Interpretive Release Applicability of the Investment Advisers Act to Financial Planners, Pension Consultants, and Other Persons Who Provide Investment Advisory Services as a Component of Other Financial Services IA-1092
us-sec-interpretive-releases-ia-1092interpretiveInterpretive Release Applicability of the Investment Advisers Act to Financial Planners, Pension Consultants, and Other Persons Who Provide Investment Advisory Services as a Component of Other Financial Services IA-1092Guidance
SECURITIES AND EXCHANGE COMMISSION
[R~l. No. IA-I092]
Applicability of the Investment Advisers Act to Financial Planners, Pension
Consultants, and Other Persons Who Provide Investment Advisory Services as a
Component of Other Financial Services.
ACTION: Statement of staff interpretive position.
SUMMARY: The Commission is publishing the views of the staff of the Division
of Investment Management on the applicability of the Investment Advisers Act of
1940 to financial planners and other persons who provide invest~ent advice as a
component of other financial services. The views expressed in this statement
were developed jointly;by Division staff and the North American Securities
Administrators Association, Inc. ("NASAA") to update Investment Advisers Act
Release No. 770 and provide uniform interpretations of the application of~
federal and state adviser laws to financial planners and other persons. The
it
revised statement clarifies, among other things, the "business" element of the
definition of investment adviser.
FOR FURTHER INFORMATION CONTACT: A. Thomas Smith III, Attorney, (202) 272-2030
Office of the Chief Counsel, Division of Investment Management, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: Since the Commission published Investment Advisers
Act Re1. No. 770 (Aug. 13, 1981)("IA-770"), the Commission and NASAA have
worked together to promote more uniform regulation of investment advisers under
federal and state securities laws. At the federal level, advisers are regu
lated under the Investment Advisers Act of 1940 ("Advisers Act"). Approximately
40 states regulate the activities of advisers under state adviser laws that
typically are substantially similar to the Advisers Act. The staff of the
Division and the NASAA Financial Planners/Investment Advisers Committee jointly
developed the views stated in this release to provide uniform interpretations
·j <.-". r;l • \ 'j . - 2 about the applicability of federal and state adviser laws to the activities of financial .planners and other persons. While the views being published are based substantially on IA-770, this release revises IA-770 in some respects. Specifically, the revised release provides additional guidance on the fiduciary respons ibilities of advisers, clarifiesthe"business" element of the definition of investment adviser, and supplements the views contained in lA-770 by references to interpretive letters issued by the Division since IA-770 was published. I . BACKGROUND. Financial planning typically involves providing a variety of services, principally advisory in nature, to .individuals or familie's regarding the management of their financial resources based ,upon an analysis of individual. .; client needs. Generally, financialplanriing .servicesinvolve prepa·ringa financial program for a client based on the client'sfinancialcircwnstances and objectives. This information normally would cbve't' present 'and anticipated' assets and liabilities, inclUding ihsurance, savings, investments, and anticipated retirement or other employee benefits. Theprograrn developed for the client usually includes general-recomrtlendations for a course ofa:-etivity I or specific actions, to betaken by the client . For example I recommendati.ons may be made that the client obtain insurance or revise existing coverage, establish an individual retirement account, increase or decrease funds held in savings accounts, or invest funds in securities. A financial planner may develop tax or estate plans for clients or refer clients to an accountant or attorney for these services. The provider of such financial planning services in most cases assists the client in implementing the recommended program by, among other things, making
- 3 specific recommendations to carry out the general recommendations of the program, or by selling the client insurance products, securities, or other investments. The financial planner may also review the client's program periodically and recommend revisions. Persons providing such financial planning services use various compensation arrangements. Some financial planners charge clients an overall fee for developing an individual client program while others charge clients an hourly fee. In some instances financial planners are compensated, in whole or in part, by commissions on the sale to the client of insurance products, interests in real estate, securities (such as common stocks, bonds, limited partnership interests, and mutual funds), or ~ other investments. A second common form of service relating to financial matters is provided by "pension consultants" who typically offer, in addition to administrative services, a variety of advisory services to employee benefit plans and their fiduciaries based upon an analysis of the needs of the plan. These advisory services may include advice as to the types of funding media available to provide plan benefits, general recommendations as to what portion of plan assets should be invested in various investment media, including securities, and, in some cases, recommendations regarding investment i~ specific securities or other investments. Pension consultants may also assist plan fiduciaries in determining plan investment objectives and policies and in designing funding media for the plan. They may also provide general or specific advice to plan fiduciaries as to the selection or retention of persons to manage the assets of
