[Federal Register Volume 84, Number 134 (Friday, July 12, 2019)]
[Rules and Regulations]
[Pages 33681-33689]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12209]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 276

[Release No. IA-5249]


Commission Interpretation Regarding the Solely Incidental Prong 
of the Broker-Dealer Exclusion From the Definition of Investment 
Adviser

AGENCY: Securities and Exchange Commission.

ACTION: Interpretation.

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SUMMARY: The Securities and Exchange Commission (the ``SEC'' or the 
``Commission'') is publishing an interpretation of a section of the 
Investment Advisers Act of 1940 (the ``Advisers Act'' or the ``Act''), 
which excludes from the definition of ``investment adviser'' any broker 
or dealer that provides advisory services when such services are 
``solely incidental'' to the conduct of the broker or dealer's business 
and when such incidental advisory services are provided for no special 
compensation.

DATES: Effective July 12, 2019.

FOR FURTHER INFORMATION CONTACT: James McGinnis, Senior Counsel, 
Investment Adviser Regulation Office, at (202) 551-6787 or 
IArules@sec.gov; and Benjamin Kalish, Attorney-Advisor, or

[[Page 33682]]

Parisa Haghshenas, Branch Chief, Chief Counsel's Office at (202) 551-
6825 or IMOCC@sec.gov, Division of Investment Management, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is publishing an 
interpretation of the solely incidental prong of the broker-dealer 
exclusion in section 202(a)(11)(C) of the Advisers Act [15 U.S.C. 
80b].\1\
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    \1\ 15 U.S.C. 80b. Unless otherwise noted, when we refer to the 
Advisers Act, or any paragraph of the Advisers Act, we are referring 
to 15 U.S.C. 80b of the United States Code, at which the Advisers 
Act is codified.
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Table of Contents

I. Introduction
II. Interpretation and Application
    A. Historical Context and Legislative History
    B. Scope of the Solely Incidental Prong of the Broker-Dealer 
Exclusion
    C. Guidance on Applying the Interpretation of the Solely 
Incidental Prong
III. Economic Considerations
    A. Background
    B. Potential Economic Effects

I. Introduction

    The Advisers Act regulates the activities of certain ``investment 
advisers,'' who are defined in section 202(a)(11) of the Advisers Act 
in part as persons who, for compensation, engage in the business of 
advising others about securities. Section 202(a)(11)(C) excludes from 
the definition of investment adviser--and thus from the application of 
the Advisers Act--a 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'' for 
those services (the ``broker-dealer exclusion''). The broker-dealer 
exclusion shows, on the one hand, that at the time the Advisers Act was 
enacted Congress recognized broker-dealers commonly provided some 
investment advice to their customers in the course of their business as 
broker-dealers and that it would be inappropriate to bring broker-
dealers within the scope of the Advisers Act because of this aspect of 
their business.\2\ On the other hand, the limitations of the exclusion 
show that Congress excluded broker-dealer advisory services from the 
scope of the Advisers Act only under certain circumstances--namely, 
when those services are solely incidental to the broker-dealer's 
regular business as a broker-dealer (the ``solely incidental prong'') 
and when the broker-dealer receives no special compensation (the 
``special compensation prong'').\3\
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    \2\ Opinion of General Counsel Relating to Section 202(a)(11)(C) 
of the Investment Advisers Act of 1940, Investment Advisers Act 
Release No. 2 (Oct. 28, 1940) (``Advisers Act Release No. 2'').
    \3\ See Regulation Best Interest, Securities Exchange Act 
Release No. 83062 (April 18, 2018) [83 FR 21574 (May 9, 2018)] 
(``Reg. BI Proposal''), at n.343. The broker-dealer exclusion is 
conjunctive--that is, the broker-dealer must both provide investment 
advice that is solely incidental to the conduct of his business as a 
broker-dealer and the broker-dealer must receive no special 
compensation. In the event that a broker-dealer's investment advice 
fits within the guidance of this Release with respect to the solely 
incidental prong, that broker-dealer must also receive no special 
compensation for the advisory service to be consistent with the 
broker-dealer exclusion.
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    On April 18, 2018, the Commission proposed a rulemaking intended to 
enhance the standard of conduct for broker-dealers when providing 
recommendations.\4\ The Commission also proposed an interpretation 
intended to reaffirm and in some cases clarify the standard of conduct 
for investment advisers,\5\ as well as a rulemaking intended to provide 
retail investors with clear and succinct information regarding key 
aspects of their brokerage and advisory relationships.\6\ The Reg. BI 
Proposal discussed the broker-dealer exclusion and requested comment on 
the scope of the exclusion as applied to a broker-dealer's exercise of 
investment discretion.\7\ While some commenters addressed when a 
broker-dealer's advisory services are ``solely incidental to the 
conduct of his business as a broker or dealer'' in the context of the 
exercise of investment discretion, more commenters addressed this prong 
more generally.\8\ For example, many commenters requested general 
guidance on or expressed views about the meaning of the solely 
incidental prong \9\ and the permissibility under this prong of various 
broker-dealer activities that relate to the investment advice they 
provide in light of the Reg. BI Proposal and the Relationship Summary 
Proposal.\10\ Other commenters suggested that our approach to the Reg. 
BI Proposal was inconsistent with the solely incidental prong of the 
broker-dealer exclusion. One commenter suggested that the Reg. BI 
Proposal, if adopted, would allow broker-dealers to provide investment 
advice beyond what the solely incidental prong should ``reasonably be 
interpreted to permit,'' arguing that to qualify for exclusion from 
regulation under the Advisers Act, broker-dealers should only ``be able 
to provide very limited advice. . . .'' \11\ Two commenters thought 
that the Commission's expressed support for maintaining the ``broker-
dealer model as an option for retail customers seeking investment 
advice'' \12\ was inconsistent with the solely incidental prong.\13\

