Document ID: SEC-2007-1333-0001
Agency: sec
Document Type: Proposed Rule
Title: Interpretive Rule Under the Advisers Act Affecting Broker-Dealers
Posted Date: 2007-09-28T04:00Z

[Federal Register: September 28, 2007 (Volume 72, Number 188)]
[Proposed Rules]               
[Page 55126-55132]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28se07-38]                         

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 275

[Release No. IA-2652; File No. S7-22-07]
RIN 3235-AJ97

 
Interpretive Rule Under the Advisers Act Affecting Broker-Dealers

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission is publishing for 
comment an interpretive rule that would address the application of the 
Investment Advisers Act of 1940 to certain activities of broker-
dealers. The proposal would reinstate three interpretive provisions of 
a rule that was vacated by a recent court opinion. The first provision 
would clarify that a broker-dealer that exercises investment discretion 
with respect to an account or charges a separate fee, or separately 
contracts, for advisory services provides investment advice that is not 
``solely incidental to'' its business as a broker-dealer. The second 
provision would clarify that a broker-dealer does not receive special 
compensation within the meaning of section 202(a)(11)(C) of the 
Advisers Act solely because it charges a commission for discount 
brokerage services that is less than it charges for full-service 
brokerage. The third provision would clarify that a registered broker-
dealer is an investment adviser solely with respect to those accounts 
for which it provides services or receives compensation that subjects 
it to the Advisers Act.

DATES: Comments should be received on or before November 2, 2007.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number S7-22-07 on the subject line; or

[[Page 55127]]

     Use the Federal eRulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-22-07. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments 

are also available for public inspection and copying in the 
Commission's Public Reference Room, 100 F Street, NE., Washington, DC 
20549, on official business days from 10 a.m. to 3 p.m. All comments 
received will be posted without change; we do not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: David W. Blass, Assistant Director, or 
Vincent M. Meehan, Senior Counsel, at (202) 551-6787 or 
IArules@sec.gov, Office of Investment Adviser Regulation, Division of 

Investment Management, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-5041.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'' or ``SEC'') is proposing to amend rule 202(a)(11)-1 [17 
CFR 275.202(a)(11)-1] under the Investment Advisers Act of 1940.

I. Introduction

    The Investment Advisers Act of 1940 (``Advisers Act'' or ``Act'') 
\1\ regulates the activities of certain ``investment advisers,'' who 
are defined in section 202(a)(11) of the Act as persons who receive 
compensation for providing advice about securities as part of a regular 
business. Section 202(a)(11)(C) excepts from the definition of 
``investment adviser'' a broker or dealer ``whose performance of 
[advisory] services is solely incidental to the conduct of his business 
as a broker or dealer and who receives no special compensation 
therefor.''
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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, where the Advisers Act 
is codified.
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    In 2005, we adopted the original rule 202(a)(11)-1 under the 
Advisers Act, the principal purpose of which was to deem broker-dealers 
offering ``fee-based brokerage accounts'' as not subject to the 
Advisers Act.\2\ The rule also included several interpretations of 
section 202(a)(11)(C). On March 30, 2007, the Court of Appeals for the 
District of Columbia Circuit (the ``Court''), in Financial Planning 
Association v. SEC (the ``FPA decision''), vacated the original rule 
202(a)(11)-1 on the grounds that the Commission did not have the 
authority to except broker-dealers offering fee-based brokerage 
accounts from the definition of ``investment adviser.'' \3\ Though the 
Court did not question the validity of our interpretive positions, it 
vacated the entire rule, leaving our interpretations potentially in 
doubt.
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    \2\ See Certain Broker-Dealers Deemed Not to be Investment 
Advisers, Investment Advisers Act Release No. 2376 (Apr. 12, 2005) 
[70 FR 20424 (Apr. 19, 2005)] (``2005 Adopting Release''). Fee-based 
brokerage accounts are similar to traditional full-service brokerage 
accounts, which provide a package of services, including execution, 
incidental investment advice, and custody. The primary difference 
between the two types of accounts is that a customer in a fee-based 
brokerage account pays a fee based upon the amount of assets on 
account (an asset-based fee) and a customer in a traditional full-
service brokerage account pays a commission (or a mark-up or mark-
down) for each transaction.
    \3\ 482 F.3d 481 (D.C. Cir. 2007).
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    We have received requests from broker-dealers that we clarify the 
status of our interpretive positions.\4\ Because of the significance of 
the interpretations, and in order to provide the public with an 
opportunity for meaningful comment on them in light of the FPA 
decision, we are re-proposing the interpretive positions.\5\ Proposed 
rule 202(a)(11)-1 would clarify that (i) a broker-dealer provides 
investment advice that is not ``solely incidental to'' the conduct of 
its business as a broker-dealer if it exercises investment discretion 
(other than on a temporary or limited basis) with respect to an account 
or charges a separate fee, or separately contracts, for advisory 
services, (ii) a broker-dealer does not receive ``special 
compensation'' solely because it charges different rates for its full-
service brokerage services and discount brokerage services, and (iii) a 
registered broker-dealer is an investment adviser solely with respect 
to accounts for which it provides services that subject it to the 
Advisers Act. We discuss these proposed interpretive positions below.
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    \4\ See, e.g., Letter from Ira D. Hammerman, Senior Managing 
Director and General Counsel, Securities Industry and Financial 
Markets Association, to Robert E. Plaze, Associate Director, 
Division of Investment Management and Catherine McGuire, Chief 
Counsel, Division of Market Regulation (June 27, 2007). This letter 
and the comment letters cited in this Release are available for 
viewing and downloading at http://www.sec.gov/rules/proposed/s72599.shtml
.

