deeply into the statutes you will notice the exclusions only work if these professionals are giving securities advice solely incidental to the practice of their profession. Qualifying for this exclusion may be extremely difficult, because financial planning is rarely solely incidental to these professions. The SEC looks at three different factors when determining if a professional can be excluded:34
• Does the professional hold himself out as an investment adviser or financial planner? • Is the investment advice reasonably related to the professional services rendered?
• Is the professional’s fee for investment advisory services structured differently from the schedule for professional services?
CARLA CPA HAS A regular accounting practice and also advertises that she is available for financial planning services. She makes a detailed evaluation and comparison of investment alternatives. She may recommend specific no-load funds or even direct her client to an investment adviser. She is well known for her investing expertise and clients will frequently ask her questions about trading specific securities.
Question: Should Carla register?
Answer: Yes. She is in the business of giving advice about securities, and she is receiving compensation. Furthermore, she holds herself out as a planner. Accounting firms have only recently begun to take this law seriously. Consequently, now more and more accountants are registering, realizing they can no longer rely on the solely incidental to exclusion.
IN SOME CITIES it is becoming a common practice for local law firms to serve as trustees and provide investment advice to the trust.
Question: Are these attorneys, who are acting as trustees, providing investment advice solely incidental to their profession as attorneys?
Answer: No. Without even looking at the conflict of interest issues, there is no question that these law firms would also need to be registered investment advisers, as this activity is not incidental to the practice of law.
Another group of professionals, banks, and publishers of news articles are also excluded from the registration requirements. In order for publishers to be excluded, they must meet the following test: • The publication is of a general and impersonal nature, in that the advice provided is not adapted to any specific portfolio or any client’s particular needs; • The publication is bona fide or genuine; and • The publication is of general and regular circulation. It is not timed to specific market activity or to events affecting or having the ability to affect the securities industry.35
CHARLIE WANTS TO give stock tips and general investment advice over the telephone using a 900 number.
Question: Does he have to register as an RIA?
Answer: If Charlie can fit his activities into the criteria listed for the publisher’s exclusion, he does not have to register. However, if he is giving individual advice, he will need to be an RIA or affiliated with one.36
BROKER-DEALERS The Act also excludes any broker-dealer, or its registered representatives, who provide investment advice solely incidental to the conduct of their business as broker-dealers and who receive no special compensation for the advice. Note there are two requirements in order for registered representatives to fit the broker-dealer exclusion. Their investment advisory services must be solely incidental to their conduct as brokers and they must receive no special compensation for them. This completely eliminates the possibility of stockbrokers preparing a financial plan and charging a fee for it, unless they are RIAs.37 In addition, the giving of investment advice must be done with the broker-dealer’s approval. Consequently, registered representatives of broker-dealers who are performing their financial planning services completely independent of their broker-dealers are not allowed to claim the broker-dealer exclusion.38
It has been found permissible for broker-dealers and their registered representatives to distribute to customers periodic market reports or analysis containing investment advice, provided there is no special charge for the reports and rendering this advice is solely incidental to the conduct of the broker-dealer’s securities business.39 The SEC has also indicated that investment advice offered as part of an overall financial plan for the client is not considered “solely incidental” to the brokerage business, whereas investment advice on individual securities transactions is.40
ROGER IS A REGISTERED representative with Abundant Profits Broker-Dealer. Roger assists clients in choosing an investment adviser, and Roger monitors the adviser’s performance on a continuing basis. Frequently the adviser is given discretionary authority over the client’s funds and is required to funnel all securities transactions through the broker-dealer so Roger will receive a commission.
Question: Does Roger have to register as an investment adviser?
Answer: Yes. Such activity is outside the scope of normal brokerage operations.41
In summary, to fit into the broker-dealer exclusion, securities and insurance professionals are bound by the following rules:
• They cannot hold themselves out to the public as financial planners or investment advisers, or as persons providing those services. Instead they must hold themselves out as securities or financial services professionals, stockbrokers, or insurance agents.
• They can provide investment advice only in the capacity of registered representative of their broker-dealer, under the broker-dealer’s control, knowledge, and approval.
• They must disclose their dual capacities of both securities and insurance product sales when dealing with any client or potential client.
• They are not allowed to charge nor receive any clearly definable fee other than normal and customary commissions for the provision of any investment advisory service.
• Finally, the brokerage and insurance commissions charged to clients who obtain brokerage and insurance services are based on the same factors as those used to determine the commissions for clients who obtain only one of the services.42
SALLY STOCKBROKER does not hold herself out as a financial planner, nor is her broker-dealer a registered investment adviser. However, as a service to her clients, she uses the firm’s computer system to do estate planning projections, retirement projections, and asset allocation models. After gathering the data from the computer, she makes written recommendations to purchase specific investment products in line with the clients’ goals.
Question: Does Sally qualify under the broker-dealer exclusion and not have to be an RIA?
Answer: Sally, or her firm, should register as an investment adviser. It seems the services she is performing are beyond those incidental to a stockbroker. They have definitely moved into the financial planning area as defined by the SEC, particularly because she is providing clients with a written plan. In short, if she is doing planning, she must register.
EXEMPTED ADVISERS The following advisers are exempt from registering even if they fit the definition of investment adviser.
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