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Another commenter called the Commission's previously articulated 
interpretation of the solely incidental prong ``vague.'' \14\ The 
comments we received demonstrate that there is disagreement about when 
the provision of broker-dealer investment advice is consistent with the 
solely incidental prong.\15\ In light of these comments, we are 
adopting this interpretation to confirm and clarify the Commission's 
position with respect to the solely incidental prong. To illustrate how 
the interpretation functions, we discuss its application to two 
advisory services that a broker or dealer may provide, namely: (i) 
Exercising investment discretion over customer accounts and (ii) 
account monitoring.\16\ Our interpretation complements each of the 
rules and forms we are adopting, which, among other things, are 
intended individually and collectively to enhance investor 
understanding of the relationships and services offered by investment 
advisers and broker-dealers.\17\
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    \4\ See id.
    \5\ Proposed Commission Interpretation Regarding Standard of 
Conduct for Investment Advisers; Request for Comment on Enhancing 
Investment Adviser Regulation, Investment Advisers Act Release No. 
4889 (April 18, 2018) [83 FR 21203 (May 9, 2018)] (the ``Proposed 
Fiduciary Interpretation'').
    \6\ See Form CRS Relationship Summary; Amendments to Form ADV; 
Required Disclosures in Retail Communications and Restrictions on 
the Use of Certain Names or Titles, Investment Advisers Act Release 
No. 4888 (April 18, 2018) [83 FR 21416 (May 9, 2018)] 
(``Relationship Summary Proposal''). Concurrently with this 
interpretation, we also are adopting the final versions of the rules 
and interpretations proposed in the Relationship Summary Proposal, 
the Reg. BI Proposal, and the Proposed Fiduciary Interpretation. See 
Form CRS Relationship Summary; Amendments to Form ADV, Investment 
Advisers Act Release No. 5247 (June 5, 2019) (the ``Relationship 
Summary Adoption''); Regulation Best Interest: The Broker-Dealer 
Standard of Conduct, Exchange Act Release No. 86031 (June 5, 2019) 
(``Reg. BI Adoption''); and Commission Interpretation Regarding 
Standard of Conduct for Investment Advisers, Investment Advisers Act 
Release No. 5248 (June 5, 2019) (``Final Fiduciary 
Interpretation'').
    \7\ See Reg. BI Proposal, supra footnote 3, at nn.342-67 and 
accompanying text.
    \8\ We considered comments submitted in File No. S7-07-18 (Reg. 
BI Proposal, supra footnote 3); File No. S7-08-18 (Relationship 
Summary Proposal, supra footnote 6); and File No. S7-09-18 (Proposed 
Fiduciary Interpretation, supra footnote 5). Those comments are 
available on the Commission's website at https://www.sec.gov/comments/s7-07-18/s70718.htm, https://www.sec.gov/comments/s7-08-18/s70818.htm, and https://www.sec.gov/comments/s7-09-18/s70918.htm, 
respectively.
    \9\ See, e.g., Comment Letter of North American Securities 
Administrators Association, Inc. (Aug. 23, 2018) (``NASAA Letter''); 
Comment Letter of CFA Institute (Aug. 7, 2018) (``CFA Institute 
Letter'') (noting the ``need to give guidance'' on the broker-dealer 
exclusion and noting that the Commission has legal authority to 
provide needed clarification); Comment Letter of the Institute for 
the Fiduciary Standard (Aug. 6, 2018) (``IFS Letter'') (arguing that 
when a broker's investment advice is solely incidental to its 
business is one of a number of ``questions the SEC should 
address''); Comment Letter of the Consumer Federation of America 
(Aug. 7, 2018) (``CFA Letter'') (arguing that the Commission failed 
to ``engage'' on ``just how far the `solely incidental' exclusion 
stretches''); Comment Letter of the Investment Adviser Association 
(Aug. 6, 2018) (``IAA Letter'') (``[T]he Commission should 
reconsider when broker-dealers should be able to rely on the Solely 
Incidental [prong].''); Comment Letter of Michael Kitces (Aug. 2, 
2018) (``Kitces Letter'') (arguing that the Commission's prior 
interpretations of the solely incidental prong are inconsistent with 
the plain meaning and legislative history of the term).
    \10\ See, e.g., CFA Letter; Kitces Letter.
    \11\ See NASAA Letter.
    \12\ See Reg. BI Proposal, supra footnote 3, at text 
accompanying n.31.
    \13\ See CFA Letter (stating that certain aspects of the 
Relationship Summary Proposal and the Reg. BI Proposal indicated 
that broker-dealers were in an ``advice relationship'' in a manner 
that does not ``remotely sound like advice that is `solely 
incidental to' the conduct of their business as a broker or 
dealer''); Kitces Letter (arguing that referring to the broker-
dealer model as a ``model for advice'' is in contravention of the 
broker-dealer exclusion because ``advice can only be incidental if 
it occurs by chance, as a consequence of a product sale, or without 
intent to give advice'').
    \14\ See Comment Letter of Securities Arbitration Clinic, St. 
Vincent DePaul Legal Program, Inc., St. John's University School of 
Law (Aug. 7, 2018) (``St. John's Clinic Letter'').
    \15\ Furthermore, interested parties have for years expressed 
their views to the Commission on what they believe the broker-dealer 
exclusion requires, including disagreements with the Commission's 
interpretation of the exclusion. See, e.g., Comment Letter of 
Consumer Federation of America (Sept. 20, 2004) (arguing that the 
Commission should ``define `solely incidental' in a way that hews 
closely to what commenters described as Congress's clear intent to 
provide only a very narrow exclusion''), available at https://www.sec.gov/rules/proposed/s72599/s72599-1101.pdf.
    \16\ We received comments requesting guidance with respect to 
the solely incidental prong on both activities. See infra section 
II.C.
    \17\ See Reg. BI Adoption; Relationship Summary Adoption; Final 
Fiduciary Interpretation, supra footnote 6. We also received a few 
comments in response to the Reg. BI Proposal and the Relationship 
Summary Proposal requesting that the Commission provide guidance on 
the special compensation prong. See, e.g., CFA Letter (arguing, 
among other points, that special compensation would constitute any 
compensation other than commissions for trade execution); Comment 
Letter of Coalition of Mutual Fund Investors (Aug. 8, 2018) 
(``Mutual Fund Investors Letter'') (arguing that special 
compensation should include all asset-based compensation and third-
party fees from mutual funds and their advisers). We are not 
providing guidance on the special compensation prong in this Release 
as we do not believe our views on this prong require additional 
clarification. The Commission has considered the meaning of the 
special compensation prong on previous occasions. See, e.g., 
Interpretive Rule Under the Advisers Act Affecting Broker-Dealers, 
Investment Advisers Act Release No. 2652 (Sept. 24, 2007) (``2007 
Proposing Release''); Certain Broker-Dealers Deemed Not to Be 
Investment Advisers, Investment Advisers Act Release No. 2376 (Apr. 
12, 2005) (``2005 Adopting Release,'' in which, as discussed infra 
at footnote 38 and accompanying text, the Commission adopted a rule 
that a court vacated on grounds that did not address our 
interpretive positions relating to the solely incidental prong). The 
comments we received in response to requests for comment to the Reg. 
BI Proposal and the Relationship Summary Proposal did not 
demonstrate that there is significant disagreement with our 
interpretation of that prong.
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II. Interpretation and Application