    \5\ As a separate part of our response to the FPA decision, we 
have adopted a temporary rule on an interim final basis that 
establishes an alternative means for investment advisers who are 
registered with us as broker-dealers to meet the requirements of 
section 206(3) of the Advisers Act when they act, directly or 
indirectly, in a principal capacity with respect to transactions 
with certain of their advisory clients. See Temporary Rule Regarding 
Principal Trades with Certain Advisory Clients, Investment Advisers 
Act Release No. 2653 (Sept. 24, 2007).
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II. Discussion

A. ``Solely Incidental''

    Section 202(a)(11)(C) of the Advisers Act, as discussed above, 
provides an exception from the Act for a broker-dealer ``whose 
performance of [advisory services] is solely incidental to his business 
as a broker-dealer and who receives no special compensation therefor.'' 
This exception amounts to a recognition that broker-dealers commonly 
give a certain amount of advice to their customers in the course of 
their regular business as broker-dealers and that ``it would be 
inappropriate to bring them within the scope of the [Advisers Act] 
merely because of this aspect of their business.'' \6\
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    \6\ 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) [11 FR 10996 (Sept. 27, 1946)] 
(``Advisers Act Release No. 2'').
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    In the 2005 Proposing Release, we explained our understanding that 
investment advice is ``solely incidental to'' the conduct of a broker-
dealer's business within the meaning of section 202(a)(11)(C) when the 
advisory services rendered to an account are in connection with and 
reasonably related to the brokerage services provided to that 
account.\7\ We further explained that our understanding is consistent 
with the legislative history of the Advisers Act, which indicates 
Congress' intent to exclude broker-dealers providing advice as part of 
traditional brokerage services. We also explained that it is consistent 
with the Commission's contemporaneous construction of the Advisers Act 
as excepting broker-dealers whose investment advice is given ``solely 
as an incident of their regular business.'' \8\
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    \7\ Certain Broker-Dealers Deemed Not to be Investment Advisers, 
Investment Advisers Act Release No. 2340 (Jan. 6, 2005) [70 FR 2716 
(Jan. 14, 2005)] (``2005 Proposing Release'').
    \8\ Id.
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    Many commenters responding to the 2005 Proposing Release urged us 
to clarify that certain practices are not

[[Page 55128]]

