Interpretive Release 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 IA-1092

SECURITIES AND EXCHANGE COMMISSION
[R~l. 	No. 	IA-I092]
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.
ACTION: 	Statement of staff interpretive position.
SUMMARY: 	The Commission is publishing the views of the staff of the Division
of Investment Management on the applicability of the Investment Advisers Act of
1940 to financial planners and other persons who provide invest~ent advice as a
component of other financial services. 	The views expressed in this statement
were developed jointly;by Division staff and the North American Securities
Administrators Association, 	Inc. 	("NASAA") 	to update Investment Advisers Act
Release No. 	770 and provide uniform interpretations of the application of~
federal and state adviser laws to financial planners and other persons. 	The
it
revised statement clarifies, 	among other things, 	the "business" element of the
definition of investment adviser.
FOR FURTHER INFORMATION CONTACT: 	A. 	Thomas Smith III, 	Attorney, 	(202) 	272-2030
Office of the Chief Counsel, 	Division of Investment Management, 	Securities and
Exchange Commission, 	450 Fifth Street, 	N.W., 	Washington, 	D.C. 	20549.
SUPPLEMENTARY INFORMATION: 	Since the Commission published Investment Advisers
Act Re1. 	No. 	770 	(Aug. 	13, 	1981)("IA-770"), 	the Commission and NASAA have
worked together to promote more uniform regulation of investment advisers under
federal and state securities laws. 	At the federal 	level, 	advisers are regu
lated under the Investment Advisers Act of 1940 ("Advisers Act"). 	Approximately
40 states regulate the activities of advisers under state adviser laws that
typically are substantially similar to the Advisers Act. 	The staff of the
Division and the NASAA Financial Planners/Investment Advisers Committee jointly
developed the views stated in this release to provide uniform interpretations

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about the applicability of federal and state adviser laws to the activities of
financial .planners and other persons. 	While the views being published are
based substantially on IA-770, 	this release revises IA-770 in some respects.
Specifically, 	the revised release provides additional guidance on the fiduciary
respons 	ibilities of advisers, 	clarifiesthe"business" element of the
definition of investment adviser, 	and supplements the views contained in lA-770
by references 	to interpretive letters issued by the Division since IA-770 was
published.
I . 	BACKGROUND.
Financial planning typically involves providing a variety of services,
principally advisory in nature, 	to .individuals or familie's regarding the
management of their financial resources based ,upon an analysis of individual. .;
client needs. 	Generally, 	financialplanriing .servicesinvolve prepa·ringa
financial program for a client based on the client'sfinancialcircwnstances
and objectives. 	This information normally would cbve't' present 'and anticipated'
assets and liabilities, 	inclUding ihsurance, 	savings, 	investments, 	and
anticipated retirement or other employee benefits. 	Theprograrn developed for
the client usually includes general-recomrtlendations for a course ofa:-etivity I
or specific actions, 	to betaken by the client . 	For example I 	recommendati.ons
may be made 	that the client obtain insurance or revise existing coverage,
establish an individual retirement account, 	increase or decrease funds held in
savings accounts, 	or invest funds 	in securities. 	A financial planner may
develop tax or estate plans for clients or refer clients to an accountant or
attorney for these services.
The provider of such financial planning services in most cases assists the
client in implementing the recommended program by, 	among other things, making

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specific recommendations to carry out the general recommendations of the
program, 	or by selling the client insurance products, 	securities, 	or other
investments. 	The financial planner may also review the client's program
periodically and recommend revisions. 	Persons providing such financial
planning services use various compensation arrangements. 	Some financial
planners charge clients an overall fee for developing an individual client
program while others charge clients an hourly fee. 	In some instances financial
planners are compensated, 	in whole or in part, 	by commissions on the sale to
the client of insurance products, 	interests in real estate, 	securities 	(such as
common stocks, 	bonds, 	limited partnership interests, 	and mutual funds), 	or
~
other investments.
A second common form of service relating to financial matters is provided
by "pension consultants" who typically offer, 	in addition to administrative
services, 	a variety of advisory services to employee benefit plans and their
fiduciaries based upon an analysis of the needs of the plan. 	These advisory
services may include advice as 	to the types of funding media available to
provide plan benefits, 	general recommendations as 	to what portion of plan
assets should be invested in various investment media, 	including securities,
and, 	in some cases, 	recommendations regarding investment i~ specific securities
or other investments. 	Pension consultants may also assist plan fiduciaries 	in
determining plan investment objectives and policies and in designing funding
media for the plan. 	They may also provide general or specific advice to plan
fiduciaries as 	to the selection or retention of persons to manage the assets of