A. Historical Context and Legislative History

    When the Advisers Act was enacted in 1940, broker-dealers regularly 
provided investment advice.\18\ They did so in two distinct ways: As an 
auxiliary part of traditional brokerage services for which their 
brokerage customers paid fixed commissions and, alternatively, as a 
distinct advisory service for which their advisory clients separately 
contracted and paid a fee.\19\ The advice that broker-dealers provided 
as an auxiliary component of traditional brokerage services was 
referred to as ``brokerage house advice'' in a leading study of the 
time.\20\ ``Brokerage house advice'' was extensive and varied,\21\ and 
included information about various corporations, municipalities, and 
governments; \22\ broad analyses of general business and financial 
conditions; \23\ market letters and special analyses of companies' 
situations; \24\ information about income tax schedules and tax 
consequences; \25\ and ``chart reading.'' \26\ The second way in which 
broker-dealers dispensed advice was to charge a distinct fee for 
advisory services, which typically were provided through special 
``investment advisory departments'' within broker-dealer firms that 
advised customers for a fee in the same manner as firms whose sole 
business was providing ``investment counsel'' services.\27\
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    \18\ For an extensive discussion of broker-dealer practice in 
the years leading up to enactment of the Advisers Act, from which 
this summary is drawn, see 2005 Adopting Release, supra footnote 17; 
Certain Broker-Dealers Deemed Not to Be Investment Advisers, 
Investment Advisers Act Release No. 2340 (Jan. 6, 2005) (``2005 
Proposing Release'').
    \19\ See, e.g., Investment Trusts and Investment Companies: 
Hearings on S. 3580 Before a Subcomm. of the Senate Committee on 
Banking and Currency, 76th Cong., 3d Sess. 736 (1940) (``Hearings on 
S. 3580'') (testimony of Dwight C. Rose, president of the Investment 
Counsel Association of America) (``Most . . . investment dealers . . 
. and brokers advise on investment problems, either as an auxiliary 
service without charge, or for specific charges allocated to this 
specific function.'').
    \20\ See Twentieth Century Fund, The Security Markets (1935) 
(``Security Markets'') at 633-46 (discussing ``brokerage house 
advice''); see also Charles F. Hodges, Wall Street (1930) (``Wall 
Street'') at 253-85; SEC, Report on Investment Counsel, Investment 
Management, Investment Supervisory, and Investment Advisory Services 
(1939) (H.R. Doc. No. 477) (``Investment Counsel Report'') at n.1.
    \21\ See, e.g., Report of Public Examining Bd. on Customer 
Protection to N.Y. Stock Exchange (Aug. 31, 1939), at 3: The 
customer entrusts the broker with information regarding his 
financial affairs and dealings which he expects to be kept in strict 
confidence. Frequently he looks to the broker to perform a whole 
series of functions relating to the investment of his funds and the 
care of his securities. Although he could secure similar services at 
his bank, he asks his broker, as a matter of choice and convenience, 
to hold credit balances of cash pending instructions; to retain 
securities in safekeeping and to collect dividends and interest; to 
advise him respecting investments; and to lend him money on suitable 
collateral.
    \22\ Security Markets, supra footnote 20, at 633; Wall Street, 
supra footnote 20, at 254 (``This information includes current and 
comparative data for a number of years on earning and earnings 
records, capitalization, financial position, dividend record, 
comparative balance sheets and income statements . . . production 
and operating statistics, territory and markets served, officers and 
directors of the company and much other information of value to the 
investor in appraising the value of a security.'').
    \23\ Security Markets, supra footnote 20, at 634; Wall Street, 
supra footnote 20, at 254.
    \24\ Security Markets, supra footnote 20, at 640-43; Wall 
Street, supra footnote 20, at 277-85.
    \25\ Security Markets, supra footnote 20, at 641.
    \26\ Id. at 643 (defining ``chart reading'' as ``the study of 
the charted course of prices and volume of trading over a long 
period of time in order to discover typical conformations recurring 
in the past with sufficient frequency to be utilized in the present 
as a basis of judgment as to impending price changes'').
    \27\ See Advisers Act Release No. 2, supra footnote 2; see also 
Security Markets, supra footnote 20, at 646, 653 (referring to 
``investment supervisory departments'' and ``special investment 
management departments'' of broker-dealers). In general, 
contemporaneous literature used the term ``investment counsel'' or 
``investment counselor'' to refer to those who provided investment 
advice for a fee and whose advisory relationship with clients had a 
supervisory or managerial character. See id. at 646 (defining 
``investment counselor'' as ``an individual, institution, 
organization, or department of an institution or organization which 
undertakes for a fee to advise or to supervise the investment of 
funds by, and on occasion to manage the investment accounts of, 
clients''). Under the Advisers Act, ``investment counsel'' is a 
defined subset of the ``investment advisers'' to whom the Act 
applies. See section 208(c) of the Act.
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    Between 1935 and 1939, the Commission conducted a congressionally 
mandated study of investment trusts and investment companies and in 
connection with this study surveyed investment advisers, including 
broker-dealers with investment advisory departments.\28\ In a report to 
Congress (the ``Investment Counsel Report''), the Commission informed 
Congress that the Commission's study had identified two broad classes 
of problems relating to investment advisers that warranted legislation: 
``(a) The problem of distinguishing between bona fide investment 
counselors and `tipster' organizations; and (b) those problems 
involving the organization and operation of investment counsel

[[Page 33684]]

institutions.'' \29\ Based on the findings of the Investment Counsel 
Report, representatives of the Commission testified at the 
congressional hearings on what ultimately became the Advisers Act in 
favor of regulating the persons engaged in the business of providing 
investment advice for compensation.
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    \28\ Investment Counsel Report, supra footnote 20, at 1. The 
study was conducted pursuant to section 30 of the Public Utility 
Holding Company Act of 1935 [15 U.S.C. 79z-4]; see Hearings on S. 
3580, supra footnote 19, at 995-96.
    \29\ Investment Counsel Report, supra footnote 20, at 27.
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    Congress responded by passing the Advisers Act. Section 202(a)(11) 
of the Act defined ``investment adviser''--those subject to the 
requirements of the Act--broadly to include ``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 regular 
business, issues or promulgates analyses or reports concerning 
securities. . . .'' In adopting this broad definition, Congress 
necessarily rejected arguments presented during its hearings that 
legitimate investment counselors \30\ should be free from any oversight 
except, perhaps, by the few states that had passed laws regulating 
investment counselors and by private organizations, such as the 
Investment Counsel Association of America.\31\ Instead, in responding 
to such views, congressional committee members repeatedly observed that 
those whose business was limited to providing investment advice for 
compensation were subject to little if any regulatory oversight, and 
questioned why they should not be subject to regulation even though 
other professionals were.\32\
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    \30\ Hearings on S. 3580, supra footnote 19, at 745-48; see also 
2005 Adopting Release, supra footnote 17, at n.62.
    \31\ Hearings on S. 3580, supra footnote 19, at 716-18, 736-38, 
740-41, 744-45, 760, 763.
    \32\ Id. at 738-39, 745-49, 751-53 (Senators Wagner and Hughes). 
David Schenker, chief counsel for the Commission's study, offered 
the following observations in response to investment counselors' 
arguments against the registration and regulation required by the 
Act: Then there is another curious thing, Senator, that those people 
who are subject to supervision by some authoritative body of some 
kind, such as securities dealers or investment bankers have to 
register with us as brokers and dealers. People, who are brokers and 
members of stock exchanges and are supervised by the stock 
exchanges. Curiously enough, the people in the investment-counsel 
business who are supervised are not eligible for membership in the 
investment counsel association; because the association says that if 
you are in the brokerage or banking business you cannot be a member 
of the association. So the situation is that if you take their 
analysis, the only ones who would not be subject to regulation by 
the SEC. would be the people who are not subject to regulation by 
anybody at all. These investment counselors who appeared here are no 
different from the over-the-counter brokers and dealers or the 
members of the New York Stock Exchange. Id. at 995-96. Eventually, 
members of the investment counsel industry agreed with the proposed 
legislation. See id. at 1124; Investment Trusts and Investment 
Companies: Hearings on H.R. 10065 Before a Subcomm. of the House 
Committee on Interstate and Foreign Commerce, 76th Cong., 3d Sess. 
(1940) (``Hearings on H.R. 10065''); see also S. Rep. No. 76-1775, 
76th Cong., 3d Sess. 21 (1940); H.R. Rep. No. 76-2639, 76th Cong., 
3d Sess. 27 (1940).
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    Conversely, the Advisers Act specifically excluded persons, among 
others, from the broad definition of ``investment adviser'' to the 
extent that such persons rendered investment advice incidental to their 
primary business.\33\ Broker-dealers were among these excluded persons, 
as section 202(a)(11)(C) of the Act excludes from the definition of 
``investment adviser'' a broker-dealer who provides investment advice 
that is ``solely incidental to the conduct of his business as a broker 
or dealer and who receives no special compensation therefor''--i.e., 
the broker-dealer exclusion.
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    \33\ The exclusion for certain professionals in Advisers Act 
section 202(a)(11) is very similar to certain state-law provisions 
governing investment counselors at the time, which excepted 
``brokers, attorneys, banks, savings and loan associations, trust 
companies, and certified public accountants.'' See Statutory 
Regulation of Investment Advisers (prepared by the Research 
Department of the Illinois Legislative Council) reprinted in 
Hearings on S. 3580, supra footnote 19, at 1007. That report stated 
that ``the investment advice furnished by these excepted groups 
would seem to be merely incidental to some other function being 
performed by them.'' Id.
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B. Scope of the Solely Incidental Prong of the Broker-Dealer Exclusion