solely incidental to brokerage services. Proposed rule 202(a)(11)-1(a) 
would re-codify two of the interpretations we announced in 2005 
regarding activity that is not ``solely incidental'' to brokerage 
services for purposes of section 202(a)(11)(C). The situations 
addressed by these interpretations are not the only ones in which a 
broker-dealer provides advice that is not solely incidental to its 
business as a broker-dealer.\9\ Commenters are invited to suggest other 
situations that should be addressed by the rule.
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    \9\ We have removed the text ``(among other things, and without 
limitation)'' from the introductory paragraph to proposed rule 
202(a)(11)-1(a), though we included that text in 2005. We believe it 
is clear that the rule as we propose it today does not address all 
the situations in which a broker-dealer can provide advice that is 
not ``solely incidental'' to its business as a broker-dealer for 
purposes of section 202(a)(11)(C).
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    1. Separate Contract or Fee for Advisory Services. Proposed rule 
202(a)(11)-1(a)(1) would provide that a broker-dealer that separately 
contracts with a customer for, or separately charges a fee for, 
investment advisory services cannot be considered to be providing 
advice that is solely incidental to its brokerage. We view a separate 
contract specifically providing for the provision of investment 
advisory services to reflect a recognition that the advisory services 
are provided independent of brokerage services and, therefore, cannot 
be considered solely incidental to the brokerage services.\10\ 
Similarly, we have long held the view that when a broker-dealer charges 
its customers a separate fee for investment advice, it clearly is 
providing advisory services and is subject to the Advisers Act.\11\ In 
light of the FPA decision, brokerage firms and other interested parties 
may be unsure about whether we continue to hold these views. In order 
to provide certainty to those parties, the proposed rule would codify 
our interpretations.
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    \10\ 2005 Adopting Release, supra note 2 at n.145, and 
accompanying text.
    \11\ Final Extension of Temporary Rules, Investment Advisers Act 
Release No. 626 (Apr. 27, 1978) [43 FR 19224 (May 4, 1978)] 
(``Advisers Act Release No. 626''). See also Advisers Act Release 
No. 2, supra note 6 (``a broker or dealer who is specially 
compensated for the rendition of advice should be considered an 
investment adviser and not be excluded from the purview of the 
[Advisers] Act merely because he is also engaged in effecting market 
transactions in securities'').
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    We request comment on our interpretation. In the 2005 Adopting 
Release, we explained our understanding that many broker-dealers 
already use the payment of a separate fee as a bright line test to 
distinguish their brokerage activities from their advisory activities 
and we have received no information since 2005 that would change our 
understanding. Are we correct? Do broker-dealers also already consider 
advisory services that are the subject of a separate contract not to be 
solely incidental to the brokerage services they provide? Commenters 
are invited to explain to us any situation in which a broker-dealer 
could charge a separate fee for, or separately contract for, advisory 
services in a manner that, consistent with the intent of the Advisers 
Act, is ``solely incidental'' to the brokerage services provided. For 
example, could a broker-dealer separately contract for advisory 
services, but receive no ``special compensation'' therefore, for 
purposes of section 202(a)(11)(C) of the Act?
    2. Discretionary Investment Advice. We have long acknowledged that 
a broker-dealer's exercise of investment discretion over customer 
accounts raises serious questions about whether those accounts must be 
treated as subject to the Advisers Act--even where no special 
compensation is received.\12\ In 2005, we adopted, and today we are re-
proposing, a rule that would clarify that any account over which a 
broker-dealer exercises investment discretion is subject to the 
Advisers Act. Specifically, rule 202(a)(11)-1(a) would clarify that 
discretionary investment advice is not ``solely incidental to'' the 
business of a broker-dealer within the meaning of section 202(a)(11)(C) 
and, accordingly, brokers and dealers are not excepted from the Act for 
any accounts over which they exercise investment discretion as that 
term is defined in section 3(a)(35) of the Exchange Act (except that 
investment discretion granted by a customer on a temporary or limited 
basis is excluded).\13\
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    \12\ Advisers Act Release No. 626, supra note 11 (brokerage 
relationships ``which include discretionary authority to act on a 
client's behalf have many of the characteristics of the 
relationships to which the protections of the Advisers Act are 
important.'').
    \13\ We would view a broker-dealer's discretion to be temporary 
or limited within the meaning of rule 202(a)(11)-1(d) when the 
broker-dealer is given 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 not to exceed a few months; (iii) as to cash 
management, such as to exchange a position in a money market fund 
for another money market fund or cash equivalent; (iv) to purchase 
or sell securities to satisfy margin requirements; (v) to sell 
specific bonds and purchase similar bonds in order to permit a 
customer to take 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.
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    We believe that a broker-dealer's authority to effect a trade 
without first consulting a customer is qualitatively distinct from 
simply providing advice as part of a package of brokerage services. 
When a broker-dealer exercises investment discretion, it is not only 
the source of investment advice, it also has the authority to make the 
investment decision relating to the purchase or sale of securities on 
behalf of its client. This, in our view, warrants the protection of the 
Advisers Act because of the ``special trust and confidence inherent'' 
in such a relationship.\14\ Most commenters who addressed this aspect 
of our 2005 proposal, including those representing investors, advisers, 
and broker-dealers, generally agreed with us.
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    \14\ 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) [40 FR 38156 (Aug. 27, 
1975)].
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    Under the proposed rule, the exception provided by section 
202(a)(11)(C) of the Act is unavailable for any account over which a 
broker-dealer exercises investment discretion, regardless of the form 
of compensation and without regard to how the broker-dealer handles 
other accounts. We believe our interpretation is appropriate for 
several reasons.\15\ First, we believe it would apply the Advisers Act 
to the sort of relationship with a broker-dealer that the Act was 
intended to reach. Second, we believe the proposed rule is consistent 
with the interpretation that a broker-dealer is an investment adviser 
only with respect to those accounts for which the broker-dealer 
provides services or receives compensation that subject the broker-
dealer to the Advisers Act. Finally, we believe the proposed rule would 
provide a workable, bright-line test for the availability of the 
section 202(a)(11)(C) exception.
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    \15\ 2005 Adopting Release, supra note 2, at n.165 and 
accompanying text. In that release, we described our position as a 
change to the staff's prior approach under which a discretionary 
account is subject to the Act only if the broker-dealer has enough 
other discretionary accounts to trigger the Act. For the reasons 
discussed in this Release and in the 2005 Adopting Release, we 
believe that the interpretation we are proposing today and adopted 
in 2005 better effectuates the purposes of the Act.
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    We request comment on our proposed interpretive provision. Do 
commenters agree with us that it addresses the sort of relationship 
that the Advisers Act should reach? One commenter to our 2005 proposal 
asserted it does not.\16\ This commenter argued that Congress, when it 
adopted the Advisers Act, must have been aware that broker-dealers 
exercised discretionary authority and, by not expressly stating that 
brokers offering such accounts were subject to the Act, Congress 
indicated its intent to