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the plan. !I 	Pers'ons providing these s-~tv'iCes to plans are customarqy
compensated for their seri'ices through fees paid by the plan, 	its sponsor, 	or
other persons; 	by ilieans of sales cOl1lm'j.ssiOris ori the sale of itisuranceptoducts
or investments to the plan; 	or through acoi'ribituition of fees arid conunis·sions.
Another fot1Ii of firiancial adv'isoryS'~rvice iliithat provided by persons
offering a. vari,etyof financiallyre.latedservices 	to entertainers bt athletes
based upbn the needs of the individual client. 	Such persons, 	who bften use the
designation "sports representative" ot "entertainment representative," dffer a
number of 'sarvicesto clients, 	includlhg the negotiation of employntent
contracts and deveh)pmertt of promotional"op'portUriitles for 	the client, ·as well
as advisoryserviC'e's reLated toinv~sttii~ti:ts,taxplannlng, 	or budgEit and money
disc17etionbver all -6t a-pottioti&fii c;1'iettt' s 	itirrd~by collecting :in~orne,
paying l;ills ,and ,Iltaking investmerii:t for the cHertt. 	Sports or eritertaitiriterit
represe-ntilti'l1e-s are customarily-conipensated ·for theifsElrliices prilnattly
receive compElnsafiotiin the £()tiD:():££ix~achargestir houtlyfees fototh.et
servicesprovide-d, -iIlcltidingiriVestiil'eht aavhdryser'Vices.
There are oth~t persons who, ~hile not failing precisely into tirie of the
foregoing c'abegoties, 	provide financial advisory services. 	As discussed below ,
11 	The authdtitytb martage aTl or a Pdtdbhof a plan's assets often is
delegated to a person who qualifies as an "Investment manager" under the
Ijimployee Retirement lricome Security A.ct of 1974 [29 U.S.C. 	IOOlet sE7g.].
Vnder that statute, 	which is applicable to private sector pension and
~elfare benefit plans, 	an "investment manager" must be a registered
investment adviser under the Advisers Act, 	a bank as defined in the
Ad:visers Act, 	or an irtsurance company that is qualified to perform
se,rV'ices as an investment manager under the laws of more than one state.

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financial planners, 	pension consultants, 	sports or entertainment representa
tives or other persons providing financial advisory services, 	may be investment
advisers within the meaning of the Advisers Act, 	state adviser laws, 	or both.
II. 	STATUS AS AN INVESTMENT ADVISER
A. 	Definition of Investment Adviser
Section 202(a)(II) 	of the Advisers Act defines the term "investment
adviser" 	to mean:
.. 	any person who, 	for compensation, 	engages in the
business .of advising others, 	either directly or through
publications or writings, 	as to the value of securities or
as 	to the advisability of investing in, 	purchasing, 	or
selling securities, 	or who, 	for compensation and as part of
a r~gular business, 	issues or promulgates analyses or
reports concerning securities 	. 	. 	. 	.
Whether a person providing financially related services of the type
discussed in this release is an investment adviser within the meaning of the
Advisers Act depends upon all the relevant facts and circumstances. 	As a
general matter, 	if the activities of any person providing integrated advisory
services satisfy the elements of the definition, 	the person would be an
investment adviser within the meaning of the Advisers Act, 	unless entitled to
rely on one of the exclusions from the definition of investment adviser 1n
clauses 	(A) 	to 	(F) 	of Section 202(a)(II). 	21 	A determination as to whether a
person providing financial planning, 	pension consulting, 	or other integrated
advisory services 	is an investment adviser will depend upon whether such
person: 	(1) 	provides advice, 	or issues reports or analyses, 	regarding
1/ 	See discussion of Section 202(a)(ll)(A) 	to 	(F) 	in Section lIB, infra.

