making some comments regarding the client’s savings and investment strategy. If planners fail to discuss securities with their clients, they would probably be breaching their fiduciary duty.
The following have been found to fit the requirements of advice:
1. Analyses or valuations of particular securities, or securities markets in general, even without specific buy, hold, or sell recommendations.28
2. Market timing recommendations concerning the time to move a percentage of assets into a category of investments such as mutual funds or foreign stocks.29
3. Advising clients on the choice or retention of another investment adviser (a solicitor) or serving as a person who evaluates investment advisers.30
4. Providing statistical or historical data about securities that incorporate the writer’s judgments.31
TOM, A CFP LICENSEE with a large brokerage firm, does not hold himself out to be a financial planner, although he does do financial planning incidental to his business as a broker. To build a client base, he has developed a seminar entitled “Financial Planning for the 21st Century.” This seminar is offered to current and prospective clients for the nominal fee of $25. The fee was designed to cover the cost of renting a hotel room, refreshments, and printing a 100-page workbook. During the seminar, Tom reviews all aspects of financial planning, including how to evaluate stocks and bonds and what to look for in investment purchases. He does not give anyone individual advice regarding securities at the seminar, but he may meet with them privately later.
Question: Is Tom giving advice regarding securities for which he is compensated, and must he register as an investment adviser; or does he fit into one of the exclusions?
Answer: Tom would be required to register. Even though the modest fee for attending the class was used only to cover Tom’s expenses and Tom did not make a profit, it is still considered compensation. Furthermore, Tom does not fit into the broker-dealer exclusion because the activities of giving a seminar are not considered to be incidental to his brokerage business.
SECURITIES Once again, the SEC has construed the word “security” in the widest possible sense. The legal definition of a security is quite lengthy and includes any scheme involving the investment of money in a common enterprise with profits to come solely from the efforts of others.32 It includes all sorts of investments that most people never consider to be securities, such as certificates of deposit, notes, and mortgages. There are only two exclusions under the definition: annuities and life insurance.
THE INVESTMENT ADVISERS ACT and numerous rules, regulations, and releases have defined not only who is required to register but also who is not. Note: there is a big difference between exemptions and exclusions. Those persons or entities who are exempt from registering must still follow the laws; for example, anti-fraud provisions. This group consists of those few advisers who limit their clients to insurance companies, have fewer than 15 clients or limit their practice to one state, and do not give advice regarding nationally listed securities. However, those who are excluded from registration are not considered to be investment advisers and therefore need not follow the anti-fraud or other provisions.33
Three excluded categories are pertinent to this section: certain professionals, broker-dealers, and exempted advisers.
PROFESSIONALS Some professionals, including accountants, lawyers, engineers, and teachers, are excluded from the Act. At first glance, these exclusions may look promising, but when you delve more deeply into the statutes you will notice the exclusions only work if these professionals are giving securities advice solely incidental to the practice of their profession. Qualifying for this exclusion may be extremely difficult, because financial planning is rarely solely incidental to these professions. The SEC looks at three different factors when determining if a professional can be excluded:34
• Does the professional hold himself out as an investment adviser or financial planner? • Is the investment advice reasonably related to the professional services rendered?
• Is the professional’s fee for investment advisory services structured differently from the schedule for professional services?
CARLA CPA HAS A regular accounting practice and also advertises that she is available for financial planning services. She makes a detailed evaluation and comparison of investment alternatives. She may recommend specific no-load funds or even direct her client to an investment adviser. She is well known for her investing expertise and clients will frequently ask her questions about trading specific securities.
Question: Should Carla register?
Answer: Yes. She is in the business of giving advice about securities, and she is receiving compensation. Furthermore, she holds herself out as a planner. Accounting firms have only recently begun to take this law seriously. Consequently, now more and more accountants are registering, realizing they can no longer rely on the solely incidental to exclusion.
IN SOME CITIES it is becoming a common practice for local law firms to serve as trustees and provide investment advice to the trust.
Question: Are these attorneys, who are acting as trustees, providing investment advice solely incidental to their profession as attorneys?
Answer: No. Without even looking at the conflict of interest issues, there is no question that these law firms would also need to be registered investment advisers, as this activity is not incidental to the practice of law.
Another group of professionals, banks, and publishers of news articles are also excluded from the registration requirements. In order for publishers to be excluded, they must meet the following test: • The publication is of a general and impersonal nature, in that the advice provided is not adapted to any specific portfolio or any client’s particular needs; • The publication is bona fide or genuine; and • The publication is of general and regular circulation. It is not timed to specific market activity or to events affecting or having the ability to affect the securities industry.35
CHARLIE WANTS TO give stock tips and general investment advice over the telephone using a 900 number.
Question: Does he have to register as an RIA?
Answer: If Charlie can fit his activities into the criteria listed for the publisher’s exclusion, he does not have to register. However, if he is giving individual advice, he will need to be an RIA or affiliated with one.36
BROKER-DEALERS The Act also excludes any broker-dealer, or its registered representatives, who provide investment advice solely incidental to the conduct of their business as broker-dealers and who receive no special compensation for the advice. Note there are two requirements in order for registered representatives to fit the broker-dealer exclusion. Their investment advisory services must be solely incidental to their conduct as brokers and they must receive no special compensation for them. This completely eliminates the possibility of stockbrokers preparing a financial plan and charging
Lemke and Lins, 1-6.
Ibid.
Eli P. Bernzweig,
Ibid.
Ibid., (citing
Ibid., 34.
Lemke and Lins, 1-8.
Mr. Alfred A. Zurl, 1995 SEC No-Action letter; and Mr. Hugh A. Hoffman, 1995 SEC No-Action letter.