[[Page 55129]]

except such broker-dealers from the Act. We disagree. As we explained 
in 2005, the Advisers Act does not address directly whether a broker-
dealer exercising investment discretion over a commission-based account 
must comply with the Act. The Act applies unless the advisory services 
are ``solely incidental to'' the broker-dealer's business and no 
``special compensation'' is received. We remain unable to conclude that 
in 1940 Congress would have understood investment discretion to be part 
of the traditional package of services broker-dealers offered for 
commissions. We are aware of nothing in the legislative history of 
section 202(a)(11)(C) (or of the Act as a whole) or in the brokerage 
practices in 1940 that would preclude our interpretation of that 
section as being unavailable for all accounts over which broker-dealers 
exercise investment discretion. Do commenters agree?
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    \16\ Comment Letter of Morgan, Lewis & Bockius LLP (Feb. 7, 
2005).
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    We also are interested in understanding the impact on investors of 
these distinctions. We also request comment on our reference in the 
proposed rule to the definition of ``investment discretion'' in section 
3(a)(35) of the Exchange Act. Is a different definition more 
appropriate? If so, what definition should we use? Are we correct in 
excluding investment discretion given on a temporary or limited basis? 
Have we correctly identified the circumstances in which a broker-dealer 
exercises temporary or limited discretion?
    3. Financial Planning. The rule we adopted in 2005 also contained a 
provision stating that when a broker-dealer provides advice as part of 
a financial plan or in connection with providing financial planning 
services, a broker-dealer provides advice that is not solely incidental 
if it (i) holds itself out to the public as a financial planner or as 
providing financial planning services, (ii) delivers to its customer a 
financial plan, or (iii) represents to the customer that the advice is 
provided as part of a financial plan or financial planning 
services.\17\
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    \17\ 2005 Adopting Release, supra note 2, at Section III(E).
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    We have decided not to propose this provision as part of this rule, 
which many financial services firms found difficult to apply.\18\ 
Instead, we plan to consider issues relating to financial planning in 
light of the results of a study we commissioned by the RAND Corporation 
(``RAND Study'') comparing the levels of protection afforded customers 
of broker-dealers and investment advisers under the federal securities 
laws. The RAND Study is expected to be delivered to us no later than 
December 2007, several months ahead of schedule.\19\
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    \18\ Our staff attempted to address some of the interpretive 
issues that were raised by this provision in a staff interpretive 
letter. Securities Industry Association, SEC Staff Letter (Dec. 16, 
2005), available at http://www.sec.gov/divisions/investment/guidance.shtml.
 That letter is terminated.