    The Commission and its staff have on several occasions discussed 
the scope of the broker-dealer exclusion.\34\ In adopting a rule 
regarding fee-based brokerage accounts in 2005, for example, the 
Commission stated that investment advisory services are ``solely 
incidental to'' the conduct of a broker-dealer's business when the 
services are offered in connection with and are reasonably related to 
the brokerage services provided to an account.\35\ The interpretation 
was consistent with the Commission's contemporaneous construction of 
the Advisers Act as excluding broker-dealers whose investment advice is 
given ``solely as an incident of their regular business.'' \36\ The 
2005 interpretation stated that the importance or frequency of the 
investment advice was not a determinant of whether the solely 
incidental prong was satisfied; the Commission rejected the view that 
only minor, insignificant, or infrequent advice qualifies for the 
broker-dealer exclusion, noting that the advice broker-dealers gave as 
part of their brokerage services in 1940 was often substantial and 
important to customers.\37\
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    \34\ See, e.g., Advisers Act Release No. 2, supra footnote 2; 
Applicability of the Investment Advisers Act to Certain Brokers and 
Dealers; Interpretation of the Term `Special Compensation', 
Investment Advisers Act Release No. 640 (Oct. 5, 1978); 
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, 
Investment Advisers Act Release No. 1092 (Oct. 8, 1987).
    \35\ 2005 Adopting Release, supra footnote 17; 2005 Proposing 
Release, supra footnote 18.
    \36\ See Advisers Act Release No. 2, supra footnote 2; see also 
2005 Adopting Release, supra footnote 17.
    \37\ See 2005 Adopting Release, supra footnote 17, at nn.139-42 
and accompanying text.
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    On March 30, 2007, the Court of Appeals for the District of 
Columbia Circuit in Financial Planning Association v. SEC vacated the 
rule regarding fee-based brokerage accounts, but not on grounds that 
addressed our interpretive positions relating to the solely incidental 
prong.\38\ In September 2007, we proposed to reinstate these 
interpretive positions.\39\
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    \38\ See 482 F.3d 481 (D.C. Cir. 2007).
    \39\ 2007 Proposing Release, supra footnote 17.
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    Since that time, a federal appellate court has addressed the solely 
incidental prong. In 2011, in Thomas v. Metropolitan Life Insurance 
Company, the Court of Appeals for the Tenth Circuit addressed the scope 
of the broker-dealer exclusion in the context of a private suit 
alleging that a broker had violated the Advisers Act by failing to 
disclose incentives to sell proprietary products.\40\ As part of its 
analysis of the exclusion, the court looked to the interpretation of 
the solely incidental prong that we advanced in 2005 and 2007. The 
court found these interpretations to be ``persuasive'' in light of its 
own analysis of the text of the solely incidental prong of the broker-
dealer exclusion as well as the legislative history and historical 
background of the Advisers Act.\41\ The court concluded that a broker-
dealer's investment advice is solely incidental to its conduct as a 
broker-dealer if the advice is given ``only in connection with the 
primary business of selling securities.'' \42\ Thus, the court 
explained, ``broker-dealers who give advice that is not connected to 
the sale of securities--or whose primary business consists of giving 
advice--do not meet the [solely incidental] prong'' of the broker-
dealer exclusion.\43\ The court also agreed with the Commission's 
interpretations that the solely incidental prong does not

[[Page 33685]]

hinge upon ``the quantum or importance'' of a broker-dealer's advice 
but on its relationship to the broker-dealer's primary business.\44\ In 
the court's view, ``[t]he quantum or importance of the broker-dealer's 
advice is relevant only insofar as the advice cannot supersede the sale 
of the product as the `primary' goal of the transaction or the 
`primary' business of the broker-dealer.'' \45\
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    \40\ 631 F.3d 1153 (10th Cir. 2011).
    \41\ Id. at 1163-64.
    \42\ Id. at 1164.
    \43\ Id.
    \44\ Id. at 1163.
    \45\ Id. at 1166. In Thomas, the brokerage firm's representative 
had conducted an analysis of the plaintiffs' financial situation and 
advised them to purchase a particular financial product based in 
part on that analysis. The plaintiffs alleged that the firm's policy 
``required [representatives] to provide investment advice to 
potential customers as a means to sell more proprietary products'' 
and that this policy was ``so pervasive that [representatives] 
allegedly gave financial advice to every customer to whom they sold 
a product.'' Id. at 1157. The Court rejected the plaintiffs' 
contention that these facts rendered the advice so central to the 
transaction that it could not be considered ``solely incidental'' to 
it. Because the representative's advice ``was closely related to the 
sale of the [product] and selling the [product] was the primary 
object of the transaction,'' the Court concluded, the advice was 
``solely incidental'' to the representative's conduct as a broker. 
Id. at 1167.
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    Based on the text and history of the solely incidental prong, our 
previous interpretations of the prong, the Thomas decision, and the 
comments we have received, we are providing the following 
interpretation.\46\ We interpret the statutory language to mean that a 
broker-dealer's provision of advice as to the value and characteristics 
of securities or as to the advisability of transacting in securities 
\47\ is consistent with the solely incidental prong if the advice is 
provided in connection with and is reasonably related to the broker-
dealer's primary business of effecting securities transactions.\48\ If 
a broker-dealer's primary business is giving advice as to the value and 
characteristics of securities or the advisability of transacting in 
securities, or if the advisory services are not offered in connection 
with or are not reasonably related to the broker-dealer's business of 
effecting securities transactions, the broker-dealer's advisory 
services are not solely incidental to its business as a broker-
dealer.\49\ Whether advisory services provided by a broker-dealer 
satisfy the solely incidental prong is assessed based on the facts and 
circumstances surrounding the broker-dealer's business, the specific 
services offered, and the relationship between the broker-dealer and 
the customer.
---------------------------------------------------------------------------

    \46\ To the extent that this interpretation is inconsistent with 
the Commission's prior interpretations with respect to the solely 
incidental prong, this interpretation supersedes those 
interpretations.
    \47\ See Advisers Act section 202(a)(11) (definition of 
``investment adviser'').
    \48\ Cf. 2005 Adopting Release, supra footnote 17 (``In general, 
investment advice is `solely incidental to' the conduct of a broker-
dealer's business within the meaning of section 202(a)(11)(C) and to 
`brokerage services' provided to accounts . . . when the advisory 
services rendered are in connection with and reasonably related to 
the brokerage services provided.''). We have modified the wording of 
our interpretation to make clear that the broker-dealer's primary 
business must also be effecting securities transactions.
    \49\ Nothing in this interpretation alters the Commission's 2006 
interpretation of section 28(e) of the Exchange Act, which, in the 
context of a client commission arrangement that otherwise satisfies 
section 28(e), permits a broker-dealer to be paid out of a pool of 
commissions for its research even if that broker-dealer did not 
effect a securities transaction. See Commission Guidance Regarding 
Client Commission Practices Under Section 28(e) of the Securities 
Exchange Act of 1934, Securities Exchange Act Release No. 54165 
(July 18, 2006), 71 FR 41978 (July 24, 2006).
---------------------------------------------------------------------------

    The quantum or importance of investment advice that a broker-dealer 
provides to a client is not determinative as to whether or not the 
provision of advice is consistent with the solely incidental prong. 
Advice need not be trivial, inconsequential, or infrequent to be 
consistent with the solely incidental prong. Indeed, our simultaneous 
adoption of (i) Regulation Best Interest, which raises the standard of 
conduct that applies to broker-dealer recommendations, and (ii) the 
relationship summary, which provides information about broker-dealer 
recommendation services to customers, underscores that broker-dealer 
investment advice can be consequential even when it is offered in 
connection with and reasonably related to the primary business of 
effecting securities transactions.
    To illustrate the application of this interpretation in practice, 
we provide the following guidance on the application of the 
interpretation to (i) exercising investment discretion over customer 
accounts and (ii) account monitoring.

