
No-Action Letter under Investment Advisers Act of 1940 Section 202(a)(11)(c) and Rule 202(a)(11)-1
Securities Industry Association
December 16, 2005 Mr. Ira D. Hammerman Senior Vice President and General Counsel Securities Industry Association 1425 K Street, N.W. Washington, D.C. 20005-3500 Dear Mr. Hammerman: On April 12, 2005, the Commission adopted rule 202(a)(11)-1 under the Investment Advisers Act of 1940 which excepts from the definition of investment adviser certain broker-dealers that provide non-discretionary advice, solely incidental to their brokerage services, regardless of the form of compensation.1 We understand from you and your counsel that the Securities Industry Association has received a number of questions from your members concerning the implementation and operation of that portion of the rule relating to the financial planning activities of broker-dealers. The questions involve: (1) advertisements; (2) financial planning and brokerage services; (3) dual capacities for dually registered firms; and (4) use of certain educational or specialized training credentials. This letter responds to those questions. We note that this response assumes close familiarity with the rule and the Adopting Release, both of which should be read carefully. Our response is not a substitute for these sources. It represents the views of the staff of the Division of Investment Management, and is not a rule, regulation, or statement of the Securities and Exchange Commission. The Commission has neither approved nor disapproved this response.
- Must broker-dealers dually register as investment advisers if they hold themselves out for purposes of rule 202(a)(11)-1 by using advertisements that reference the availability of a broad range of investment advisory and financial planning services?Holding itself out as providing advisory services does not by itself require a broker-dealer to register under the Advisers Act. Under rule 202(a)(11)-1(b), a broker-dealer is an investment adviser subject to the Advisers Act if it portrays itself, in advertisements or otherwise, to the public (i.e., holds itself out) as a financial planner and also provides investment advice as part of a financial plan or in connection with providing financial planning services.2Rule 202(a)(11)-1 does not require a broker-dealer to treat as an investment advisory client a customer to whom the broker-dealer merely makes it known that financial planning or other investment advisory services are available but to whom the broker-dealer does not provide such services.3 Whether a broker-dealer acts as an investment adviser to any given customer under rule 202(a)(11)-1(b)(2) depends in part on the nature of the services actually provided to the customer. Under rule 202(a)(11)-1(b)(2), unless a broker-dealer (dually registered or otherwise) provides advice to that customer as part of a financial plan or in connection with providing financial planning services, the broker-dealer will not be deemed to be engaging in advisory activities with respect to that customer that are subject to the Advisers Act.
- What determines when a broker-dealer is providing a financial plan or financial planning services to a customer within the Advisers Act as opposed to services provided as part of a brokerage relationship subject to the Securities Exchange Act of 1934 and self-regulatory organization rules?Under rule 202(a)(11)-1(b)(2)(ii), a broker-dealer that provides advice to its customers as part of a financial plan or in connection with financial planning services and delivers to a customer a financial plan provides advice that is not solely incidental to its conduct of business as a broker-dealer. Whether a particular document or financial tool is a financial plan would turn on whether the document or tool is used in the context of delivering advice that bears the characteristics of a financial plan.4A financial plan generally seeks to address a wide spectrum of a clients long-term financial needs, and can include recommendations about insurance, savings, tax and estate planning, and investments.5 This is distinct from a financial tool that is used to provide guidance to a customer with respect to a particular transaction or an allocation of customer funds and securities based upon the long-term needs of a client, but that is not applied in the context of the more comprehensive plan described above.6 When used in this more limited way, a financial tool would be viewed as part of a broker-dealers brokerage relationship with its customer. Where the financial tool is used with, or made available to, a brokerage customer, the fact that a broker-dealer discloses to the customer that the financial tool is a brokerage service and not a financial plan can be helpful in determining whether the broker-dealer is providing brokerage services.7 How a reasonable investor would perceive the services would also be an important consideration.8
- May a firm that is dually registered as a broker-dealer and an investment adviser act as an investment adviser in providing financial planning services to a customer and as a broker-dealer in providing brokerage services to the same customer?Under section 206 of the Advisers Act, advisers owe fiduciary obligations to a client or prospective client. The Division believes that whether a client relationship exists will turn on the terms of the contract the client has entered into with the broker-dealer/investment adviser as well as the course of dealing between the parties and the reasonable expectations of the customer/client that arise from that course of dealing.Even when the Advisers Act does apply, however, the Advisers Act carves out an exception specifically designed to accommodate dually registered broker-dealers. Under section 206(3), the limitations on principal transactions do not apply if the broker-dealer/investment adviser is not acting in an advisory capacity with respect to a transaction. When a broker-dealer/investment advisory client initiates a transaction with its broker-dealer/investment adviser from whom the client has not received advice to buy or sell the security, the limitations of section 206(3) do not apply. When a broker-dealer provides generalized, non-specific investment advice to a customer, (e.g., invest a portion of your account in equity securities,) the same broker-dealer subsequently effecting transactions in specific equity securities at the direction of the customer would not, in our view, be acting in an advisory capacity with respect to the subsequent transactions.As a general matter, a broker-dealer/investment adviser may discontinue its advisory relationship with its client and then assume a brokerage relationship. An advisory contract, for example, may contain a provision under which both parties agree to terminate the advisory relationship, or either party may initiate the termination of the advisory relationship. The parties may agree that the advisory relationship terminates with the delivery of a financial plan. The extent to which the broker-dealer/investment adviser would thereby limit the scope of its fiduciary obligations to the client would turn, in our view, on whether the broker-dealer/investment adviser has provided the client full disclosure about the change in the relationship and any consequent change in the obligations assumed by the broker-dealer. Disclosure by a broker to a customer should be sufficient to enable the client to reasonably understand that the broker-dealer/investment adviser is removing itself from a position of trust and confidence with its client.9 In our view, a mere statement of a change in the capacity in which the firm is acting would be inadequate ordinarily to effectively alter the fundamental nature of the relationship.