    \19\ See Commission Seeks Time for Investors and Brokers to 
Respond to Court Decision on Fee-Based Accounts, SEC Press Release 
No. 2007-95 (May 14, 2007). The results of the RAND Study are 
expected to provide an important empirical foundation for the 
Commission to consider what action to take to improve the way 
investment advisers and broker-dealers provide financial services to 
customers. One option that will be available to the Commission will 
be making the RAND Study results available to the public and seeking 
comments on them.
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B. Full-Service and Discount Brokerage Programs

    As part of our 2005 rulemaking, we adopted an interpretive 
provision which clarified that a broker-dealer will not be considered 
to have received ``special compensation'' for purposes of section 
202(a)(11)(C) of the Advisers Act (and therefore will not be subject to 
the Act) solely because the broker-dealer charges a commission, mark-
up, mark-down or similar fee for brokerage services that is greater or 
less than one it charges another customer.\20\ We are re-proposing that 
interpretive position today as proposed rule 202(a)(11)-1(b).\21\
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    \20\ Discount brokerage programs, including electronic trading 
programs, give customers who do not want or need all the services 
that traditionally are provided in a full-service brokerage account 
the ability to trade securities at a reduced commission rate. 
Electronic trading programs provide customers the ability to trade 
on-line, typically without the assistance of a broker-dealer's 
registered representative. Customers trading electronically may 
devise their own investment or trading strategies, or may seek 
advice separately from investment advisers.
    \21\ We have, however, modified the text of the rule to clarify 
that it is an interpretation of the phrase ``special compensation.'' 
In addition, in the 2005 rulemaking, we stated that the interpretive 
position was necessary to supersede past staff interpretations that 
would lead to a full-service broker-dealer being subject to the 
Advisers Act ``with respect to accounts for which it provides advice 
incidental to its brokerage business merely because it offers 
electronic trading or other forms of discount brokerage.'' 2005 
Proposing Release at n.88 and accompanying text. Having revisited 
those past staff interpretations, we conclude that they do not 
necessarily lead to the conclusion that a broker-dealer's full-
service accounts are advisory accounts subject to the Advisers Act 
merely because the broker-dealer also offers some form of discount 
brokerage.
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    This interpretive position reflects the longstanding view that, 
with respect to brokerage commissions or other transaction-based 
compensation, broker-dealers receive ``special compensation'' where 
there is a clearly definable charge for investment advice.\22\ But, if 
a firm negotiates different fees with its customers for similar 
transactions, the Commission would not conclude that the customer being 
charged the higher fee is paying ``special compensation'' for 
investment advice based solely on differences in charges, because 
whether the pricing difference is based on the presence or absence of 
investment advice is ``too hypothetical.'' \23\ Similarly, if, for 
example, a broker-dealer had a general fee schedule for full service 
brokerage that included access to brokerage personnel, and had a 
separate fee schedule for automated transactions using an Internet Web 
site, we would not, absent other factors, view the difference as 
``special compensation.'' As one commenter to our 2005 proposal noted, 
electronic brokerage programs offer ``lower expenses and less overhead, 
[and it is] entirely appropriate, and necessarily competitive, for 
firms to have reduced their fees for such services, and this reduction 
is obviously in clients' best interests.'' \24\
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    \22\ See Advisers Act Release No. 626 supra note 11. As the 
Commission's general counsel opined in a 1940 letter responding to 
questions about ``special compensation,'' where the only difference 
in the services provided to two brokerage customers is that one 
receives advice and the other does not, and the firm always charges 
a higher amount to the customer that receives the advice, the 
customer paying the higher transaction amount is paying ``special 
compensation.'' Advisers Act Release No. 2, supra note 6.
    \23\ This view is consistent with the staff position announced 
in Advisers Act Release No. 626, supra note 11.
    \24\ See Comment Letter of Merrill, Lynch, Pierce, Fenner & 
Smith (Feb. 7, 2005), at p. 7.
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    The Commission would not look outside the fee structure of a given 
firm to determine whether special compensation exists. That is, just 
because a ``discount'' firm offered lower rates than a ``full-service'' 
firm, we would not consider the ``full-service'' firm's charges 
``special compensation.'' \25\ We request comment on this 
interpretation. Do commenters support it? Should we consider any 
modifications and, if so, which ones?
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    \25\ Id.
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C. Dual Registrants