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securities; 	(2) 1.$ i.n. the 'business of pr·oviding s~¢h services ;aRd (3) provides
suc:h serv.i.ces for cOlJlpensation. 	TIuIse ehreeel.elllents are discus~d beJ.Qw.
It would .s'e.e1n appar:entthat .l.i' pe:rson ldW gives advice. orma'kes
recOflIinendationsor is.sues repQrts or analyse:sW'it'h re$pectto speci;fi:c
securi~ie~ is al'linve,st$ellt a4W'is~r undei;Section 2:Q.2(a){11), 	a$·~tiniLng the
other elements of the definition of investment adviser are met, h 	It.. .. 	t:hat
However. 	ith~s. beena~kie:4DOtla nt;uilberofocca:s,L~whether adVi,ce I
reco11llllen4ati:Q.n's..or l'~.~rts ~t d:ooo·t perta.i~ ;to: :s,pecifieseaudt:i".e.s sa.cUsfy
or in relatiGtl t<>.any non ... securi-ti.esinve:s·tment Qr fin4'neial v~hiclewould
Jj 	Inthi.sregard,asdlsclolssed indetai.l belo__ f 	it btbe staff's 'Vie.w that
a person Wbo gives ~dviee or ~~epa~san~11ses eortcerningsec~rities
generally may, 	nevertheles-s,l'l();t he "int'hebusble'ss"of d~iillig 'soartd,
therefote, 	will n<>tl!>ee'OnS'ider<ed att"i,av.e-stment .adv-iser'" astbatternt is
used in Section 2Q2(a;) (11) .
!±/ 	S-ee,L. L.;. IHgba'JZdK!M~y (p-ub. 	a:vail. 	I>e!c! 	11, 	1979).

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also be "advising" others within the meaning of Section 202(a)(1l). ;U
Similarly, 	a person who advises employee benefit plans on funding plan benefits
by investing in, 	purchasing, 	or selling securities, 	as opposed to, 	or in
addition to, 	insurance products, 	real estate not involving securities, 	or other
funding media, 	would be "advising" others within the meaning of Section
202(a)(11). 	A person providing advice to a client as to the selection or
retention of an investment manager or managers also, 	under certain
circumstances, would be deemed to be "advising" others within the meaning of
Section 202(a)(11). 	2J
2. 	The "Business" Standard
~
Under Section 202(a)(11), 	an investment adviser is one who, 	for
compensation, 	(1) 	engages 	in the business of advising o~hers as 	to the value of
securities or as to the advisability of investing in, 	purchasing, 	or selling
2/ 	See, 	~~, Thomas Beard (pub. 	avail. 	May 8, 	1975); 	Sinclair-deMarinis
Inc. 	(pub. 	avail. 	May 1, 	1981).
2J 	See, 	~~. FPC Securities Corp. 	(pub. 	avail. 	Dec. 	1, 	1974) 	(program to
assist client in selection and retention of investment manager by, 	among
other things, 	recommending investment managers to clients, 	monitoring and
evaluating the performance of a client's investment manager, 	and advising
client as to the retention of such manager); 	William Bye Co. 	(pub. 	avail.
Apr. 	26, 	1973) 	(program involving recommendations to client as to ~elec
tion and retention of investment manager based upon c~ient's investment
objectives and periodic monitoring and evaluation of investment manager's
performance). 	On occasion in the past the staff has taken no-action
positions with respect to certain situations involving persons providing
advice to clients as 	to the selection or retention of investment managers.
See, 	~~, Sebastian Associates. 	Ltd., 	(pub. 	avail. 	Aug. 	7, 	1975)
(provision of assistance to clients in obtaining and coordinating the
services of various professionals such as 	tax attorneys and investment
advisers, 	including referring clients to such professionals, 	in connection
with business as agent for clients with respect to negotiation of employ
ment and promotional contracts); Hudson Valley Planning Inc. 	(pub. 	avail.
Feb. 	25, 	1978) 	(provision of names of several investment managers to
client upon request, 	without recommendation, 	in connection with business
of providing administrative services to employee benefit plans.)

