When a broker-dealer should be treated as an investment adviser is an issue that has been around since the 1930s. If a broker-dealer is an “investment adviser” as that term is broadly defined in the Investment Advisers Act of 1940, the broker-dealer becomes subject to all of the substantive restrictions and record-keeping requirements of the Investment Advisers Act and the rules that the Securities and Exchange Commission has promulgated pursuant to its authority under the act. Particularly troubling to broker-dealers is the general fiduciary duty to advisees that the U.S. Supreme Court has read into §206 of the act and the principal trading restrictions contained in §206(3), which apply when an investment adviser trades for its own account with an advisee. The SEC has taken a very strict view of these restrictions, requiring prior advisee permission for each separate trade. Broker-dealers have been able to rely upon the exemption contained in §202(a)(11)(C) of the Investment Advisers Act to avoid registration under the act when they provide only “incidental” investment advice and they receive no “special compensation” for this advice.
The latest iteration of the issue of when a broker-dealer should be treated as investment adviser is the SEC study released in January 2011.1 The study was done pursuant to congressional directive contained in section 913 of the Dodd-Frank Act. Congress in particular asked the SEC to study “the potential impact of eliminating the broker and dealer exemption from the definition of ‘investment adviser’ under section 202(a)(11)(C) of the Investment Advisers Act of 1940.”2 The SEC staff rejected eliminating the exemption.3 In light of this recommendation, it seems quite unlikely that the exemption will be disappearing any time soon even if the commission acts upon any of the staff’s recommendations, which itself seems unlikely.4