- 4. Does a broker-dealer representatives use of an educational or specialized training credential or degree such as Certified Financial Planner (CFP) on his business card or letterhead constitute holding out for purposes of rule 202(a)(11)-1? Yes, but a broker-dealer would not lose the availability of the broker-dealer exception of section 202(a)(11)(C), and therefore would not be required to register as an investment adviser (assuming another exemption from registration is not otherwise available), unless one or more of its representatives both (i) provides advice as part of a financial plan or in connection with financial planning services, and (ii) includes such credentials on his business card or letterhead.If the broker-dealer is dually registered, the use of these business cards or letterhead alone would not, however, require the broker-dealer/adviser to treat as advisory clients each customer to whom a card or letterhead is delivered unless the broker-dealer/adviser also provides investment advice to that customer as part of a financial plan or in connection with financial planning services.10
Sincerely, Robert E. Plaze Associate Director
Via Federal Express August 5, 2005 Mr. Robert E. Plaze Associate Director, Division of Investment Management United States Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 Re: Request for Interpretive Guidance on Investment Advisers Act Rule 202(a)(11)-1 Dear Mr. Plaze: The Securities Industry Association11 requests that the Commission staff provide interpretive guidance regarding paragraph (b)(2) of Rule 202(a)(11)-1 (Rule) of the Investment Advisers Act of 1940 (Advisers Act),12 which addresses financial planning.13 Such guidance is necessary to address various questions that have arisen among our member broker-dealers about the application of this portion of the Rule. Interpretive guidance will allow firms to more effectively implement and avoid inadvertent violations of the Rule. Our request for guidance focuses on four issues: (1) whether broker-dealers must dually register as investment advisers if they hold themselves out for purposes of the Rule by using advertisements that reference the availability of a broad range of investment advisory and financial planning services; (2) what determines when a broker-dealer is providing a financial plan or financial planning services to a customer within the Advisers Act as opposed to services provided as part of a brokerage relationship subject to the Securities Exchange Act of 1934 and self-regulatory organization rules; (3) whether a firm that is dually registered as a broker-dealer and an investment adviser may act as an investment adviser in providing financial planning services to a customer and as a broker-dealer in providing brokerage services to the same customer; and (4) whether a broker-dealer representatives use of an educational or specialized training credential or degree on their business card or letterhead constitutes holding out for purposes of the Rule. For your convenience, we have formulated proposed guidance on each of the four issues described above. Attached, please find proposed questions and answers, in draft form, for your consideration. Should you have any questions, please contact Marianne Smythe of Wilmer, Cutler, Pickering, Hale & Dorr at 202-663-6711, or the undersigned at 212-618-0509. Sincerely, Michael D. Udoff Vice President, Associate General Counsel and Secretary cc: The Honorable Christopher Cox, Chairman The Honorable Paul S. Atkins, Commissioner The Honorable Roel C. Campos, Commissioner The Honorable Cynthia A. Glassman, Commissioner The Honorable Annette Nazareth, Commissioner Giovanni Prezioso, General Counsel Meyer Eisenberg, Acting Director, Division of Investment Management Nancy Morris, Attorney-Fellow, Division of Investment Management Robert L.D. Colby, Director, Division of Market Regulation Linda C. Thomsen, Director, Division of Enforcement 1 See Investment Advisers Act Release No. 2376 (Apr. 12, 2005) (Adopting Release). 2 See rule 202(a)(11)-1(b)(2). 3 Adopting Release at n.159. 4 A financial tool may include questionnaires, financial calculators, asset allocation analysis and cash flow analysis. See Adopting Release at Section VI.B.2. 5 See Adopting Release at Section III.E.2. 6 Id. (Typically, what distinguishes financial planning from other types of advisory services is the breadth and scope of the advisory services provided.) 7 Id. 8 Id. 9 We note that there are circumstances under which broker-dealers have been held to fiduciary standards similar to advisers. See Adopting Release at n.98 and accompanying text. 10 See rule 202(a)(11)-1(b)(2). 11 The Securities Industry Association (SIA), established in 1972 through the merger of the Association of Stock Exchange Firms and the Investment Banker’s Association, brings together the shared interests of nearly 600 securities firms to accomplish common goals. SIA member firms (including investment banks, broker-dealers, and mutual fund companies) are active in all U.S. and foreign markets and in all phases of corporate and public finance. More information about the SIA is available on its home page: www.sia.com. 12 17 C.F.R. 275.202(a)(11)-1. 13 We submit this request in addition to our petition to extend certain compliance dates for the Rule until April 1, 2006.