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securitj.es, 	or. 	alternatively , 	(2'}1:lSsuesor.promu\].;gates r~l'()rtsor :.analyses
cQllC:erJli'ng.secUl':ities as parto! aregularbus:tne-ss . 	Kachofthes'e two
alternatives J;,p. .th.estat4-toJ;y defi:niti·pn ·~f investment adviserc:O.ntains .8.
busine.sstest -~ one il.nvolv:es-~,ell~gingin'lihe-nus'!ness"of ;adlfls.:in.gothers
while the;Q:t!le:r iavolvesiss.ui~r~orts-a,bJU1·t securities a-s"par:t;o£' -a ,regular
bus;iness. "Whilethe"bus:lneS$l'st.and;a:r-:ds;e'Stab';Hshed,underS~ct'i!On·aU2(;,e:J{ll.)
are phra.sed somewhat di:ffe·rently ,it is the $t·aff's opinion that they ,should be
intei:'p~et~ in t:hes~emanner. 	1-n J~oth -c~es ,the determination-to 'betnade is
wbeth'er the ~gree :ofthe-pe,rson's,~4visoryac-tivitiesconstitutes ,belong "in
,the '-bl,.tsiness" of an inves~entaooise,r.'fhegivingQfad:Vicene~<.tnol:
con,stitutetheprincipal-businessa:e'tivi:ty or any -particularpO:t"tion en! 'the
bu.sinessact;.i:vities9f -1). 'p.e:~S4n:il1P!!'d,er 	f':orthepe'rsontobe al,l, 'i-n~s:_ent
advis.~\t'.w:t<ierSepti-on202:(a);{11.) 	. 	The gaving .-o'fadvice needQn:1,y~be ,dQ6eQD
s-ueh abash that .i-t -con$t;iz~utes 'abusinessaetiv-i tyoccurring -w:i~ehs~1Jle
regul.u::ity..The fre:quene-yQ$:-tbe .,activity -icsaf'ac'tQ:r ,bu,t :1:s J){)\t
det.e.rminttt.ive.
Whether a. 'P~ttson: gtYiqg ,~dvlGe'about S~eurtties 'for '(loll1P«nsa:tlO't\'w.ould
be "in the bus!n«}$s"'Jif ;~d:Q_:i~ 'sl>~depe-nds'uporiallJ!e:levant:factsand
circumstallc~. 	!hes·taft" c{)lls'id¢lfsa pers'on to ,be "hi the b.us1tne,$;s~of
providing advieeifcheperson:(i) 'holds himsel'follt as an in'Ves:ttment ':s.dv.iser
or aSQne whoprovic:le:s invesQnentadvice ,'(it) :receivesany sepat:ate 'or
additional cOQ:lpensation thatrel'resents a clearly definable charge for
providiqg a:d.viceabnut secttriities, -re;ga-rd:less Qfwhether t:hecompetlsa:t-,i-,on is
separate {rom or :j;ncludeci wttM.n~ny ·ove,r.al1 compensation, 	or receives
transactioti-bas~d compensation if thecUent implements 	the investment advice,
or (iii) on anything other than rare, 	isolated and non-periodic instances,

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provides specific investment advice. 1/ 	For the purposes of 	(iii) above,
"specific investment advice" 	includes a recommendation, 	analysis or report
about specific securities or specific categories of securities 	(~ ~,
industrial development bonds, 	mutual funds, 	or medical technology stocks). 	It
includes a recommendation that a client allocate certain percentages of his
assets 	to life insurance, 	high yielding bonds, 	and mutual funds or particular
types of mutual funds such as growth stock funds or money market funds.
However, 	specific investment advice does not include advice limited to a
general recommendation to allocate assets in securities, 	life insurance, 	and
tangible assets.
~
In applying the foregoing tests, 	the staff may consider other financial
services activities offered to clients. 	For example, 	if ~
a financial planner
structures his planning so as 	to give only generic, 	non-specific investment
advice as a financial planner, 	but then gives specific securities advice in his
capacity as a registered representative of a dealer or as agent of an insurance
company, 	the person would not be able to assert that he was not "in the
business" of giving investment advice. 	See discussion of the broker-dealer
exception set forth in Section 202(a)(11)(C) 	of the Advisers Act, 	infra. 	,In
the staff's view, 	it is necessary to consider these other financial 	services
activities. 	Section 208(d) 	of the Advisers Act makes 	it illegal for someone to
do indirectly under the Advisers Act what cannot be done directly.
3. 	Compensation
The definition of investment adviser applies to persons who give
investment advice for compensation. 	This compensation element is satisfied by
1/ 	See Zinn v. 	Parish, 	644 F.2d 360 	(7th Cir. 	1981).

