Opinion ID: 184135
Heading Depth: 3
Heading Rank: 1

Heading: Interpretation of the Broker-Dealer Exemption

Text: This case centers around the proper interpretation of the IAA. Generally, the IAA imposes fiduciary duties on investment advisers. See 15 U.S.C. § 80b-6. Investment advisers include, in relevant part, any person who, for compensation, engages in the business of advising others. . . as to the advisability of investing in, purchasing, or selling securities. Id. § 80b-2(a)(11). The term compensation has been defined broadly as the receipt of any economic benefit, whether in the form of an advisory fee or some other fee related to the total services rendered, commissions, or some combination of the foregoing. United States v. Elliott, 62 F.3d 1304, 1311 n. 8 (11th Cir.1995) (citing 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, 52 Fed.Reg. 38400, 38403 (Oct. 8, 1987)). Although the general definition of investment adviser is broad, it contains several specific exemptions. Relevant here is subsection (a)(11)(C), which exempts from the definition of investment adviserand hence from the IAA's substantive provisionsany broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor. 15 U.S.C. § 80b-2(a)(11)(C). Such services refers to the services set forth in the initial definition: advising others . . . as to the value of securities or as to the advisability of investing in, purchasing, or selling securities. Id. § 80b-2(a)(11). Therefor refers to such services. Id. So, subsection (a)(11)(C), the broker-dealer exemption, exempts brokers and dealers who give investment advice so long as (1) the advice is solely incidental to their conduct as brokers or dealers, and (2) they receive no special compensation for that advice. The two requirements are conjunctive; in order to be exempted, broker-dealers must satisfy both. The district court held that Mr. Laxton fell within the IAA's broker-dealer exemption. See Thomas, 2009 WL 2778663, at . Specifically, the district court held that the phrase solely incidental to means solely attendant to or solely in connection with, as opposed to solely a minor part of or solely an insignificant part of. Id. at -7. Thus, the court held that applicability of the exemption depends not on the quantum or importance of the broker-dealer's advice, but rather on whether the broker-dealer gives advice in connection with the sale of a product. Id. With regard to the second prong, the district court held that special compensation requires a clearly definable charge attributable to investment advice. Id. at -8. Thus, according to the district court, compensation in the form of brokerage commissionswhich is received for the sale of a productis not special compensation, even when the transaction leading to the sale involved investment advice. Id. at . The court based its interpretation on the statute's plain language, its legislative history as interpreted by the D.C. Circuit in Fin. Planning Ass'n v. SEC, 482 F.3d 481 (D.C.Cir.2007), and several SEC releases. Id. at -9. On appeal, Plaintiffs challenge the district court's interpretation. Aplt. Br. 16-20. They argue that the phrase solely incidental to refers to the quantum or importance of advice given, not whether the advice is connected to the sale of the product. Id. at 26-27. Thus, according to Plaintiffs, Mr. Laxton did not meet the first prong of the broker-dealer exemption because investment advice formed a central component to all Mr. Laxton's transactions. Id. at 43. Plaintiffs argue that their proposed interpretation better advances the IAA's purpose, which was to dramatically expand the scope of fiduciary obligations to persons who provide financial services to consumers. Id. at 32. Additionally, they argue that special compensation is received any time a broker receives economic benefit from a transaction involving investment advice. Id. at 50. In the alternative, they argue that even under the district court's interpretation, genuine issues of fact remain as to whether Mr. Laxton received special compensation for his advice. Id. at 51-52. After carefully reviewing the parties' contentions, we conclude that the district court properly interpreted the IAA's broker-dealer exemption. That interpretation comports with the IAA's language, legislative history, and the position taken by the SEC.