,.. - 4 the plan. !I Pers'ons providing these s-~tv'iCes to plans are customarqy compensated for their seri'ices through fees paid by the plan, its sponsor, or other persons; by ilieans of sales cOl1lm'j.ssiOris ori the sale of itisuranceptoducts or investments to the plan; or through acoi'ribituition of fees arid conunis·sions. Another fot1Ii of firiancial adv'isoryS'~rvice iliithat provided by persons offering a. vari,etyof financiallyre.latedservices to entertainers bt athletes based upbn the needs of the individual client. Such persons, who bften use the designation "sports representative" ot "entertainment representative," dffer a number of 'sarvicesto clients, includlhg the negotiation of employntent contracts and deveh)pmertt of promotional"op'portUriitles for the client, ·as well as advisoryserviC'e's reLated toinv~sttii~ti:ts,taxplannlng, or budgEit and money disc17etionbver all -6t a-pottioti&fii c;1'iettt' s itirrd~by collecting :in~orne, paying l;ills ,and ,Iltaking investmerii:t for the cHertt. Sports or eritertaitiriterit represe-ntilti'l1e-s are customarily-conipensated ·for theifsElrliices prilnattly receive compElnsafiotiin the £()tiD:():££ix~achargestir houtlyfees fototh.et servicesprovide-d, -iIlcltidingiriVestiil'eht aavhdryser'Vices. There are oth~t persons who, ~hile not failing precisely into tirie of the foregoing c'abegoties, provide financial advisory services. As discussed below , 11 The authdtitytb martage aTl or a Pdtdbhof a plan's assets often is delegated to a person who qualifies as an "Investment manager" under the Ijimployee Retirement lricome Security A.ct of 1974 [29 U.S.C. IOOlet sE7g.]. Vnder that statute, which is applicable to private sector pension and ~elfare benefit plans, an "investment manager" must be a registered investment adviser under the Advisers Act, a bank as defined in the Ad:visers Act, or an irtsurance company that is qualified to perform se,rV'ices as an investment manager under the laws of more than one state.
- 5 financial planners, pension consultants, sports or entertainment representa tives or other persons providing financial advisory services, may be investment advisers within the meaning of the Advisers Act, state adviser laws, or both. II. STATUS AS AN INVESTMENT ADVISER A. Definition of Investment Adviser Section 202(a)(II) of the Advisers Act defines the term "investment adviser" to mean: .. any person who, for compensation, engages in the business .of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a r~gular business, issues or promulgates analyses or reports concerning securities . . . . Whether a person providing financially related services of the type discussed in this release is an investment adviser within the meaning of the Advisers Act depends upon all the relevant facts and circumstances. As a general matter, if the activities of any person providing integrated advisory services satisfy the elements of the definition, the person would be an investment adviser within the meaning of the Advisers Act, unless entitled to rely on one of the exclusions from the definition of investment adviser 1n clauses (A) to (F) of Section 202(a)(II). 21 A determination as to whether a person providing financial planning, pension consulting, or other integrated advisory services is an investment adviser will depend upon whether such person: (1) provides advice, or issues reports or analyses, regarding 1/ See discussion of Section 202(a)(ll)(A) to (F) in Section lIB, infra.
.t, •
- 6 ~
securities; (2) 1.$ i.n. the 'business of pr·oviding s~¢h services ;aRd (3) provides
suc:h serv.i.ces for cOlJlpensation. TIuIse ehreeel.elllents are discus~d beJ.Qw.
It would .s'e.e1n appar:entthat .l.i' pe:rson ldW gives advice. orma'kes
recOflIinendationsor is.sues repQrts or analyse:sW'it'h re$pectto speci;fi:c
securi~ie~ is al'linve,st$ellt a4W'is~r undei;Section 2:Q.2(a){11), a$·~tiniLng the
other elements of the definition of investment adviser are met, h It.. .. t:hat
However. ith~s. beena~kie:4DOtla nt;uilberofocca:s,L~whether adVi,ce I
reco11llllen4ati:Q.n's..or l'~.~rts ~t d:ooo·t perta.i~ ;to: :s,pecifieseaudt:i".e.s sa.cUsfy
or in relatiGtl t<>.any non ... securi-ti.esinve:s·tment Qr fin4'neial v~hiclewould
Jj Inthi.sregard,asdlsclolssed indetai.l belo__ f it btbe staff's 'Vie.w that
a person Wbo gives ~dviee or ~~epa~san~11ses eortcerningsec~rities
generally may, nevertheles-s,l'l();t he "int'hebusble'ss"of d~iillig 'soartd,
therefote, will n<>tl!>ee'OnS'ider<ed att"i,av.e-stment .adv-iser'" astbatternt is
used in Section 2Q2(a;) (11) .
!±/ S-ee,L. L.;. IHgba'JZdK!M~y (p-ub. a:vail. I>e!c! 11, 1979).