.'
t ·",· , ....~ 't· t· .....t 	-"'v'- "'....' ...... -.... ..;- .... tt- ...- ._~,f;", -~- -,..t.I·-e·..;., ~n- ..c, ...,- f-;o··'~' ....·'f·' a-"" a-:~'.,:'{s·'''',.;C~' f"'e"~ o"'r' .	ue- .:-e·ue· .,p. 	~. an;,.- ,",u,o&',o&U;ce· uene'~',lH>'" Wlle ... n 'l!' .1<' 	...-He 	".L"U·- U'"- 	u' 	UV".li 'UC"'f' .... ' -'.
the: j;'rtlf-e~rti1i~t!~ a:d~iiStiliY' p:b:D'tilott1 d&: ttlte' t!()!Glfl\. 5e1N:'i!ce's'., 	'Ulte' colftp'efiS'~.ilin)
elieme.'i'i1tt i;8' s'a'ttM1!·:il~'d;; Le: at s1ingl!e-> ffe'e' iis;; ett~:gfif& f6-~ a' ntim~:e'r' (j'E dltf":Be1ff'~ln!;
AC'Cl311dlilrtg-lty, 	aJ nel1-SOrti lftf(JXtj;d!IJngt.cil ~'i.iettyr o1f se:~~~ tib) 11'1 C:1"il.e.n"t:" 	i~c;;:I1lJd~ng;
tnVl!s\bUten"e ad\lif~;ry;' ~eWilc\'fs.~"ftsi!- wlliid1l:t till~; pe!lt'~rot\, re'cewE\':~ I1tiy,' ecoodbfild .
- benef.ii't" 	fo~· e')t~ilie>,. It}':' t1~:1~-e. a.1f .~ sdirrg:]je~ f~e;; d.!t (fQtfi&S--s;,:t6lfS: o,'dfi' t1te-' s:~~l1e, t.O
the <flitetHt; ~ :Ms:wralfc"'e1lfttd~:ttg; @: f1ttli~mtm'~;" ~u1.~~: p~lrt~~~; sueh:
adv'i:so.ry: s~W1iee'S!~ '~f(fJi:f c-01ft~l:1W~lidnt''' ~tmi1n; dle, meartiJhtg ()'f' S:~e'ti~<ft\1 2b"2'(al»)«(lil)';
y 	See, £. ",- rmgsdr. (pub. 	avaiJL 	Dec. 	rt, 	V9:1~).
V 	See,~. &:. 	War,ttetil Hi. 	Litvirtg-s:toli (:pub'. 	ava-il!. 	Mail!. 	8\ 	t9:at:))-',
.1Q/ 	Se'cti~h: 2:02'fa~)}('l]])-{C)' 0::£ the Ad\7.~sens Act E!X-b]JUd~S,l f'roDl tihe:- d.~-j-trti't:i\ort'
inves.'t~ntr: adv:ii<s:e,r Sf' b~1te:r: or' dt!a,rce~' ~ho) p{f,'f(fOt'ffiS! i;rt~s~tilfenl! ad~sory'
serviices ehat a1te iInciderttl1'l' to the conduct of rts br,oker ()]f d~aler
busi!tiE!/Ssj all& who; r~e;:r;v,e's1 rt()! S~€t'~r c~tt1pertsla'tjj(Jn' €lfel1~:trolf.s'$~
dis:cU'ssoiJon, 0:£ ~c'ei1on 202ta·).('1]}.)j(fC)';, 	irtti,):a;.
of

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B. 	Exclusions From Definition of Investment Adviser
Clauses 	(A) 	to 	(E) 	of Section 202(a)(11) 	of the Advisers Act set forth
limited exclusions from the definition of investment adviser available to
certain persons.!lI 	Whether an exclusion from the definition of investment
adviser is available to any financial planner, 	pension consultant or other
person providing investment advisory services within the meaning of Section
202(a)(11), 	depends upon the relevant facts and circumstances.
!lI 	Section 202(a)(11) 	provides that the definition of investment adviser does
not include:
(A) ~
a bank, 	or any bank holding company as defined in the
Bank Holding Company Act of 1956, which is not an
investment company; .~
(B) 	any lawyer, 	accountant, 	engineer or teacher whose performance of
such 	[advisory] 	services 	is solely incidental to the practice of
his profession;
(C) 	any broker or dealer whose performance of such 	(advisory]
services 	is solely incidental to the conduct of his business as
a broker or dealer and who receives no special compensation
therefor;
(D) 	,the publisher of any bona fide newspaper, 	news magazine or
business or financial publication of general and regular ,
circulation;
(E) 	any person whose advice, 	analyses, 	or reports related to no
securities other than securities which are direct obligations of
or obligations guaranteed as to principal or i~terest by the
United States, 	or securities issued or guaranteed by
corporations in which the United States has a direct or indirect
interest which shall be designated by the Secretary of the
Treasury, 	pursuant to Section 3(a)(l2) of the Securities
Exchange Act of 1934, 	as exempted securities for the purposes of
that Act 	....
Section 202(a)(ll)(F) 	excludes from the definition of investment adviser
"such other persons not within the 	intent of this paragraph, 	as the
Commission may designate by rules and regulations or order."