C. Guidance on Applying the Interpretation of the Solely Incidental 
Prong

1. Investment Discretion
    The Commission has for many years considered issues related to a 
broker-dealer's exercise of investment discretion over customer 
accounts and the extent to which such practices could be considered 
solely incidental to the business of a broker-dealer.\50\ The 
Commission has stated that discretionary brokerage relationships ``have 
many of the characteristics of the relationships to which the 
protections of the Advisers Act are important.'' \51\ In particular, 
the Commission has explained that when a broker-dealer exercises 
investment discretion, it is not providing advice to customers that is 
in connection with and reasonably related to effecting securities 
transactions; rather, the broker-dealer is making investment decisions 
relating to the purchase or sale of securities on behalf of customers 
on an ongoing basis.\52\ At the same time, the Commission has taken the 
position that some limited exercise of discretionary authority by 
broker-dealers could be considered solely incidental to their 
business.\53\
---------------------------------------------------------------------------

    \50\ See Reg. BI Proposal, supra footnote 3, at nn.343-62 and 
accompanying text.
    \51\ Final Extension of Temporary Exemption from the Investment 
Advisers Act for Certain Brokers and Dealers, Investment Advisers 
Act Release No. 626 (Apr. 27, 1978) (``Advisers Act Release No. 
626'').
    \52\ See 2005 Proposing Release, supra footnote 18.
    \53\ See Reg. BI Proposal, supra footnote 3, at nn.355-62 and 
accompanying text. Cf. NASD rule 2510 (allowing discretion only if a 
customer ``has given prior written authorization to a stated 
individual or individuals . . . in accordance with [FINRA] rule 
3010'').
---------------------------------------------------------------------------

    We requested comment in the Reg. BI Proposal on a broker-dealer's 
exercise of investment discretion over customer accounts and the extent 
to which the exercise of investment discretion should be considered 
solely incidental to the business of a broker-dealer.\54\ Commenters 
agreed that the exercise of unlimited discretion should not be 
considered ``solely incidental'' investment advice.\55\ Commenters 
expressed varying views, however, on the extent to which the exercise 
of temporary or limited discretion could be considered solely 
incidental to the business of a broker-dealer. Several commenters 
suggested that the exercise of any investment discretion should be 
governed by the Advisers Act.\56\ One commenter suggested that the 
Commission should interpret the solely incidental prong through the 
lens of the definition of ``investment discretion'' in section 3(a)(35) 
of the Securities Exchange Act of 1934 (the ``Exchange Act''),\57\ 
noting that section 3(a)(35)

[[Page 33686]]

focuses on ``the level of authority, decision-making ability, 
influence--and ultimately, control--an intermediary has over another's 
money'' and arguing that those with section 3(a)(35) investment 
discretion have a heightened likelihood of mismanagement and abuse of 
another's money.\58\ Another commenter suggested that, while discretion 
generally should subject a broker-dealer to the Advisers Act, there are 
certain cases where temporary or limited discretion does not have the 
supervisory or managerial character of the investment discretion 
warranting the protections of the Advisers Act.\59\
---------------------------------------------------------------------------

    \54\ See Relationship Summary Proposal, supra footnote 6, at 
nn.363-67 and accompanying text; see also id. at nn.343-62 and 
accompanying text for a description of the Commission's historical 
approaches.
    \55\ See, e.g., Comment Letter of Financial Planning Coalition 
(Aug. 7, 2018) (``FPC Letter'') (``[A] broker-dealer's provision of 
unfettered discretionary investment advice should never be 
considered `solely incidental' to its business as a broker-dealer.'' 
(emphasis removed)); CFA Letter; IFS Letter.
    \56\ See, e.g., Comment Letter of Invesco Advisers, Inc. (Aug. 
7, 2018) (``Discretionary management over an account, whether or not 
temporary, is not within the scope of the `solely incidental' 
exclusion.''); IAA Letter; CFA Institute Letter.
    \57\ Under Exchange Act section 3(a)(35), a person exercises 
``investment discretion'' with respect to an account if, directly or 
indirectly, such person (A) is authorized to determine what 
securities or other property shall be purchased or sold by or for 
the account, (B) makes decisions as to what securities or other 
property shall be purchased or sold by or for the account even 
though some other person may have responsibility for such investment 
decisions, or (C) otherwise exercises such influence with respect to 
the purchase and sale of securities or other property by or for the 
account as the Commission, by rule, determines, in the public 
interest or for the protection of investors, should be subject to 
the operation of the provisions of this title and the rules and 
regulations thereunder. 15 U.S.C. 78c(a)(35).
    \58\ See FPC Letter (noting also that several federal and state 
courts have used factors similar to those in section 3(a)(35) to 
impose a fiduciary standard). Another commenter also suggested using 
Exchange Act section 3(a)(35) ``investment discretion'' as a basis 
for establishing whether discretion is not solely incidental for 
purposes of the broker-dealer exclusion, with an exception for 
investment discretion ``that a customer grants on a temporary or 
limited basis.'' See Comment Letter of Pickard Djinis and Pisarri 
(Aug. 14, 2018) (``Pickard Letter'').
    \59\ See Comment Letter of the Securities Industry and Financial 
Markets Association (Aug. 7, 2018) (``SIFMA Letter'').
---------------------------------------------------------------------------

    Applying our interpretation of the solely incidental prong, a 
broker-dealer's exercise of unlimited discretion \60\ would not be 
solely incidental to the business of a broker-dealer consistent with 
the meaning of section 202(a)(11)(C).\61\ It would be inconsistent with 
the solely incidental prong for broker-dealers to exercise ``investment 
discretion'' as that term is defined in section 3(a)(35) of the 
Exchange Act with respect to any of its accounts, except for certain 
instances of investment discretion granted by a customer on a temporary 
or limited basis, as discussed below. A broker-dealer with unlimited 
discretion to effect securities transactions possesses ongoing 
authority over the customer's account indicating a relationship that is 
primarily advisory in nature; such a level of discretion by a broker-
dealer is so comprehensive and continuous that the provision of advice 
in such context is not incidental to effecting securities transactions.
---------------------------------------------------------------------------

    \60\ We view unlimited investment discretion as a person having 
the ability or authority to buy and sell securities on behalf of a 
customer without consulting the customer--i.e., having 
responsibility for a customer's trading decisions.
    \61\ The Commission has in the past stated that the 
quintessentially supervisory or managerial character of investment 
discretion warrants the protection of the Advisers Act. See 
Amendment and Extension of Temporary Exemption from the Investment 
Advisers Act for Certain Brokers and Dealers, Investment Advisers 
Act Release No. 471 (Aug. 20, 1975); see also 2005 Proposing 
Release, supra footnote 18; 2005 Adopting Release, supra footnote 
17.
---------------------------------------------------------------------------