- 7 also be "advising" others within the meaning of Section 202(a)(1l). ;U Similarly, a person who advises employee benefit plans on funding plan benefits by investing in, purchasing, or selling securities, as opposed to, or in addition to, insurance products, real estate not involving securities, or other funding media, would be "advising" others within the meaning of Section 202(a)(11). A person providing advice to a client as to the selection or retention of an investment manager or managers also, under certain circumstances, would be deemed to be "advising" others within the meaning of Section 202(a)(11). 2J 2. The "Business" Standard ~ Under Section 202(a)(11), an investment adviser is one who, for compensation, (1) engages in the business of advising o~hers as to the value of securities or as to the advisability of investing in, purchasing, or selling 2/ See, ~~, Thomas Beard (pub. avail. May 8, 1975); Sinclair-deMarinis Inc. (pub. avail. May 1, 1981). 2J See, ~~. FPC Securities Corp. (pub. avail. Dec. 1, 1974) (program to assist client in selection and retention of investment manager by, among other things, recommending investment managers to clients, monitoring and evaluating the performance of a client's investment manager, and advising client as to the retention of such manager); William Bye Co. (pub. avail. Apr. 26, 1973) (program involving recommendations to client as to ~elec tion and retention of investment manager based upon c~ient's investment objectives and periodic monitoring and evaluation of investment manager's performance). On occasion in the past the staff has taken no-action positions with respect to certain situations involving persons providing advice to clients as to the selection or retention of investment managers. See, ~~, Sebastian Associates. Ltd., (pub. avail. Aug. 7, 1975) (provision of assistance to clients in obtaining and coordinating the services of various professionals such as tax attorneys and investment advisers, including referring clients to such professionals, in connection with business as agent for clients with respect to negotiation of employ ment and promotional contracts); Hudson Valley Planning Inc. (pub. avail. Feb. 25, 1978) (provision of names of several investment managers to client upon request, without recommendation, in connection with business of providing administrative services to employee benefit plans.)
- 8
securitj.es, or. alternatively , (2'}1:lSsuesor.promu\].;gates r~l'()rtsor :.analyses
cQllC:erJli'ng.secUl':ities as parto! aregularbus:tne-ss . Kachofthes'e two
alternatives J;,p. .th.estat4-toJ;y defi:niti·pn ·~f investment adviserc:O.ntains .8.
busine.sstest -~ one il.nvolv:es-~,ell~gingin'lihe-nus'!ness"of ;adlfls.:in.gothers
while the;Q:t!le:r iavolvesiss.ui~r~orts-a,bJU1·t securities a-s"par:t;o£' -a ,regular
bus;iness. "Whilethe"bus:lneS$l'st.and;a:r-:ds;e'Stab';Hshed,underS~ct'i!On·aU2(;,e:J{ll.)
are phra.sed somewhat di:ffe·rently ,it is the $t·aff's opinion that they ,should be
intei:'p~et~ in t:hes~emanner. 1-n J~oth -c~es ,the determination-to 'betnade is
wbeth'er the ~gree :ofthe-pe,rson's,~4visoryac-tivitiesconstitutes ,belong "in
,the '-bl,.tsiness" of an inves~entaooise,r.'fhegivingQfad:Vicene~<.tnol:
con,stitutetheprincipal-businessa:e'tivi:ty or any -particularpO:t"tion en! 'the
bu.sinessact;.i:vities9f -1). 'p.e:~S4n:il1P!!'d,er f':orthepe'rsontobe al,l, 'i-n~s:_ent
advis.~\t'.w:t<ierSepti-on202:(a);{11.) . The gaving .-o'fadvice needQn:1,y~be ,dQ6eQD
s-ueh abash that .i-t -con$t;iz~utes 'abusinessaetiv-i tyoccurring -w:i~ehs~1Jle
regul.u::ity..The fre:quene-yQ$:-tbe .,activity -icsaf'ac'tQ:r ,bu,t :1:s J){)\t
det.e.rminttt.ive.