- H
f;:9q l?~'f f}J7 'A~Ao.~nit~t'ltwh(,l h:pl(;\~pitnself q\.tt .~.~ ~l)~ p·~J?Hc ~;;; pr~vi·~U.llg
fin~m~i~~p~{Umif\~,p~~i9P.gg,1i\.~'!}.t:W£. {lr .(),t:~!! ·f·tfll.mcia:l~d.vi~9'ry~~w:t~~~"
:Ell ~:u~1;1, §c.::~s~ it: ':w(;l~lQ.~f'.P~41i' ,~b.~t: th~ p~.rt(;l1'1JViI,f\~;~ of !n¥~$t;mC}l:lt il4vhq~y
Q\lS~l'V~~;~ ofa b~q~er c).~ d.e~ie~.tt .~ J)!"~'Fs9~ ~~Hleiv~w ~ny $.p'.e(;·l,.~l. ~9ij\p,eJVi!,ii·t:i~n
for p+,pv~~in,g~l'lV-i~.l:!,tlJl~nt adV:~~~>:I:'¥§.~1i¥1;;,~.~$., W 	'~@~~o:v~r, 	1;:h~'~9<],'!$!~~t'fqm
1:;~~~F~~·~~!~~~t t-p'v:e{i~~nt.~~v:t~~:tr. ~Q.,l\t~·~fH~ i~ ~~.61M·Q:P,~Q2:!.) (U·)..«(il~ '~Ji ,9n ],y 	" .
~v.i.il9;bl. ~ ~n ~~·~.Qp.i~te<i p~~,~~nQ.f.fJ. ~~~!lq; 9~ .d~~~Hi' ,~~ !'t;~gi~t<.ere~ ?
.~
W 	SEt~. 34 ~I t.f$ftil11e:r,bf·!4l;l'lEt~<P.'J.i~~ ~v:an,F~;b. :U. 	19~Q) ~ '~i~!'iM:~~,
M~r~~e~<p\,l9; 	avaiL 	198.~ );~~}i~""c~:R~~,~§'.~~t~~J:\~.:,~~~	Feb • 8. 	..(pUQ:
~v~!J. ~~Y "l, 19.'~6,).. 	~e: .!4'ln(~f.:~~~.t(:>'\l.~';9 ,'~~'\;"'l!!;f;~m~f~~~.\J,~"]"p·~,~:~itl911
. Z02(fi) (11) (B) by it$ ter~s is '~niy ~v~U~'1;>.l~ to llJ.wy~r~ ~ Aegout}t~~~~.
el\~in~~Jl{;. ~R.4 te~gh~l'~. 	A '~lY~9~ .~;~'{l,&"Q. !-~ '- ':J19f~$$·;!-'l.~tP,~lF.t>\J.~tl ~\W
of th.os~en~erated in Section 2Q2(a) 0,1.> on whQ pe1if~»;n\~ 	inv~$tlll.~nt
~d,vbQ:r;y ~~1tV!ce~wQuldl>e 	all itlve~~lP.ent; a~vt~~r vit:h~n ~*e m~"t'ttlg Qf
ij,~ctil?-Il ~02(~) eU) whether or pot ~\1e pe~form.;lnce of itWe$tDlent a,dyilllory
sefV1.c~~ i~ '!n~idental tQtoe pract;~gof ~uch pr9f~ss.i9n, 	V~~e~§ ~n~the¥
'P@-$h f~~ ~~~l\\4ing the p.ef$.ol\' ffQ~ t:h~ 4ef!~J:tion:of tnv-estment adviser
~s, .s,vaUaP,le ~ the p.erso.n wQul<l. b@ $.\,\~j ~~t t:9 tfhe A.,dvhers Act.
W 	.~~e~ .~.~ ;;,.. 	F,J.N~~~O.~l.w~a no·t;e $. 	fQJr a gener,d state~el\t of tlwviews
o.f' the staffregat:dt,ng sp.ecial. P9I1\Pert~~ti(u\ .Y;u,dep se;cH~ ~02(4}(nH~) I
SS~ l:nve.$.tment idvi§ers 4qt: ~e,le~~;~ tlQ. 	~4~(,~q~~~eli 	~. 	l?1~n. 	@U~ ~~bert
S~.~~!'t7X~~~ 	(llyb. 	~v~il, f\pril Z·9. 	H~·a~). 	~,~~ 4he'!~S~{.lQf 	~\1e 	.
~~b,u.~i~e:Ii1~~ ,~t~n4ar'{1~ !:l\1JP!ll" 	.