    We recognize, however, that there are situations where a broker-
dealer may exercise temporary or limited discretion in a way that is 
not indicative of a relationship that is primarily advisory in nature. 
Generally, these are situations where the discretion is limited in 
time, scope, or other manner and lacks the comprehensive and continuous 
character of investment discretion that would suggest that the 
relationship is primarily advisory. The totality of the facts and 
circumstances would be relevant to determining whether temporary or 
limited discretion is consistent with the solely incidental prong. 
Taking into consideration specific examples that commenters have 
suggested in the past, instances of temporary or limited investment 
discretion that, standing alone, would not support the conclusion that 
a relationship is primarily advisory--and therefore outside the scope 
of the solely incidental prong--include discretion: (i) As to the price 
at which or the time to execute an order given by a customer for the 
purchase or sale of a definite amount or quantity of a specified 
security; (ii) on an isolated or infrequent basis, to purchase or sell 
a security or type of security when a customer is unavailable for a 
limited period of time; (iii) as to cash management, such as to 
exchange a position in a money market fund for another money market 
fund or cash equivalent; \62\ (iv) to purchase or sell securities to 
satisfy margin requirements, or other customer obligations that the 
customer has specified; (v) to sell specific bonds or other securities 
and purchase similar bonds or other securities in order to permit a 
customer to realize a tax loss on the original position; (vi) to 
purchase a bond with a specified credit rating and maturity; and (vii) 
to purchase or sell a security or type of security limited by specific 
parameters established by the customer. We view these examples of 
temporary or limited discretion as typically consistent with the 
broker-dealer exclusion because they are in connection with and 
reasonably related to a broker-dealer's business of effecting 
securities transactions and do not suggest that the broker-dealer's 
primary business is providing investment advice.
---------------------------------------------------------------------------

    \62\ Certain changes to money market fund regulation and 
operations have been implemented since our prior interpretations. 
See Money Market Fund Reform; Amendments to Form PF, Investment 
Company Act Release No. 31166 (Jul. 23, 2014) (removing an exemption 
that permitted institutional non-government money market funds to 
maintain a stable net asset value, while maintaining such exemption 
for certain other money market funds, and applying certain fees and 
gates reforms to institutional non-government money market funds and 
retail money market funds but not to government money market funds, 
among other changes). In light of these changes, differently 
categorized money market funds may have different investment 
characteristics. Accordingly, we anticipate that FINRA will be 
reviewing the application of the rules that apply to the exercise of 
broker-dealer discretion in this context. The Commission staff also 
will evaluate broker-dealer exercise of discretionary cash 
management to consider whether additional measures may be necessary.
---------------------------------------------------------------------------

    We have previously described a similar list of situations that we 
would consider temporary or limited discretion that may be consistent 
with the solely incidental prong.\63\ We make three refinements.
---------------------------------------------------------------------------

    \63\ See 2005 Adopting Release, supra footnote 17, at nn.178-81 
and accompanying text; 2007 Proposing Release, supra footnote 17, at 
n.13 and accompanying text.
---------------------------------------------------------------------------

    First, we are not including authority for a period ``not to exceed 
a few months'' relating to the time a broker-dealer may purchase or 
sell a security or type of security when a customer is unavailable for 
a limited period of time. Depending on the facts and circumstances, a 
period of discretion lasting a few months may be indicative of a 
business or customer relationship that is primarily advisory in nature.
    Second, we would view it as consistent with our interpretation of 
the solely incidental prong for broker-dealers to purchase or sell 
securities to satisfy margin requirements, or other customer 
obligations that the customer has specified (new wording italicized). 
In our view, there may be similar obligations to a broker-dealer or a 
third party whereby a broker-dealer may be authorized to make a 
purchase or sale, such as a sale to satisfy a collateral call.
    Third, we would view it as consistent with our interpretation of 
the solely incidental prong for broker-dealers to sell specific bonds 
or other securities in order to permit a customer to realize a tax loss 
on the original position (new wording italicized). We see no 
distinction between bonds or other securities in this particular 
context.
2. Account Monitoring
    We received several comments regarding the extent to which a 
broker-dealer may monitor the status and

[[Page 33687]]

performance of a customer's account while relying on the broker-dealer 
exclusion. Some commenters suggested that a broker-dealer's agreement 
to provide ongoing monitoring for the purpose of recommending changes 
to a customer's investments is not an advisory service that is solely 
incidental to the primary securities transaction business of a broker-
dealer and thus the broker-dealer exclusion should not be available to 
broker-dealers who provide such services.\64\ Another commenter 
suggested that broker-dealers providing personalized investment advice 
about securities on an ongoing basis should not be able to rely on the 
broker-dealer exclusion.\65\ Commenters also suggested that providing 
services that cause overseen assets to meet the definition of 
``regulatory assets under management'' under Form ADV (i.e., securities 
portfolios for which the broker-dealer provides ``continuous and 
regular supervisory or management services'') should subject a broker-
dealer to the Advisers Act.\66\
---------------------------------------------------------------------------

    \64\ See FPC Letter (``[B]roker-dealers that enter into 
agreements with retail customers to provide ongoing monitoring for 
purposes of recommending changes in investments should be considered 
investment advisers and subject to fiduciary obligations under the 
Advisers Act. Entering into an agreement to provide ongoing 
monitoring. . . goes beyond advice that is solely incidental to the 
conduct of business as a broker-dealer. . . .''); IAA Letter (same 
quotation as the FPC Letter); IAA Letter (``[A] broker-dealer that 
agrees to provide a retail customer ongoing monitoring for purposes 
of recommending changes in investments would not be providing 
services that are solely incidental to its business as a broker-
dealer under the 2007 interpretation.''); Fisher Letter (``Brokers 
can give ongoing investment advice . . . yet still not be required 
to register as an investment adviser. . . . [T]he boundaries 
[between brokers and investment advisers] have practically been 
erased.'').
    \65\ See Mutual Fund Investors Letter (``[The SEC] should . . . 
subject broker-dealers to the Advisers Act when they are providing 
personalized investment advice about securities on an ongoing basis 
. . . The term `solely incidental' should be interpreted narrowly 
and only include personalized investment advice that is one-time, 
temporary, or limited in scope.'').
    \66\ See IAA Letter; Pickard Letter.
---------------------------------------------------------------------------

    We disagree with commenters who suggested that any monitoring of 
customer accounts would not be consistent with the solely incidental 
prong. A broker-dealer that agrees to monitor \67\ a retail customer's 
account on a periodic basis for purposes of providing buy, sell, or 
hold recommendations may still be considered to provide advice in 
connection with and reasonably related to effecting securities 
transactions.\68\ In contrast, when a broker-dealer, voluntarily and 
without any agreement with the customer, reviews the holdings in a 
retail customer's account for the purposes of determining whether to 
provide a recommendation to the customer--and, if applicable, contacts 
that customer to provide a recommendation based on that voluntary 
review--the broker-dealer's actions are in connection with and 
reasonably related to the broker-dealer's primary business of effecting 
securities transactions. Absent an agreement with the customer (which 
would be required to be disclosed pursuant to Regulation Best 
Interest), we do not consider this voluntary review to be ``account 
monitoring.'' \69\
---------------------------------------------------------------------------