Whether a. 'P~ttson: gtYiqg ,~dvlGe'about S~eurtties 'for '(loll1P«nsa:tlO't\'w.ould
be "in the bus!n«}$s"'Jif ;~d:Q_:i~ 'sl>~depe-nds'uporiallJ!e:levant:factsand
circumstallc~. !hes·taft" c{)lls'id¢lfsa pers'on to ,be "hi the b.us1tne,$;s~of
providing advieeifcheperson:(i) 'holds himsel'follt as an in'Ves:ttment ':s.dv.iser
or aSQne whoprovic:le:s invesQnentadvice ,'(it) :receivesany sepat:ate 'or
additional cOQ:lpensation thatrel'resents a clearly definable charge for
providiqg a:d.viceabnut secttriities, -re;ga-rd:less Qfwhether t:hecompetlsa:t-,i-,on is
separate {rom or :j;ncludeci wttM.n~ny ·ove,r.al1 compensation, or receives
transactioti-bas~d compensation if thecUent implements the investment advice,
or (iii) on anything other than rare, isolated and non-periodic instances,
- 9 provides specific investment advice. 1/ For the purposes of (iii) above, "specific investment advice" includes a recommendation, analysis or report about specific securities or specific categories of securities (~ ~, industrial development bonds, mutual funds, or medical technology stocks). It includes a recommendation that a client allocate certain percentages of his assets to life insurance, high yielding bonds, and mutual funds or particular types of mutual funds such as growth stock funds or money market funds. However, specific investment advice does not include advice limited to a general recommendation to allocate assets in securities, life insurance, and tangible assets. ~ In applying the foregoing tests, the staff may consider other financial services activities offered to clients. For example, if ~ a financial planner structures his planning so as to give only generic, non-specific investment advice as a financial planner, but then gives specific securities advice in his capacity as a registered representative of a dealer or as agent of an insurance company, the person would not be able to assert that he was not "in the business" of giving investment advice. See discussion of the broker-dealer exception set forth in Section 202(a)(11)(C) of the Advisers Act, infra. ,In the staff's view, it is necessary to consider these other financial services activities. Section 208(d) of the Advisers Act makes it illegal for someone to do indirectly under the Advisers Act what cannot be done directly. 3. Compensation The definition of investment adviser applies to persons who give investment advice for compensation. This compensation element is satisfied by 1/ See Zinn v. Parish, 644 F.2d 360 (7th Cir. 1981).
.'
t ·",· , ....~ 't· t· .....t -"'v'- "'....' ...... -.... ..;- .... tt- ...- ._~,f;", -~- -,..t.I·-e·..;., ~n- ..c, ...,- f-;o··'~' ....·'f·' a-"" a-:~'.,:'{s·'''',.;C~' f"'e"~ o"'r' . ue- .:-e·ue· .,p. ~. an;,.- ,",u,o&',o&U;ce· uene'~',lH>'" Wlle ... n 'l!' .1<' ...-He ".L"U·- U'"- u' UV".li 'UC"'f' .... ' -'.
the: j;'rtlf-e~rti1i~t!~ a:d~iiStiliY' p:b:D'tilott1 d&: ttlte' t!()!Glfl\. 5e1N:'i!ce's'., 'Ulte' colftp'efiS'~.ilin)
elieme.'i'i1tt i;8' s'a'ttM1!·:il~'d;; Le: at s1ingl!e-> ffe'e' iis;; ett~:gfif& f6-~ a' ntim~:e'r' (j'E dltf":Be1ff'~ln!;
AC'Cl311dlilrtg-lty, aJ nel1-SOrti lftf(JXtj;d!IJngt.cil ~'i.iettyr o1f se:~~~ tib) 11'1 C:1"il.e.n"t:" i~c;;:I1lJd~ng;
tnVl!s\bUten"e ad\lif~;ry;' ~eWilc\'fs.~"ftsi!- wlliid1l:t till~; pe!lt'~rot\, re'cewE\':~ I1tiy,' ecoodbfild .
- benef.ii't" fo~· e')t~ilie>,. It}':' t1~:1~-e. a.1f .~ sdirrg:]je~ f~e;; d.!t (fQtfi&S--s;,:t6lfS: o,'dfi' t1te-' s:~~l1e, t.O
the <flitetHt; ~ :Ms:wralfc"'e1lfttd~:ttg; @: f1ttli~mtm'~;" ~u1.~~: p~lrt~~~; sueh:
adv'i:so.ry: s~W1iee'S!~ '~f(fJi:f c-01ft~l:1W~lidnt''' ~tmi1n; dle, meartiJhtg ()'f' S:~e'ti~<ft\1 2b"2'(al»)«(lil)';
y See, £. ",- rmgsdr. (pub. avaiJL Dec. rt, V9:1~).
V See,~. &:. War,ttetil Hi. Litvirtg-s:toli (:pub'. ava-il!. Mail!. 8\ t9:at:))-',
.1Q/ Se'cti~h: 2:02'fa~)}('l]])-{C)' 0::£ the Ad\7.~sens Act E!X-b]JUd~S,l f'roDl tihe:- d.~-j-trti't:i\ort'
inves.'t~ntr: adv:ii<s:e,r Sf' b~1te:r: or' dt!a,rce~' ~ho) p{f,'f(fOt'ffiS! i;rt~s~tilfenl! ad~sory'
serviices ehat a1te iInciderttl1'l' to the conduct of rts br,oker ()]f d~aler
busi!tiE!/Ssj all& who; r~e;:r;v,e's1 rt()! S~€t'~r c~tt1pertsla'tjj(Jn' €lfel1~:trolf.s'$~
dis:cU'ssoiJon, 0:£ ~c'ei1on 202ta·).('1]}.)j(fC)';, irtti,):a;.