    Finally, we adopted in 2005, and are re-proposing today, a rule 
providing that a broker-dealer that is registered under both the 
Exchange Act and the Advisers Act is an investment adviser solely with 
respect to those accounts for which it provides advice or receives 
compensation that subject the broker-dealer to the Advisers Act.\26\ We 
received few comments regarding this provision of the original rule, 
and we

[[Page 55130]]

are proposing it as adopted. The provision would codify a long-standing 
interpretation of the Act that permits a broker-dealer also registered 
under the Act to distinguish its brokerage customers from its advisory 
clients.\27\
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    \26\ Proposed rule 202(a)(11)-1(c).
    \27\ 2005 Adopting Release, supra note 2. See also Advisers Act 
Release No. 626, supra note 11.
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III. General Request for Comment

    The Commission is proposing the interpretive provisions described 
above and we welcome your comments. We solicit comment, both specific 
and general, on each component of the proposals. We request and 
encourage any interested person to submit comments regarding:
     The proposals that are the subject of this release;
     Additional or different revisions; and
     Other matters that may have an effect on the proposals 
contained in this release.
    Comment is also solicited from the point of view of broker-dealers 
and investment advisers, their customers and clients, other regulatory 
bodies (such as state securities regulators), and other interested 
persons. Any person wishing to submit written comments on any aspect of 
the proposal is requested to do so.

IV. Cost-Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by 
its rules, and is considering the costs and benefits of proposed rule 
202(a)(11)-1. Proposed rule 202(a)(11)-1 would clarify that if a 
broker-dealer exercises investment discretion over customer accounts or 
contracts with a customer for, or charges a separate fee for, advisory 
services it is not providing advice that is ``solely incidental'' to 
its business as a broker-dealer. The proposed rule also would clarify 
that a broker-dealer does not receive ``special compensation'' solely 
because it charges a commission rate to one customer that is greater or 
less than one it charges another customer. Finally, proposed rule 
202(a)(11)-1 would clarify that broker-dealers that also are registered 
as investment advisers are subject to the Advisers Act solely with 
respect to accounts for which they provide services or receive 
compensation that subject them to the Act.
    As discussed above, in 2005 we adopted the original rule 
202(a)(11)-1 under the Advisers Act. The original rule included, among 
other things, the interpretive rules we are proposing today. On March 
30, 2007, the Court vacated original rule 202(a)(11)-1, though the 
Court did not question the validity of our interpretive positions. The 
rules we are proposing today are substantially identical to those 
interpretive positions. As requested by the Commission, the Court has 
stayed the issuance of its mandate until October 1, 2007, and thus the 
interpretive positions contained in original rule 202(a)(11)-1 remain 
in effect. Accordingly, we would expect that advisers' conduct would 
have conformed to the interpretive positions contained in original rule 
202(a)(11)-1 and therefore the proposed rules, if adopted, would have 
no effect on advisers' conduct.
    The principal benefit of the proposed rule would be to clarify the 
validity of these interpretations in light of the FPA decision.\28\ We 
believe that broker-dealers that currently rely on the interpretation 
that a broker-dealer would not be deemed to be an investment adviser 
solely because the broker-dealer charges a commission, mark-up, mark-
down, or similar fee for brokerage services that is greater or less 
than one it charges another customer would benefit because it will be 
clear that they can continue to offer the same services under the same 
regulatory regime. Similarly, we believe that broker-dealers relying on 
the interpretation that permits dually-registered broker-dealers to 
distinguish their brokerage accounts from their advisory accounts would 
benefit because it will be clear that they can continue to make these 
distinctions among their accounts.
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    \28\ The Commission previously solicited comment on the benefits 
of these interpretations. 2005 Proposing Release, supra note 7. See 
also 2005 Adopting Release, supra note 2, for a discussion of the 
benefits of each of these proposed interpretations.
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    We do not believe that the proposed rule would require broker-
dealers or investment advisers to incur new or additional costs.\29\ As 
noted, proposed rule 202(a)(11)-1 would re-codify substantially 
identical interpretations of section 202(a)(11)(C) that were contained 
in the rule vacated by the FPA decision. Prior to that decision, 
broker-dealers operated with the understanding that contracting with a 
customer for, or charging a separate fee for, advisory services or 
exercising investment discretion (other than on a temporary or limited 
basis) would not be considered ``solely incidental'' to the brokerage 
services they provide for purposes of section 202(a)(11)(C) of the 
Advisers Act. Similarly, broker-dealers operated full-service and 
discount brokerage programs relying on the interpretation that they 
were not subject to the Act solely because they offered different rate 
structures for those services. Furthermore, dually-registered broker-
dealers already distinguish their brokerage customers from their 
advisory clients in reliance on our previous interpretation contained 
in the vacated rule. We, therefore, believe the proposed rule would not 
change existing obligations or relationships. Accordingly, we do not 
believe that broker-dealers or investment advisers would need to take 
steps or alter their business practices in such a way that would 
require them to incur new or additional costs as a result of the 
adoption of the proposed rule.
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    \29\ The Commission previously solicited comment on the costs of 
these interpretations. 2005 Proposing Release, supra note 7. See 
also 2005 Adopting Release, supra note 2, for a discussion of the 
costs associated with each of these proposed interpretations.
---------------------------------------------------------------------------