    \67\ The guidance in this section applies when a broker-dealer 
agrees to monitor a customer's account. See Reg. BI Adoption, supra 
footnote 6, at section II.B.2 for a discussion of what constitutes 
such an agreement.
    \68\ See id. Monitoring agreed to by the broker-dealer would 
result in a recommendation to purchase, sell, or hold a security 
each time the agreed-to monitoring occurs and would be covered by 
Regulation Best Interest. See id. (``For example, if a broker-dealer 
agrees to monitor the retail customer's account on a quarterly 
basis, the quarterly review and each resulting recommendation to 
purchase, sell, or hold, will be a recommendation subject to 
Regulation Best Interest.'').
    In agreeing to provide any monitoring services, broker-dealers 
should also consider that a broker-dealer that separately contracts 
or charges a separate fee for advisory services is providing 
investment advice that is inconsistent with the broker-dealer 
exclusion. See, e.g., 2005 Adopting Release, supra footnote 17. 
Broker-dealers should also consider that, even where such monitoring 
is consistent with the solely incidental prong, the broker-dealer 
must also receive no special compensation for the activity to be 
eligible for the broker-dealer exclusion. Broker-dealers receive 
special compensation where there is a clearly definable charge for 
investment advice. See Advisers Act Release No. 626, supra footnote 
51; see also Advisers Act Release No. 2, supra footnote 2; 2007 
Proposing Release, supra footnote 17 (describing this interpretation 
as the Commission's ``longstanding view'').
    \69\ See Reg. BI Adoption, supra footnote 6, at section 
II.B.2.b. Any recommendation made to the retail customer as a result 
of such voluntary review would be subject to Regulation Best 
Interest. See id.
---------------------------------------------------------------------------

    We decline to delineate every circumstance where agreed-upon 
monitoring is and is not solely incidental to a broker-dealer's 
brokerage business. Broker-dealers may consider adopting policies and 
procedures that, if followed, would help demonstrate that any agreed-
upon monitoring is in connection with and reasonably related to the 
broker-dealer's primary business of effecting securities transactions. 
For example, broker-dealers may include in their policies and 
procedures that a registered representative may agree to monitor a 
customer's account at specific time frames (e.g., quarterly) for the 
purpose of determining whether to provide a buy, sell, or hold 
recommendation to the customer.\70\ However, such policies and 
procedures should not permit a broker-dealer to agree to monitor a 
customer account in a manner that in effect results in the provision of 
advisory services that are not in connection with or reasonably related 
to the broker-dealer's primary business of effecting securities 
transactions, such as providing continuous monitoring.\71\ 
Additionally, dually registered firms may similarly consider adopting 
policies and procedures that distinguish the level and type of 
monitoring in advisory and brokerage accounts.\72\
---------------------------------------------------------------------------

    \70\ As noted in the Reg. BI Adoption, and consistent with the 
relationship summary adopted in the Relationship Summary Adoption, 
the scope and frequency of a broker-dealer's monitoring is a 
material fact relating to the type and scope of services provided to 
a retail customer and thus is required to be disclosed under 
Regulation Best Interest. See id. at section II.B.2; cf. 
Relationship Summary Adoption, supra footnote 6. A broker-dealer 
disclosing to a customer that the broker-dealer will provide 
monitoring constitutes an agreement to monitor. See supra footnote 
67.
    \71\ The two examples of advisory services we discuss in this 
Release--investment discretion and monitoring--cannot be viewed and 
interpreted in isolation. For example, it would not be consistent 
with the solely incidental prong for a broker-dealer to exercise 
unlimited investment discretion over a customer account even if its 
monitoring activities do comport with the solely incidental prong. 
Thus, any policies and procedures that a broker-dealer adopts to 
ensure that the broker-dealer's activities are in connection with 
and reasonably related to the broker-dealer's primary business of 
effecting securities transactions similarly should not grant the 
broker-dealer the ability or authority to buy and sell securities on 
behalf of a customer as part of periodic account monitoring, except 
in circumstances of temporary or limited discretion that would be 
consistent with the solely incidental prong, as discussed above.
    \72\ In the Final Fiduciary Interpretation, we note that 
investment advisers may consider whether written policies and 
procedures relating to monitoring would be appropriate under 
Advisers Act rule 206(4)-7. See Final Fiduciary Interpretation, 
supra footnote 6, at section II.B.3.
     Additionally, the Reg. BI Adoption confirms that a dual 
registrant is an investment adviser solely with respect to those 
accounts for which a dual registrant provides investment advice or 
receives compensation that subjects it to the Advisers Act. See Reg. 
BI Adoption, supra footnote 6, at section II.B.3.d. Determining the 
capacity in which a dual registrant is making a recommendation is a 
facts and circumstances test. See id.
---------------------------------------------------------------------------

    The Commission will consider further comment on its interpretation 
of the solely incidental prong of the broker-dealer exclusion and its 
application to certain brokerage activities to evaluate whether 
additional guidance might be appropriate in the future. Based on any 
comments received, the Commission may, but need not, supplement this 
interpretation.

III. Economic Considerations

    The Commission's interpretation above is intended to advise the 
public of its understanding of the solely incidental prong of the 
broker-dealer exclusion. The interpretation does not itself create any 
new legal obligations for broker-dealers. Nonetheless, the

[[Page 33688]]

Commission recognizes that to the extent a broker-dealer's practices 
are not consistent with this interpretation of the solely incidental 
prong, the interpretation could have potential economic effects. We 
discuss these effects below.

A. Background

    The Commission's interpretation regarding the solely incidental 
prong of the broker-dealer exclusion would affect broker-dealers and 
their associated persons as well as the customers of those broker-
dealers, and the market for financial advice more broadly.\73\ As of 
December 2018, there were approximately 3,764 registered broker-dealers 
with over 140 million customer accounts. In total, these broker-dealers 
have over $4.3 trillion in total assets, which are total broker-dealer 
assets as reported on Form X-17a-5.\74\ Of the broker-dealers 
registered with the Commission as of December 2018, 363 broker-dealers 
were dually registered with the Commission as investment advisers.\75\ 
Dual registrant firms hold over 90 million (63%) of the overall 140 
million customer accounts held by broker dealers.\76\ As part of the 
Reg. BI Proposal, we requested data and other information related to 
the nature and magnitude of discretionary services offered by broker-
dealers,\77\ but did not receive any data or information to inform our 
analysis of potential economic effects stemming from this 
interpretation.
---------------------------------------------------------------------------

    \73\ See Relationship Summary Adoption, supra footnote 6, at 
section IV.B (discussing the market for financial advice generally).
    \74\ Assets are estimated by Total Assets (allowable and non-
allowable) from Part II of the FOCUS filings (Form X-17A-5 Part II, 
available at https://www.sec.gov/files/formx-17a-5_2.pdf) and 
correspond to balance sheet total assets for the broker-dealer. The 
Commission does not have an estimate of the total amount of customer 
assets for broker-dealers. We estimate broker-dealer size from the 
total balance sheet assets as described above.
    \75\ For purposes of this analysis, a dual registrant is any 
firm that is dually registered with the Commission as an investment 
adviser and a broker-dealer. Because this number does not include 
the number of broker-dealers who are also registered as state 
investment advisers, the number undercounts the full number of 
broker-dealers that operate in both capacities.
    \76\ Some broker-dealers may be affiliated with investment 
advisers without being dually registered. From Question 10 on Form 
BD, 2,098 broker-dealers report that directly or indirectly, they 
either control, are controlled by, or under common control with an 
entity that is engaged in the securities or investment advisory 
business. Comparatively, 2,691 (19.57%) SEC-registered investment 
advisers report an affiliate that is a broker-dealer in Section 7A 
of Schedule D of Form ADV, including 1,916 SEC-registered investment 
advisers that report an affiliate that is a registered broker-
dealer. Approximately 74% of total assets under management of 
investment advisers are managed by these 2,691 investment advisers.
    \77\ See Reg. BI Proposal, supra footnote 3.
---------------------------------------------------------------------------