Our analysis starts with the plain language of the statute. See, e.g., Wright v. Fed. Bureau of Prisons, 451 F.3d 1231, 1234 (10th Cir.2006) (citation omitted). We read the words of the statute in their context and with a view to their place in the overall statutory scheme. Id. (internal quotation marks and citations omitted). If the statutory language is clear, our analysis ends and we must apply its plain meaning. United States v. Husted, 545 F.3d 1240, 1245 (10th Cir.2008). However, [i]f the court finds the statute ambiguous, the court then looks beyond the plain text to resolve the ambiguity, examining legislative intent [and] overall statutory construction. United States v. Hinckley, 550 F.3d 926, 932 (10th Cir.2008) (footnote and citation omitted). A statute is ambiguous if it is capable of being understood by reasonably well-informed persons in two or more different senses. Id. (internal quotation marks and citation omitted). The IAA does not define the phrase solely incidental to. See 15 U.S.C. § 80b-2. Dictionary definitions of the word incidental differ somewhat. [2] However, all definitions establish that the word incidental has two components. To be considered incidental, two actions or objects must be related in a particular waythe incidental action or object must occur only as a result of or in connection with the primary. Additionally, the incidental action or object must be secondary in size or importance to the primary. Plaintiffs emphasize the second component of the definition, arguing that dictionary definitions of `incidental' universally support Plaintiffs' interpretation of the term as `inconsequential,' `non-central,' or `non-mandatory.' Aplt. Br. 25-26. Yet, the relational aspect is equally important and cannot be ignoredto be considered incidental, an action or object must be of lesser size or importance and be undertaken in connection with the primary action or object. The district court's interpretation acknowledges both components of incidental, while the Plaintiffs' proposed interpretation would have us focus on the quantum or importance of the advice without regard to its relationship with the broker-dealer's business. Further, the phrase solely incidental to, when read as a whole, makes more sense under the district court's interpretation. Solely, of course, means exclusively or only. Webster's Unabridged Dictionary 1815 (2d ed. 2001). This compliments the relational aspect of incidental: solely modifies incidental to, and the phrase as a whole renders the exemption applicable only when the broker-dealer gives advice in connection with the sale of a product. Under Plaintiffs' proposed reading, application of the exemption would hinge upon the quantum or importance of the broker-dealer's advice. Besides creating a difficult problem of line-drawinghow much advice is too much, and how could we measure the importance of the advice?under Plaintiffs' interpretation solely would not meaningfully modify incidental to and would be superfluous. We are unwilling to adopt such an interpretation. Accordingly, the plain text of the statute supports the district court's interpretation, which we adopt. Sources beyond the plain text confirm this result. The SEC is charged with implementing the IAA. See 15 U.S.C. § 80b-11(a). Therefore, we would defer to the SEC's interpretation if it were embodied in a rule or regulation that has the force of law. See Newton v. F.A.A., 457 F.3d 1133, 1136-37 (10th Cir.2006) (quoting United States v. Mead Corp., 533 U.S. 218, 226-27, 121 S.Ct. 2164, 150 L.Ed.2d 292 (2001)). However, the SEC has not promulgated such a rule or regulation. [3] Therefore, we consult the SEC's position only for its persuasive value. Via Christi Reg'l Medical Cntr., Inc. v. Leavitt, 509 F.3d 1259, 1272 (10th Cir.2007) (quoting Christensen v. Harris Cnty., 529 U.S. 576, 587, 120 S.Ct. 1655, 146 L.Ed.2d 621 (2000) (citing Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 89 L.Ed. 124 (1944))). Since its first release on the issue in 1946, the SEC's position has been consistent: in the IAA, Congress recognized that brokers and dealers commonly give a certain amount of advice to their customers in the course of their regular business, and it would be inappropriate to bring them within the scope of the [IAA] merely because of this aspect of their business. Opinion of General Counsel Relating to Section 202(a)(11)(C) of the Investment Advisers Act of 1940, Investment Company Act Release No. 2, 11 Fed.Reg. 10996, 10996 (Sept. 27, 1946). More specifically, the SEC has indicated that advice is solely incidental to a broker-dealer's business when the advisory services rendered to an account are in connection with and reasonably related to the brokerage services provided to that account. See Certain Broker-Dealers Deemed Not To Be Investment Advisers, Investment Advisers Act Release No. 2340, 70 Fed.Reg. 2716, 2726 (Jan. 14, 2005) (emphasis added) [hereinafter Vacated Rule], vacated on other grounds, Fin. Planning Ass'n, 482 F.3d 481; Interpretive Rule Under the Advisers Act Affecting Broker-Dealers, Investment Advisers Act Release No. 2652, 72 Fed.Reg. 55126 (Sept. 28, 2007) (proposed rule) [hereinafter Proposed Rule]. Thus, the SEC's position is that application of the broker-dealer exemption hinges upon whether the advice in question relates to or is connected with the broker-dealer's primary businessnot upon the quantum or importance of that advice. This position is based on the SEC's analysis and interpretation of the statutory history, as well as its knowledge of the historical practices of brokers and dealers. See Vacated Rule at 2726-27; Proposed Rule at 55127-28. The SEC has particular expertise in this area, and we find its position persuasive. Our interpretation also finds support in legislative history. The IAA was the last of a series of regulatory laws passed in response to the stock market crash of 1929. See Fin. Planning Ass'n, 482 F.3d at 483; Arthur B. Laby, Reforming the Regulation of Broker-Dealers and Investment Advisers, 65 BUS. LAW. 395, 402 (2010) [hereinafter Laby, Reforming the Regulation of Broker-Dealers ]. One of the earlier statutes, the Public Utility Holding Company Act of 1935, commissioned the SEC to conduct a study on investment trusts and investment advisers. Laby, Reforming the Regulation of Broker-Dealers, at 402. The SEC conducted the study and noted that a large number of people had begun to market themselves as professional investment counsel. See H.R. Doc. No. 477, at 28 (1939). This emerging group purported to give unbiased advice in exchange for compensation. Id. These activities were largely unregulated and, in the SEC's view, posed a substantial risk to investors. Id. Of particular concern were brokerage businesses that divided into two segments: one that acted as traditional brokers and sold securities and another that gaveand was compensated forinvestment advice as a distinct product. Amicus Curiae ACLI Br. 10-11 [hereinafter Amicus Br.]; see H.R. Doc. No. 477. In response, Congress introduced bills that became the IAA. See S. 3580, 76th Cong. (1940); H.R. 10065, 76th Cong. (1940). As the bills advanced in the House and Senate, members of Congress acknowledged that investment brokers and dealerswho were regulated under the Securities Exchange Act of 1934, see Laby, Reforming the Regulation of Broker-Dealers, at 403; Amicus Br. 7gave investment advice yet were not the target of the new regulation. See Fin. Planning Ass'n, 482 F.3d at 485; H.R. Doc. No. 477, at 3; 86 Cong. Rec. 2847 (1940); 86 Cong. Rec. 9813 (1940). Instead, the IAA targeted the emerging group of professional investment advisers: those persons who gave investment advice as a product separate and apart from the sale of securities. Our interpretation of solely incidental to comports with this historybroker-dealers meet the first prong of the exemption so long as they give investment advice only in connection with the primary business of selling securities. On the other hand, 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 first prong of the broker-dealer exemption.
