SEC Issues Guidance on Permissible Investment Advisory Services by Brokers and Dealers
On June 5, 2019, as part of regulatory reforms intended to improve the quality and transparency of investors’ relationships with securities professionals, the Securities and Exchange Commission (SEC) issued an interpretation of the “solely incidental” prong of the broker-dealer exclusion to the definition of “investment adviser” contained in the Investment Advisers Act of 1940, as amended (IAA). This interpretation became effective on June 12, 2019. Section 202(a)(11) of the IAA defines an “investment adviser” as a person who, for compensation, engages in the business of advising others as to the value of securities or as the advisability of investing in, purchasing, or selling securities, or that issues or promulgates analyses or reports concerning securities. Investment advisers are generally required to register with the SEC or with one or more of the states. Under Section 202(a)(11)(C) of the IAA, however, a broker or dealer is excluded from the definition of “investment adviser” if its advisory services are “solely incidental” to the conduct of its business as a broker or dealer and it does not receive any special compensation for those advisory services. The SEC’s interpretation reiterates the SEC’s view that the advisory services performed by a broker or dealer do not have to be “trivial, inconsequential, or infrequent” to meet the “solely incidental” prong. Rather, an advisory service will be deemed “solely incidental” if it “is provided in connection with and is reasonably related to the broker-dealer’s primary business of effecting securities transactions,” based on the totality of the facts and circumstances surrounding the broker-dealer’s business, the services that it offers and its relationships with customers.
Practice Pointer: The bulk of the SEC interpretation focuses on how the “solely incidental” prong applies in two contexts: (i) investment discretion over customer accounts; and (ii) account monitoring and account reviews. Securities professionals should review the interpretation to evaluate whether their current operations align with the SEC’s recent guidance.