B. Potential Economic Effects

    Broker-dealers currently incur ongoing costs related to compliance 
with their legal and regulatory obligations, including costs related to 
understanding their practices and structuring their practices to be 
consistent with the solely incidental prong of the broker-dealer 
exclusion. This interpretation generally confirms the scope of the 
solely incidental prong of the broker-dealer exclusion.
    Generally, we believe that few, if any, broker-dealers take the 
view that they act consistently with the solely incidental prong with 
respect to any accounts over which the broker-dealer exercises more 
than temporary or limited investment discretion.\78\ As with other 
circumstances in which the Commission speaks to the legal obligations 
of regulated entities, we acknowledge that affected firms, including 
those whose practices are consistent with the Commission's 
interpretation, incur costs to evaluate the Commission's interpretation 
and assess its applicability to them. Further, to the extent certain 
broker-dealers currently understand the scope of permissible monitoring 
or other permissible advisory activities under the solely incidental 
prong to be different from what is set forth in this interpretation, 
there could be some economic effects.\79\
---------------------------------------------------------------------------

    \78\ See Comment Letter of UBS (noting that broker-dealers have 
existing arrangements where they exercise temporary or limited 
discretion, such as discretion as to time and price, and that those 
types of discretion ``do not present the sort of risks about which 
the SEC is concerned with respect to the exercise of unfettered 
discretion'') (emphasis added); SIFMA Letter (noting that there are 
instances in which temporary or limited discretion, such as 
discretion as to prices at which securities can be purchased, does 
not have the supervisory or managerial character of the investment 
discretion warranting the protections of the Advisers Act).
    \79\ The above application of our interpretation of the solely 
incidental prong to the exercise of investment discretion is 
generally consistent with the position taken in the 2005 Adopting 
Release and preliminarily taken in the 2007 Proposing Release. We 
believe that many broker-dealers changed their practices with 
respect to investment discretion in light of those releases, and 
thus those practices likely are consistent with our interpretation 
of the solely incidental prong.
---------------------------------------------------------------------------

    This interpretation may produce economic effects to the extent that 
it causes any broker-dealers to recognize that their practices are 
inconsistent with the solely incidental prong and to adjust their 
practices to make them consistent. In particular, broker-dealers that 
have interpreted the solely incidental prong to conduct more advisory 
activities than this interpretation permits may choose to no longer 
provide such services to customers. This could result in a loss of 
certain customers, a reduction in certain business activities, and 
could preclude those broker-dealers from further developing certain 
services for their customers, except to the extent those broker-dealers 
are dually registered firms and their customers are also advisory 
clients. This may, in turn, result in decreased competition in the 
market for certain services, increased fees for those services, or a 
diminished number of broker-dealers offering commission-based services 
to investors.\80\
---------------------------------------------------------------------------

    \80\ For example, to the extent that broker-dealers respond to 
the interpretation by limiting the levels of discretion that they 
provide for their customers, execution quality (including the 
execution price) may be affected due to the delays encountered when 
the broker-dealer must contact a customer to proceed with a 
transaction.
---------------------------------------------------------------------------

    To the extent any broker-dealers have been providing advisory 
services beyond the scope of this interpretation, their customers may 
receive fewer advisory services if these broker-dealers choose not to 
register as investment advisers and adjust their business practices in 
light of this interpretation. To the extent that this interpretation 
would lead to a decline in the supply of certain services offered by 
broker-dealers (or a decline in broker-dealers offering services to 
particular customers), it could reduce the efficiency of portfolio 
construction for those investors who might otherwise benefit from 
broker-dealers providing investment advice with respect to their 
account and would find similar advice from investment advisers to be 
too costly or unattainable (e.g., due to account minimum requirements). 
For example, certain broker-dealers may incur costs to adopt or revise 
policies and procedures to ensure that the account monitoring that they 
may agree to provide their customers is consistent with this 
interpretation and may choose instead to stop offering such monitoring 
services. Further, to the extent that any broker-dealers determine that 
their services are not consistent with this interpretation, they may 
choose to register as investment advisers with the Commission, or one 
or more states, as applicable. Such broker-dealers would bear costs in 
choosing to register as investment advisers to continue providing those 
services, and their clients may face higher fees as a result. 
Alternatively, broker-dealers that have investment adviser affiliates 
may seek to place existing customers in advisory accounts instead of 
brokerage accounts.
    Broker-dealers that determine they must change business practices 
as a

[[Page 33689]]

result of this interpretation will choose their responses based on 
their circumstances. For example, if broker-dealers with affiliated 
advisers are able to utilize their existing regulatory infrastructure 
and compliance policies and procedures to account for activities that 
are inconsistent with the solely incidental exclusion they may face 
lower costs associated with migration of brokerage accounts and 
activities to investment advisory accounts. By contrast, we expect the 
costs of regulatory registration and compliance to be greater for any 
standalone broker-dealers that choose to become registered investment 
advisers, as they are more likely to need to undertake new systems, 
procedures, and policies.
    To the extent that broker-dealers choose to discontinue providing 
certain services, register as investment advisers, or encourage 
migration of customer's brokerage accounts to advisory accounts of 
affiliates, this interpretation could result in a shift in the demand 
for the services of different types of financial service providers, 
decreasing the demand for services of broker-dealers and increasing the 
demand for the services of investment advisers.\81\
    This interpretation may also produce some overall economic effects 
to the extent that it causes any broker-dealers that to date have 
avoided performing limited discretion and other activities to recognize 
that they may perform such activities consistent with the solely 
incidental prong of the broker-dealer exclusion. Such broker-dealers 
may respond to this interpretation by increasing the amount of limited 
discretionary services or monitoring services that they agree to 
provide to their customers. Investors that have established 
relationships with such broker-dealers may benefit from more efficient 
access to these services and may demand these services from broker-
dealers rather than becoming clients of investment advisers. While 
additional provision of these services by broker-dealers also raises 
the risk of regulatory arbitrage because similar activities would be 
regulated under different regimes, we believe this risk will be 
mitigated by the adoption of rules that enhance the standard of conduct 
that applies to broker-dealer recommendations.

List of Subjects in 17 CFR Part 276

    Securities.

Amendments to the Code of Federal Regulations

    For the reasons set out above, the Commission is amending title 17, 
chapter II of the Code of Federal Regulations as set forth below:

PART 276--INTERPRETATIVE RELEASES RELATING TO THE INVESTMENT 
ADVISERS ACT OF 1940 AND GENERAL RULES AND REGULATIONS THEREUNDER

0
1. Part 276 is amended by adding Release No. IA-5249 and the release 
date of June 5, 2019, to the end of the list of interpretive releases 
to read as follows:

----------------------------------------------------------------------------------------------------------------
                Subject                   Release No.              Date                   FR vol. and page
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
Commission Interpretation Regarding            IA-5249  June 5, 2019.............  [Insert FR Volume Number] FR
 the Solely Incidental Prong of the                                                 [Insert FR Page Number]
 Broker-Dealer Exclusion from the
 Definition of Investment Adviser.
----------------------------------------------------------------------------------------------------------------

     
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    \81\ To the extent this interpretation results in altered 
compliance costs for standalone broker-dealers, non-affected 
standalone broker-dealers (i.e., those standalone broker-dealers 
that already are in compliance with the solely incidental prong as 
we have interpreted it), dual registrants, investment advisers, and 
other financial intermediaries that are not required to register as 
investment advisers (such as banks, trust companies, insurance 
companies, commodity trading advisers, and municipal advisors) may 
to a varying degree gain business at these affected broker-dealers' 
expense.

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    By the Commission.

    Dated: June 5, 2019.
Vanessa A. Countryman,
Acting Secretary.
[FR Doc. 2019-12209 Filed 7-11-19; 8:45 am]
BILLING CODE 8011-01-P