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.
Under the appropriate reading of the IAA, the district court correctly granted summary judgment in favor of Defendants. It is undisputed that Mr. Laxton was acting as a broker during the relevant time frame, and that Mr. Laxton would be covered by the IAA if not for the broker-dealer exemption. Thus, summary judgment was appropriate if there are no genuine disputes of material fact that (1) Mr. Laxton's advice was given in connection with his conduct as a broker or dealer, (2) Mr. Laxton did not receive compensation that was (a) in exchange for his advice, as opposed to for the sale of the product, and (b) distinct from traditional, transaction-based compensation. Taking all the facts and inferences therefrom in favor of the Plaintiffs, there are no genuine disputes of material fact, and Mr. Laxton is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(a). First, the record establishes that Mr. Laxton's advice was given only in connection with selling the VULP to Plaintiffs. In the course of these proceedings, Plaintiffs have arguedand produced evidence tending to provethat Defendants used investment advice as a strategy to sell proprietary products. CJA 138. Mr. Laxton followed these sales policies. Id. ; JA 294-97, 309-10. Mr. Laxton's advice was closely related to the sale of the VULP and selling the VULP was the primary object of the transaction. Accordingly, the record establishes that Mr. Laxton's advice was solely incidental to his conduct as a broker. 15 U.S.C. § 80b-2(a)(11)(C). With regard to the second prong, the record also establishes that Mr. Laxton was compensated for the sale of the VULP, not for the investment advice he rendered. Plaintiffs allege that Mr. Laxton provided investment advice on several occasions. CJA 130, 142. However, he was compensated only onceafter the VULP was sold. Id. at 147; JA 293-94. In fact, Mr. Laxton would have been dischargedand thus not compensatedhad he not reached his production goals, as measured by the sale of proprietary products. CJA 147. Accordingly, Mr. Laxton's compensation was tied to selling products, not to giving investment advice. Plaintiffs submit that Mr. Laxton received other benefits, such as life and health insurance, for reaching his sales goals. Id. at 147. However, there is no evidence that Mr. Laxton would have received more benefits had he rendered more advice without selling more products. This establishes that Mr. Laxton received compensation for selling products, not for giving advice. Finally, the record establishes that the $500 Mr. Laxton received after he sold the VULP was a traditional, transaction-based brokerage commission. The Field Representative's report styles the $500 as a Production Credit for the sale of the VULPclearly a commission. JA 393. That the actual amount of the commission Mr. Laxton received varied from the sales charge identified in the prospectus is of no consequence. The compensationwhatever the amountwas predicated on the sale of the VULP. This is the hallmark of a traditional commission. Thus, not only did Mr. Laxton not receive compensation specifically for rendering advice; the compensation he received constituted a traditional brokerage commission for the sale of a product and thus was not special. Therefore, the record establishes that Mr. Laxton meets the second prong of the broker-dealer exemption. Plaintiffs argue that, because they provided a link between the advice and Mr. Laxton's compensation, a jury should determine as a matter of fact whether Mr. Laxton was compensated for rendering investment advice or for selling the product. Aplt. Br. 52. However, the record establishes the contraryMr. Laxton received compensation only after selling the VULP; Mr. Laxton would have been fired if he did not complete a certain amount of sales; Mr. Laxton gave advice on other occasions, but was not compensated for it. These undisputed facts compel the conclusion that Mr. Laxton was compensated for selling the product, not specifically for rendering advice. There is no evidence from which a reasonable jury could conclude that Mr. Laxton's compensation constituted special compensation for investment advice. The record shows that Mr. Laxton gave advice that was solely incidental to his conduct as a broker or dealer, and that he received no special compensation therefor. 15 U.S.C. § 80b-2(a)(11)(C). Accordingly, there are no genuine disputes of material fact for trial and Defendants were entitled to judgment as a matter of law. We DISMISS that portion of the appeal concerning the denial of leave to amend to add securities fraud claims. The district court's judgment on the IAA claims is AFFIRMED.