- 13
scope of the person's employment with the broker or dealer. 1aJ 	For example,
if a registered representative provides advice independent of, 	or separate
from, 	his broker or dealer employer such as by establishing a separate
financial planning practice, 	then he could not rely on the exclusion because
his investment advisory activities would not be subject to control by his
broker or dealer employer. 121 	Similarly, 	the exclusion would be unavailable
if he provides advice without the knowledge and approval of his employer
because 	in that capacity his advisory activities would, 	by definition, 	be
outside 	the control of his employer. 	lQJ
III. 	REGISTRATION AS AN INVESTMENT ADVISER
Any person~
who is an investment adviser within the meaning of Section
j.
202(a)(11) 	of the Advisers Act, 	who is not excluded from the definition of
investment adviser by virtue of one of the exclusions in Section 202(a)(11),
and who makes use of the mails or any instrumentality of interstate commerce in
connection with the person's business as an investment adviser, 	is required by
Section 203(a) of the Advisers Act to register with the Commission as an
investment adviser unless specifically exempted from registration by Section
203(b) 	of the Advisers Act. 	llJ 	Also, 	any person who is an investment ad~iser
~ 	See, 	~~, Corinne E. 	Wood (pub. 	avail. 	April 17, 	1986); George E. 	Bates
(pub. 	avail. 	April 26, 	1979).
15/ 	See, !L.. ~,Robert S. 	Strevell, 	supra note 13; 	Elmer D. 	Robinson (pub.
avail. 	Jan. 	6, 	1986); 	Brent A. 	Neiser 	(pub. 	avail. 	Jan. 	21, 	198.6.) .
.~:"~);'
Id.
1Z/ 	Section 203(b) 	exempts from registration:
(1) 	any investment adviser all of whose clients are residents of the
State within which such investment adviser maintains his or. its
principal office and place of business, 	and who does not furnish
(continued ... )

.~.
- 14
withint.h~ lJleaniIlog o,f aPY state investment adviser definition, 	Cl,n~who is not
IV .AFPVlCAlfION6F	z·. 	. 	ANlfIFRAUD PROVISIONS	- 	.. __ 	. . _ .'
11/( ... Q~p~in~ed)
aCllv'i-ee Q,riss~ean~ly~·es 	or repo,rts'Ylthli~~P.~t.to?~~lgi.~,:L~~ Ji1; te4
oradin'ittedto unlisteq' trading p~ivi.l;eges9n any natJo:Il~l ~e~rities~
-e.K,~a~ge;
(3) 	any 'inve·s;t;;mentadv·is;er w1J,o d~rirygth¢;e~~rsce 	of the preceding ~elve
m()int;l\sna.$had fe,~er thanfi fteep c;:ll~nts alld~ho:neitije'rno ids
h!~elf out ge~ra11y to thepub:lte asani~vestweBit a4vt~eJ; nor acts
a-I" an inve,,st·ment adviser to any invest,ne,nt company registered under
the 	[I nves·tmel'l,t G;Qmpany Ac t]. 	. 	.
ill 	The .;illtifra\,ld provisionsofso~stat:esta:tl4;f;¢slllay apply tp .a,nyperson
rec~i~~~g co~s~deration f~om another personf9.r roendering ~nvestment
advi~~even if the pe~~on rendering the inv~stment advice is technically
exclu,4edfrom the state definition'of investment adviser.