    We request comment on the assumptions on which we base our 
preliminary conclusion that broker-dealers and investment advisers 
would not incur new or additional costs if we determined to adopt the 
rule as proposed. We encourage commenters to discuss any costs and 
benefits that we did not consider in our discussion above. We request 
commenters to provide analysis and empirical data to support their 
statements regarding any costs or benefits associated with proposed 
rule 202(a)(11)-1.

V. Paperwork Reduction Act

    Proposed rule 202(a)(11)-1 would not impose any new ``collections 
of information'' within the meaning of the Paperwork Reduction Act of 
1995.\30\ The proposed rule would not create any new filing, reporting, 
recordkeeping, or disclosure reporting requirements for broker-dealers 
or investment advisers. The proposed rule would re-codify three 
interpretive provisions. First, the rule would clarify that a broker-
dealer that exercises investment discretion with respect to an account 
or contracts with a customer for, or charges a separate fee for, 
advisory services provides investment advice that is not ``solely 
incidental to'' its business as a broker-dealer. Second, the rule would 
clarify that a broker-dealer does not receive ``special compensation'' 
solely because it charges a commission rate to one customer that is 
greater or less than one it charges another customer. Third, the rule 
would clarify that a registered broker-dealer is an investment adviser 
solely with respect to those accounts for which it provides services or 
receives compensation that subject it to the Advisers Act. We believe 
the proposed

[[Page 55131]]

rule contains no new ``collections of information'' under the Paperwork 
Reduction Act that requires the approval of the Office of Management 
and Budget under 44 U.S.C. 3501. An agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
unless it displays a currently valid OMB control number.
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    \30\ 44 U.S.C. 3501 to 3520.
---------------------------------------------------------------------------

    In our 2005 releases, we estimated that the interpretive provisions 
we adopted then in the original rule 202(a)(11)-1, and which we are re-
proposing today as revised rule 202(a)(11)-1, would have the effect of 
requiring certain broker-dealers that contract with customers for, or 
charge a separate fee for, advisory services or provide discretionary 
brokerage to register under the Advisers Act.\31\ We estimated that the 
rule, which we are proposing today as rule 202(a)(11)-1(a), therefore 
increased the number of respondents under several existing collections 
of information, and, correspondingly, increased the annual aggregate 
burden under those existing collections of information.\32\ 
Accordingly, we submitted to the Office of Management and Budget 
(``OMB''), in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11, and 
the OMB approved, amending these collections of information for which 
we estimated the annual aggregate burden likely increased as a result 
of the 2005 adoption of rule 202(a)(11)-1. The titles of the affected 
collections of information are: ``Form ADV,'' ``Form ADV-W and Rule 
203-2,'' ``Rule 203-3 and Form ADV-H,'' ``Form ADV-NR,'' ``Rule 204-
2,'' ``Rule 204-3,'' ``Rule 204A-1,'' ``Rule 206(4)-3,'' ``Rule 206(4)-
4,'' ``Rule 206(4)-6,'' and ``Rule 206(4)-7,'' all under the Advisers 
Act. The approved collections of information numbers appear under OMB 
control numbers 3235-0049, 3235-0313, 3235-0538, 3235-0240, 3235-0278, 
3235-0047, 3235-0596, 3235-0242, 3235-0345, 3235-0571, and 3235-0585, 
respectively.
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    \31\ See 2005 Proposing Release, supra note 7, at Section VII; 
2005 Adopting Release, supra note 2, at Section VIII.
    \32\ In 2005, as today, we estimated that the provisions now 
contained in proposed rule 202(a)(11)-1(b) and 202(a)(11)-1(c) did 
not contain any collections of information within the meaning of the 
Paperwork Reduction Act.
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    We have determined not to modify these burden estimates because we 
continue to believe they were appropriate and, with respect to the 
proposals in this release, that there is no additional paperwork 
burden.
    We request comment on whether our assumption that there is no 
additional paperwork burden is correct.