of
1 •. - 11 B. Exclusions From Definition of Investment Adviser Clauses (A) to (E) of Section 202(a)(11) of the Advisers Act set forth limited exclusions from the definition of investment adviser available to certain persons.!lI Whether an exclusion from the definition of investment adviser is available to any financial planner, pension consultant or other person providing investment advisory services within the meaning of Section 202(a)(11), depends upon the relevant facts and circumstances. !lI Section 202(a)(11) provides that the definition of investment adviser does not include: (A) ~ a bank, or any bank holding company as defined in the Bank Holding Company Act of 1956, which is not an investment company; .~ (B) any lawyer, accountant, engineer or teacher whose performance of such [advisory] services is solely incidental to the practice of his profession; (C) any broker or dealer whose performance of such (advisory] services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor; (D) ,the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular , circulation; (E) any person whose advice, analyses, or reports related to no securities other than securities which are direct obligations of or obligations guaranteed as to principal or i~terest by the United States, or securities issued or guaranteed by corporations in which the United States has a direct or indirect interest which shall be designated by the Secretary of the Treasury, pursuant to Section 3(a)(l2) of the Securities Exchange Act of 1934, as exempted securities for the purposes of that Act .... Section 202(a)(ll)(F) excludes from the definition of investment adviser "such other persons not within the intent of this paragraph, as the Commission may designate by rules and regulations or order."
- H
f;:9q l?~'f f}J7 'A~Ao.~nit~t'ltwh(,l h:pl(;\~pitnself q\.tt .~.~ ~l)~ p·~J?Hc ~;;; pr~vi·~U.llg
fin~m~i~~p~{Umif\~,p~~i9P.gg,1i\.~'!}.t:W£. {lr .(),t:~!! ·f·tfll.mcia:l~d.vi~9'ry~~w:t~~~"
:Ell ~:u~1;1, §c.::~s~ it: ':w(;l~lQ.~f'.P~41i' ,~b.~t: th~ p~.rt(;l1'1JViI,f\~;~ of !n¥~$t;mC}l:lt il4vhq~y
Q\lS~l'V~~;~ ofa b~q~er c).~ d.e~ie~.tt .~ J)!"~'Fs9~ ~~Hleiv~w ~ny $.p'.e(;·l,.~l. ~9ij\p,eJVi!,ii·t:i~n
for p+,pv~~in,g~l'lV-i~.l:!,tlJl~nt adV:~~~>:I:'¥§.~1i¥1;;,~.~$., W '~@~~o:v~r, 1;:h~'~9<],'!$!~~t'fqm
1:;~~~F~~·~~!~~~t t-p'v:e{i~~nt.~~v:t~~:tr. ~Q.,l\t~·~fH~ i~ ~~.61M·Q:P,~Q2:!.) (U·)..«(il~ '~Ji ,9n ],y " .
~v.i.il9;bl. ~ ~n ~~·~.Qp.i~te<i p~~,~~nQ.f.fJ. ~~~!lq; 9~ .d~~~Hi' ,~~ !'t;~gi~t<.ere~ ?
.~
W SEt~. 34 ~I t.f$ftil11e:r,bf·!4l;l'lEt~<P.'J.i~~ ~v:an,F~;b. :U. 19~Q) ~ '~i~!'iM:~~,
M~r~~e~<p\,l9; avaiL 198.~ );~~}i~""c~:R~~,~§'.~~t~~J:\~.:,~~~ Feb • 8. ..(pUQ:
~v~!J. ~~Y "l, 19.'~6,).. ~e: .!4'ln(~f.:~~~.t(:>'\l.~';9 ,'~~'\;"'l!!;f;~m~f~~~.\J,~"]"p·~,~:~itl911
. Z02(fi) (11) (B) by it$ ter~s is '~niy ~v~U~'1;>.l~ to llJ.wy~r~ ~ Aegout}t~~~~.
el\~in~~Jl{;. ~R.4 te~gh~l'~. A '~lY~9~ .~;~'{l,&"Q. !-~ '- ':J19f~$$·;!-'l.~tP,~lF.t>\J.~tl ~\W
of th.os~en~erated in Section 2Q2(a) 0,1.> on whQ pe1if~»;n\~ inv~$tlll.~nt
~d,vbQ:r;y ~~1tV!ce~wQuldl>e all itlve~~lP.ent; a~vt~~r vit:h~n ~*e m~"t'ttlg Qf
ij,~ctil?-Il ~02(~) eU) whether or pot ~\1e pe~form.;lnce of itWe$tDlent a,dyilllory
sefV1.c~~ i~ '!n~idental tQtoe pract;~gof ~uch pr9f~ss.i9n, V~~e~§ ~n~the¥
'P@-$h f~~ ~~~l\\4ing the p.ef$.ol\' ffQ~ t:h~ 4ef!~J:tion:of tnv-estment adviser
~s, .s,vaUaP,le ~ the p.erso.n wQul<l. b@ $.\,\~j ~~t t:9 tfhe A.,dvhers Act.
