TO: BISA Members
FROM: Richard D. Starr — Chairman, Legislative, Regulatory & Compliance Committee
DATE: 03 January 2006
SUBJECT: Compliance — Investment Advisers Act Deadline

Recent guidance from the SEC staff should be of interest to members that offer financial planning services as part of their brokerage business. As you know, the deadline is approaching for compliance implementation of SEC Rule 202(a)(11)-1 under the Investment Advisers Act of 1940 ("The Act"). The effective date of the Rule remains April 15, 2005; the extended compliance date for the Rule is January 31, 2006.

Many Members have long relied on provisions that provided exemption from registration under the Investment Advisers Act of 1940 if the broker-dealer provided securities advice "solely incidental" to its securities brokerage business. Many bank broker-dealers and their affiliated wealth management divisions have been transitioning away from their transaction oriented business and toward assets under management for a fee.

In brief, the Rule requires broker-dealers who provide financial planning services, or who offer discretionary, fee-based brokerage accounts to register pursuant to The Act. State laws require agents of the broker-dealer to be NASD Series 65 licensed. Broker-dealers registering agents for new licensure should consider training them for Series 66. The Series 66 combines the Series 63 and the Series 65, and it does not duplicate the testing for Series 7. However, for those agents already having the 7 and 63, the Series 65 fulfills the requirement.

Financial Planning: The test for exemption based on providing advice "solely incidental" to brokerage services is a difficult one. If the broker-dealer holds itself out generally to the public as either a financial planner or as providing financial planning services; or if it delivers to its customer a financial plan; or if it represents to the customer that the advice is provided as a part of a financial plan or financial planning services, then the broker-dealer cannot qualify for the exemption from registration under The Act. The SEC staff, in a December 16, 2005 interpretive letter, stated that an adviser/broker-dealer and its client could agree that once the financial plan was delivered, the advisory relationship would terminate. The client could then open a brokerage account.

The SEC staff also addressed "holding out" in two contexts. First, a broker-dealer may advertise that it provided a broad range of services including financial planning, and not be required to register as an adviser unless it actually provides financial planning. A registered representative may use its advisory credentials (such as "CFP") on a business card and will not be "holding out" as an adviser, unless it actually provides financial planning services.

Finally, the SEC staff repeated the guidance that a financial plan seeks to address a variety of financial needs, such as savings, retirement, insurance, tax planning, and investments. However, a financial tool that merely assists a customer with a single transaction or an asset allocation, but does not address broad areas such as retirement planning or savings, would not be a financial plan.

Nondiscretionary, Fee based Accounts: A broker-dealer can avoid registration under The Rule if it offers a non-discretionary fee-based account, its advice is "solely incidental" to its brokerage business, and it provides the following prominent disclosure in its advertising and agreements:

"Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time."

This disclosure raises important services issues. The broker-dealer must have complete written policies and procedures that describe the person(s) (not specifically by name) available to discuss the differences between brokerage accounts and advisory accounts. This will require training, record keeping, regular review, and auditing.

The more bank broker-dealers and their representatives try to present themselves as other than merely transactors, the more difficult will be the compliance. BISA Members are strongly urged to consult with legal counsel specializing in these securities matters. The deadline will not likely be extended, and the SEC has determined there is significant public benefit to this Rule and its immediate implementation.

If you need assistance with this matter, please call Dick Starr, Chairman of BISA Legislative, Regulatory & Compliance Committee, at 425-392-1699. He will be pleased to refer you to reference materials and to appropriate legal counsel. The BISA is planning a call-in information session regarding this topic that will be announced soon.