Opinion ID: 184135
Heading Depth: 4
Heading Rank: 2

Heading: Special Compensation

Text: The second prong of the broker-dealer exemption is more straightforward. Broker-dealers who give incidental advice are exempted from the IAA so long as they receive[] no special compensation therefor. 15 U.S.C. § 80b-2(a)(11)(c). On its face, the second prong of the exemptions reveals two requirements: (1) compensation must not be special, and (2) compensation must not be received in exchange for investment advice. The IAA does not define the phrase special compensation. However, surrounding phrases and statutory context often clarify the meaning of an undefined term. See, e.g., United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assoc., Ltd., 484 U.S. 365, 371, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). In this case, the use of the word compensation in subsection (a)(11) and the overall context of the broker-dealer exemptionin particular, its reference to the business of a broker or dealerclarifies that special compensation means compensation received specifically for investment advice in a form other than traditional commissions or analogous transaction-based compensation. The IAA defines Investment Adviser to include any person who, for compensation, engages in the business of advising others with regard to securities. 15 U.S.C. § 80b-2(a)(11) (emphasis added). In United States v. Elliott , the Eleventh Circuit defined compensation to encompass any economic benefit received from a business that involves giving investment advice. 62 F.3d at 1311 n. 8 (internal quotation marks and citation omitted). Thus, if a person receives an economic benefit from a business that includes the giving of investment advice, that person falls within the initial, broad definition of investment adviser. Id. at 1311. The broker-dealer exemption, however, excludes broker-dealers who give incidental advice so long as they receive no special compensation for the investment advice. See 15 U.S.C. § 80b-2(a)(11)(C). As the district court correctly noted, the statute clearly differentiates between `compensation' and `special compensation.' Thomas, 2009 WL 2778663, at  (citing Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 78 L.Ed.2d 17 (1983)). Thus, the phrase special compensation refers to some subset of the economic benefit received from a transaction involving investment advice. But what subset of economic benefit constitutes special compensation? The context of the broker-dealer exemption provides an answer. The exemption as a whole refers to a broker-dealer's conduct of his business as a broker or dealer. 15 U.S.C. § 80b-2(a)(11)(C). Thus, the natural reading of the phrase special compensation is compensationthat is, economic benefit, see Elliott, 62 F.3d at 1311 n. 8other than that received in the normal course of a broker-dealer's business. At the time the IAA was passed, broker-dealers were normally compensated by commissions. See Fin. Planning Ass'n, 482 F.3d at 485. Thus, special compensation refers to economic benefit that is received specifically for investment advice, in a form other than a commission for the sale of the underlying product. Reading the second prong of the exclusion as a whole, we reach the following conclusion: compensation received by a broker-dealer is special only when (1) the compensation is received specifically in exchange for giving advice, as opposed to some other service, and (2) the compensation takes a form other than a commission or analogous transaction-based compensation received for the sale of a product. Our interpretation is consistent with the SEC's position, [4] which is that special compensation requires a a clearly definable charge for investment advice. Final Extension of Temporary Exemption from the IAA for Certain Brokers and Dealers, Investment Advisers Act Release No. 628, 43 Fed.Reg. 19224, 19226 (May 4, 1978). This reflects the [Division of Investment Management's] position that a client who perceives that he is paying a charge specifically for investment advice is entitled to the protections of the Advisers Act. Id.; see also Proposed Rule at 55129 (noting the SEC's 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 (footnote omitted)); id. ([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. (footnote omitted)); Private Ledger, SEC No-Action Letter, 1989 WL 246513 (Nov. 17, 1989) (Special compensation means any compensation other than that received by a broker-dealer in the ordinary course of business. (citations omitted)). Our interpretation also finds support in the IAA's legislative history. During passage of the bills that eventually became the IAA, both the House and Senate acknowledged that the IAA excludes broker-dealers who receive only brokerage commissions for transactions involving incidental investment advice. S.Rep. No. 1775, at 22 (1940); H. Rep. No. 2639, at 28 (1940); 86 Cong. Rec. 9813 (1940); 86 Cong. Rec. 10077 (1940). Finally, our interpretation makes sense in light of the historical context in which the IAA was passed. As mentioned above, the IAA was passed in response to an SEC report that detailed the emergence of a largely unregulated community of professional investment advisers. See H.R. Doc. No. 477. Two characteristics distinguished investment advisers from broker-dealers: the fact that investment advisers gave advice for its own sake; and the fact that investment advisers were compensated specifically for that advice. See Laby, Reforming the Regulation of Broker-Dealers, at 400-01; Opinion of General Counsel Relating to Section 202(a)(11)(C) of the Investment Advisers Act of 1940, Investment Company Release No. 2, 11 Fed.Reg. 10996 (Sept. 27, 1946); Fin. Planning Ass'n, 482 F.3d at 485. Our interpretation of special compensation maintains this distinction: broker-dealers who are compensated for the sale of products by traditional commissions meet the second prong of the exemption; brokers and dealers who receive compensation specifically for rendering advice, in a form other than commissions for the entire transaction, do not. Plaintiffs argue that a broker-dealer receives special compensation whenever the broker-dealer receives an economic benefit from a transaction involving investment advice. See Aplt. Br. 50. However, this interpretation would render the word special superfluous and ignore the statute's clear distinction between `compensation' and `special compensation.' Thomas, 2009 WL 2778663, at  (citing Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 78 L.Ed.2d 17 (1983)). Further, it would collapse the exemption's two prongs into one: under Plaintiffs' interpretation, if a broker-dealer receives compensation from a transaction involving investment advice, application of the exemption would depend only upon whether the advice was solely incidental to the transaction. We are unwilling to adopt such an interpretation. To summarize our holdings: the IAA excludes a broker-dealer who provides advice that is attendant to, or given in connection with, the broker-dealer's conduct as a broker or dealer, so long as he does not receive compensation that is (1) received specifically in exchange for the investment advice, as opposed to for the sale of the product, and (2) distinct from a commission or analogous transaction-based form of compensation for the sale of a product. The 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.