W .~~e~ .~.~ ;;,.. F,J.N~~~O.~l.w~a no·t;e $. fQJr a gener,d state~el\t of tlwviews
o.f' the staffregat:dt,ng sp.ecial. P9I1\Pert~~ti(u\ .Y;u,dep se;cH~ ~02(4}(nH~) I
SS~ l:nve.$.tment idvi§ers 4qt: ~e,le~~;~ tlQ. ~4~(,~q~~~eli ~. l?1~n. @U~ ~~bert
S~.~~!'t7X~~~ (llyb. ~v~il, f\pril Z·9. H~·a~). ~,~~ 4he'!~S~{.lQf ~\1e .
~~b,u.~i~e:Ii1~~ ,~t~n4ar'{1~ !:l\1JP!ll" .
- 13 scope of the person's employment with the broker or dealer. 1aJ For example, if a registered representative provides advice independent of, or separate from, his broker or dealer employer such as by establishing a separate financial planning practice, then he could not rely on the exclusion because his investment advisory activities would not be subject to control by his broker or dealer employer. 121 Similarly, the exclusion would be unavailable if he provides advice without the knowledge and approval of his employer because in that capacity his advisory activities would, by definition, be outside the control of his employer. lQJ III. REGISTRATION AS AN INVESTMENT ADVISER Any person~ who is an investment adviser within the meaning of Section j. 202(a)(11) of the Advisers Act, who is not excluded from the definition of investment adviser by virtue of one of the exclusions in Section 202(a)(11), and who makes use of the mails or any instrumentality of interstate commerce in connection with the person's business as an investment adviser, is required by Section 203(a) of the Advisers Act to register with the Commission as an investment adviser unless specifically exempted from registration by Section 203(b) of the Advisers Act. llJ Also, any person who is an investment ad~iser ~ See, ~~, Corinne E. Wood (pub. avail. April 17, 1986); George E. Bates (pub. avail. April 26, 1979). 15/ See, !L.. ~,Robert S. Strevell, supra note 13; Elmer D. Robinson (pub. avail. Jan. 6, 1986); Brent A. Neiser (pub. avail. Jan. 21, 198.6.) . .~:"~);' Id. 1Z/ Section 203(b) exempts from registration: (1) any investment adviser all of whose clients are residents of the State within which such investment adviser maintains his or. its principal office and place of business, and who does not furnish (continued ... )
.~. - 14 withint.h~ lJleaniIlog o,f aPY state investment adviser definition, Cl,n~who is not IV .AFPVlCAlfION6F z·. . ANlfIFRAUD PROVISIONS - .. __ . . _ .' 11/( ... Q~p~in~ed) aCllv'i-ee Q,riss~ean~ly~·es or repo,rts'Ylthli~~P.~t.to?~~lgi.~,:L~~ Ji1; te4 oradin'ittedto unlisteq' trading p~ivi.l;eges9n any natJo:Il~l ~e~rities~ -e.K,~a~ge; (3) any 'inve·s;t;;mentadv·is;er w1J,o d~rirygth¢;e~~rsce of the preceding ~elve m()int;l\sna.$had fe,~er thanfi fteep c;:ll~nts alld~ho:neitije'rno ids h!~elf out ge~ra11y to thepub:lte asani~vestweBit a4vt~eJ; nor acts a-I" an inve,,st·ment adviser to any invest,ne,nt company registered under the [I nves·tmel'l,t G;Qmpany Ac t]. . . ill The .;illtifra\,ld provisionsofso~stat:esta:tl4;f;¢slllay apply tp .a,nyperson rec~i~~~g co~s~deration f~om another personf9.r roendering ~nvestment advi~~even if the pe~~on rendering the inv~stment advice is technically exclu,4edfrom the state definition'of investment adviser.
- 15 practice, or course of business which operates as a fraud or deceit upon any client or prospective client." 121 An investment adviser is a fiduciary who owes his clients "an affirmative duty of 'utmost good faith, and full and fair' disclosure of all material facts." lQ/ The Supreme Court has stated that a "[f]ailure to disclose material facts must be deemed fraud or deceit within its intended meaning, for, as the experience of the 1920's and 1930's amply reveals, the darkness arid ignorance of commercial secrecy are the conditions under which predatory practices best thrive." 1lI Accordingly, the duty of an investment·adviser to refrain from fraudulent conduct includes an obligation to disclose material facts to his clients whenever the failure to do so would ~ defraud or operate as a fraud or deceit upon any client or prospective client. In this connection the adviser's duty to disclose materi~l facts is particularly pertinent whenever the adviser is in a situation involving a conflict, or potential conflict, of interest with a client. The type of disclosure required by an investment adviser who has a potential conflict of interest with a client will depend upon all the facts and 121 In addition, Section 206(3) of the Advisers Act generally makes it unlawful for an investment adviser acting as principal for his own a9count knowingly to sell any security to or purchase any security from a client, or, acting as broker for a person other than suc~ client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction. The responsibilities of an investment adviser dealing with a client as principal or as agent for another person are discussed in Advisers Act ReI. Nos. 40 and 470 (February 5, 1945 and August 20, 1975 respectively). lQ/ SEC v. Capital Gains Research Bureau, 375 u.S. 180, 184 (1963) quoting Prosser, Law of Torts (1955),534-535. ll/ Id. at 200.