VI. Initial Regulatory Flexibility Analysis

    Section 3(a) of the Regulatory Flexibility Act requires the 
Commission to undertake an Initial Regulatory Flexibility Analysis of 
the proposed rule on small entities unless the Commission certifies 
that the proposed rule, if adopted, would not have a significant 
economic impact on a substantial number of small entities.\33\ Pursuant 
to section 605(b) of the Regulatory Flexibility Act, the Commission 
hereby certifies that proposed rule 202(a)(11)-1 would not, if adopted, 
have a significant impact on a substantial number of small 
entities.\34\
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    \33\ 5 U.S.C. 603(a).
    \34\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    Proposed rule 202(a)(11)-1 would re-codify three interpretive 
provisions. First, the rule would clarify that a broker-dealer that 
exercises investment discretion with respect to an account or contracts 
with customers for, or charges a separate fee for, advisory services 
provides investment advice that is not ``solely incidental to'' its 
business as a broker-dealer. Second, the rule would clarify that a 
broker-dealer does not receive ``special compensation'' solely because 
it charges a commission rate to one customer that is greater or less 
than one it charges another customer. Third, the rule would clarify 
that a registered broker-dealer is an investment adviser solely with 
respect to those accounts for which it provides services or receives 
compensation that subject it to the Advisers Act. Proposed rule 
202(a)(11)-1 would re-codify substantially identical interpretations of 
section 202(a)(11)(C) of the Advisers Act that we adopted in 2005. 
Therefore, we do not believe that the proposed rule would have an 
economic impact on broker-dealers or investment advisers, regardless of 
whether these broker-dealers or investment advisers are small entities, 
because these entities would likely have conformed to the interpretive 
positions previously adopted. Accordingly, the Commission certifies 
that proposed rule 202(a)(11)-1 would not have a significant economic 
impact on a substantial number of small entities.
    The Commission encourages written comments regarding this 
certification. We request that commenters describe the nature of any 
impact on small businesses and provide empirical data to support the 
extent of the impact.

VII. Statutory Authority

    The Commission is proposing to amend Rule 202(a)(11)-1 pursuant to 
section 211(a) of the Advisers Act.

Text of Rule

List of Subjects in 17 CFR Part 275

    Investment advisers, Reporting and recordkeeping requirements.

    For the reasons set out in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

    1. The general authority citation for part 275 is revised to read 
as follows:

    Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(17), 80b-3, 80b-
4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless otherwise noted.
* * * * *
    2. Section 275.202(a)(11)-1 is revised to read as follows:

Sec.  275.202(a)(11)-1  Certain broker-dealers.

    (a) Solely incidental. A broker or dealer provides advice that is 
not solely incidental to the conduct of its business as a broker or 
dealer within the meaning of section 202(a)(11)(C) of the Advisers Act 
(15 U.S.C. 80b-2(a)(11)(C)) if the broker or dealer:
    (1) Charges a separate fee, or separately contracts, for advisory 
services; or
    (2) Exercises investment discretion (as that term is defined in 
section 3(a)(35) of the Securities Exchange Act of 1934 (``Exchange 
Act'') (15 U.S.C. 78c(a)(35))), except investment discretion granted by 
a customer on a temporary or limited basis, over such account.
    (b) Special compensation. A broker or dealer registered pursuant to 
section 15 of the Exchange Act (15 U.S.C. 78o) does not receive special 
compensation within the meaning of section 202(a)(11)(C) of the 
Advisers Act solely because the broker or dealer charges a commission, 
mark-up, mark-down, or similar fee for brokerage services that is 
greater than or less than one it charges another customer.
    (c) Special rule. A broker or dealer registered with the Commission 
under Section 15 of the Exchange Act is an investment adviser solely 
with respect to those accounts for which it provides services or 
receives compensation that subject the broker-dealer to the Advisers 
Act.

    By the Commission.

[[Page 55132]]

    Dated: September 24, 2007.
Nancy M. Morris,
Secretary.
 [FR Doc. E7-19269 Filed 9-27-07; 8:45 am]

BILLING CODE 8010-01-P