- 16
circ~stanc~~. .~~ ~ g~ner~l ~atter, an ~9v~s~rmust 4isclp$~ to clients all
rna4.er~al, factsl1:~gaJ;:d.iIlg the pot~Jltial cqnfl~ctQf interest so that the client
can Bl.ak,e :@. !nf'or1J!eQ decis·i,on ·q;stowhe:ther·to enter into ~~continue an
andno-p.ct~~,n le.tters. i11u~trate ~he~.c()pe of tl1,eduty to disclose material
infor~pi~n to clients *~q~r~ai~common situations involving conflicts of
in te re$'(;.g ,
disclose \tpg v~rj.o~c~pacit;j.~s in whi,~phe 'P.I:lght.a.~t w-p.,an 'dealing with ~my
part.icul,ar c'J.i~:nt.:Fpr e~a.w,p+~ ,ap.·adYise:~wllP~n~ep~to;tw.pl~ment t~he
financial.plans 'h~P;r~P~re$ :~orc'u.ents. inwhQ1e ·p,r iPa~;t,t,b.J;.:.(>,ug4th.a })croker
inforlJla ~;entthat1-p imp:Le~e,p.ti;ng thepl<illlthe·~dvJ.-s~rwill also act as
agel)tfo,r ~theb:~oke.r q.r c;l.~~lero.\t'~he:tnsu"ranc,e~(f)~p,qJ1Y· W
An investment adviser who is also a registered representative of a broker
emplojJnent·witb :,tm.e broker or dealer JDust dhclose to hh advisory clients that
W S~eE!~r .12.:.~l"o!-p~o~. s}~,ara n~te 1,~.~~$1 p.'~~olnt:he. f:laYie:rof );Jai&ht 0:
Co .. lac;:. (S~c~rLt;iesE~ch~~ge Act ,i{el.Nq. 9082; Feb. 19.1971) • where
the C9~i.l;;$.j..on hel.d, tiha.t a bt;0kero,:r Qe~l~r a.n<i ;i.tsa.ssQcia.tledpersons
de fraud,e d its c\1st.o:mer~ J.J) dle offJ.~,r ~,n4.~~:L~of secu~ities;byholding
theinselye~olJ,t as financiii1 ,pla.nners who would, as financial planners.
give coinprehensive and expert planning advice and, choose the best
investJ,P,.entsfor tlieir clients ,from ~1+ ~vq:,j,~~bles.eC1;1iJ:i-ties, when in fact
they ,were nQt expert in planning and m.adef;lhelr de~·tsiolls based on the
re~elpt o.f commi$'s.ions andu.pon ,th~ir .inv~:ntory.()f s-ecurities. Accord
Ins·t~Hl&tional t:rading CorpoM.tion (pUb.av~;il.Nov. 27, 1972).
- 17 his advisory activities are independent from his employment with the broker or dealer. 2lJ Additional disclosures would be required, depending on the circumstances, if the investment adviser recommends that his clients execute securities transactions through the broker or dealer with which the investment adviser is associated. For example, the investment adviser would be required to disclose fully the nature and extent of any interest the investment adViser has in such recommendation, including any compensation the investment adviser would receive from his employer in connection with the transaction. 1SI In addition, the investment adviser would be required to inform his clients of the~r ability to execute recommended transactions through other brokers or dealers. 22/ A ~ financial planner who will recommend or use only the financial iI products offered by his broker or dealer employer when implementing financial plans for clients should disclose this practice to clients l2I and inform clients that the plan may be limited by the products offered by the broker or dealer. Finally, the Commission has stated that nan investment adviser must not effect transactions in which he has a personal interest in a manner that could result in preferring his own interest to that of his advisory clients." W 2lJ David P. Atkinson (pub. avail. Aug. 1, 1977). See also Corrine E. Wood, supra note 14. 22/ Don P. Matheson (pub. avail. Sept. I, 1976). Z2/ Elmer D. Robinson, supra note 15. W Kidder. Peabody &Co .. Inc., 43 S.E.C. 911, 916 (1968).
- IS
Art investment: advIser Who structures His personal securftfes tratl's'ili::tiorts
to trade on the market imp'act caUSed' by li'fs r~coiriDieridat1ons td clients must
disclose this prB:ctfce to clients. 1!f./ Art irtves'tDient adviser 'geriera:lly also
must di"sclose it lit's· personal securitIes tr'ansltetldns are irtconsis~tent with the
advice giveri to c1'feri6;:. iJlJ rf:rialiy, an irtyestment adviser n'lt1~t disclose
compens-atioriiecelved from die is'suer~dfa s-ecurfty being recoiMteridE!'d. .iQ!
UriliKe othergene'ra'l ahti'fraudp~dvis1oris ttl the federal securities laws
which applyto conduct ';1n the· of1fer or sare of tiny securities" .ll/ or "in
connection with the purchase or sale of ariy sec1,1rfty," W the pertinent
provfsforisofS'ectiori 206 do not r,ef«t~ to dealfrigs' fri'sectirifie'S but are stated
., '., ~
in tE~'tms of tH~ e'tfect oi' p'oteritfa:l effect of'prdhilJi'tedconduct on die cl'fent.
S'pedffcally, Section 206(1) prohibits' ,; ariy devlcE!", s'dreme, or arti'fic'Ef to
defraud, any cl1'erit or prospective ¢irent ,'i arid ,S~ctiort 2-06(2)' p'r6hi})it's "any
transact.iorij, praddce:, or cours'~ ofbu~ines's wIlle'lt op~rates as' a' fraud" or
deceit up.ort any cHent or prdspe'ct!ve c1.f~tit." . In' tiffs' regard, ihe Cdmmi'sSion
has applied Sections 206(1}artd (2) In clrcumstande's in which the fraudulent
conduct arose out ofcthe imtestmertt. advhory relationship b~tWeeri an investIftetit
w SEC v, Capital Gains Research BureaU, supra note 19, at 197.
w In-the Matter. of Dow Theory Le.tiers et al., Advisers Act ReI: No.
(Feb. 2f~ 19i7).
571
W lri:tl1~: z.i§tt~t of 'Inves tmerlt Corttro>tledR~search et al"
~eh!as~fNo~iol (Sept. iT, 1979'Y. Advisers Act
ll./sectiori l7(a) [15 U.S.C. 77q{a>'J of the< S~cudties Act of 1933 [15 U.S.C.
77a et seq. r.
RUle 1'06- 5 [17 cm 240.l0if. 5] \ittd~rthe;>SecttridesExchang'eAct of 1934
ri5 U:S.c. 7Sa et~]. See~ls'(f Setd'on IS{e) [1'5 U.S'.C. 7'8'b(c)] of the
Secu:r-td~s- ExchaRge Act of 1934.
- 19 adviser and its clients, even though the conduct does not involve a securities transaction. For example, in an administrative proceeding brought by the Commission against an investment adviser, the respondent consented to a finding by the Commission that the respondent had violated Sections 206(1) and (2) by persuading its clients to guarantee its bank loans and ultimately to post their securities as collateral for its loans without disclosing the adviser's deteriorating financial condition, negative net worth, and other outstanding loans. d1/ Moreover. the staff has taken the position that an investment adviser who' sells non-securities investments to clients must, under Sections 206(1) and (2), disclose to clients and prospective clients all its interests in the sale to ~ them of such non-securities investments. ~ V. NEED FOR INTERPRETIVE ADVICE The general interpretive guidance provided in this release should facilitate greater compliance with the Advisers Act and the investment adviser laws of the states. The staff of the Commission will respond to routine requests for no-action or interpretive advice relating to the status of persons engaged in the types of businesses described in this release by referring persons making the requests to the release, unless the requests present noyel factual or interpretive issues such as material departures fr~m the nature and type of services and compensation arrangements discussed above. Requests for no-action or interpretive advice from the staff of the Commission should be 111 In the Matter of RonaldB. Donati. Inc. et al., Advisers Act Rel. Nos. 666 and 683 (February 8, 1979 and July 2. 1979 respectively). See also Intersearch Technology. Inc. [1974-1975 Transfer Binder] Fed. Sec. L. Rep. (CCH) Paragraph 80,139, at 85,189. ~ See Boston Advisory Group (pub. avail. Dec. 5, 1976).
- 20 submitted in aeeordance wIth the procedur'es set forth in Investment Advisers Act Relea$e No. 281 (Jan. 2$, 1971). ,As to requests for no-action or interp;ret-ive a,:lvice .f,rom the :states, persons should con'tact the varioul3 s,tate se~tirities. dep,artJnen~e;;to inqu:ire 'as to ~heir p.rocedures. ~c,cQr4ing.lYl"~rt 276 of Chil.pte,r 110£ Title 17 of the Code of Federal ReguLations lSaJ][~nded by ad4ittg IJflvest:~ent :Acivisers Act Release No. lA-IOn, Statellientof the staff as to the applicabili.ty of the Investment Advis'ers Act to financIal plantlerslp.ension consultants, and pther persons whQ provide in'1estlllent a~visory servioesas acom.ponent of other financial servi'ces, which f' By the OOlDDlisslon. Jonathan G. Katz Secretary DATE O~tQber 8 1 1987
Continue your research in ChatGPT or Claude
Connect Omnilex to search the legal corpus from your AI assistant.