- 15
practice, 	or course of business which operates as a fraud or deceit upon any
client or prospective client." 121 	An investment adviser is a fiduciary who
owes his clients "an affirmative duty of 'utmost good faith, 	and full and fair'
disclosure of all material facts." lQ/ 	The Supreme Court has stated that a
"[f]ailure to disclose material facts must be deemed fraud or deceit within its
intended meaning, 	for, 	as the experience of the 1920's and 1930's amply
reveals, 	the darkness arid ignorance of commercial secrecy are the conditions
under which predatory practices best thrive." 1lI 	Accordingly, 	the duty of an
investment·adviser to refrain from fraudulent conduct includes an obligation to
disclose material facts 	to his clients whenever the failure 	to do so would
~
defraud or operate as a fraud or deceit upon any client or prospective client.
In this connection the adviser's duty to disclose materi~l facts 	is
particularly pertinent whenever the adviser is in a situation involving a
conflict, 	or potential conflict, 	of interest with a client.
The type of disclosure required by an investment adviser who has a
potential conflict of interest with a client will depend upon all the facts and
121 	In addition, 	Section 206(3) 	of the Advisers Act generally makes it
unlawful for an investment adviser acting as principal for his own a9count
knowingly to sell any security to or purchase any security from a client,
or, 	acting as broker for a person other than suc~ client, 	knowingly to
effect any sale or purchase of any security for the account of such
client, without disclosing to such client in writing before the completion
of such transaction the capacity in which he 	is acting and obtaining the
consent of the client to such transaction. 	The responsibilities of an
investment adviser dealing with a client as principal or as agent for
another person are discussed in Advisers Act ReI. 	Nos. 	40 and 470
(February 5, 	1945 and August 20, 	1975 respectively).
lQ/ 	SEC v. 	Capital Gains Research Bureau, 	375 u.S. 	180, 	184 (1963) quoting
Prosser, 	Law of Torts 	(1955),534-535.
ll/ 	Id. 	at 200.

- 16
circ~stanc~~. 	.~~ ~ g~ner~l ~atter, 	an ~9v~s~rmust 4isclp$~ to clients all
rna4.er~al, factsl1:~gaJ;:d.iIlg the pot~Jltial cqnfl~ctQf interest so that the client
can Bl.ak,e :@. !nf'or1J!eQ decis·i,on ·q;stowhe:ther·to enter into ~~continue an
andno-p.ct~~,n le.tters. 	i11u~trate ~he~.c()pe of tl1,eduty to disclose material
infor~pi~n to clients *~q~r~ai~common situations involving conflicts of
in te re$'(;.g ,
disclose \tpg v~rj.o~c~pacit;j.~s in whi,~phe 'P.I:lght.a.~t w-p.,an 'dealing with ~my
part.icul,ar 	c'J.i~:nt.:Fpr e~a.w,p+~ ,ap.·adYise:~wllP~n~ep~to;tw.pl~ment t~he
financial.plans 'h~P;r~P~re$ :~orc'u.ents. inwhQ1e ·p,r iPa~;t,t,b.J;.:.(>,ug4th.a })croker
inforlJla ~;entthat1-p imp:Le~e,p.ti;ng thepl<illlthe·~dvJ.-s~rwill also act as
agel)tfo,r ~theb:~oke.r q.r c;l.~~lero.\t'~he:tnsu"ranc,e~(f)~p,qJ1Y· W
An investment adviser who is also a 	registered representative of a broker
emplojJnent·witb :,tm.e broker or dealer JDust dhclose to hh advisory clients 	that
W 	S~eE!~r .12.:.~l"o!-p~o~. s}~,ara n~te 1,~.~~$1 p.'~~olnt:he. f:laYie:rof );Jai&ht 0:
Co .. lac;:. 	(S~c~rLt;iesE~ch~~ge 	Act ,i{el.Nq. 	9082; 	Feb. 	19.1971) • where
the C9~i.l;;$.j..on hel.d, tiha.t a bt;0kero,:r Qe~l~r a.n<i ;i.tsa.ssQcia.tledpersons
de fraud,e d its c\1st.o:mer~ J.J) dle offJ.~,r ~,n4.~~:L~of secu~ities;byholding
theinselye~olJ,t as financiii1 ,pla.nners who would, 	as financial planners.
give coinprehensive and expert planning advice and, choose the best
investJ,P,.entsfor tlieir clients ,from ~1+ ~vq:,j,~~bles.eC1;1iJ:i-ties, when in fact
they ,were nQt expert in planning and m.adef;lhelr de~·tsiolls based on the
re~elpt o.f commi$'s.ions andu.pon ,th~ir .inv~:ntory.()f s-ecurities. 	Accord
Ins·t~Hl&tional t:rading CorpoM.tion (pUb.av~;il.Nov. 27, 	1972).

- 17
his advisory activities are independent from his employment with the broker or
dealer. 	2lJ 	Additional disclosures would be required, 	depending on the
circumstances, 	if the investment adviser recommends that his clients execute
securities transactions through the broker or dealer with which the investment
adviser is associated. 	For example, 	the investment adviser would be required
to disclose fully the nature and extent of any interest the investment adViser
has 	in such recommendation, 	including any compensation the investment adviser
would receive from his employer in connection with the transaction. 1SI 	In
addition, 	the investment adviser would be required to inform his clients of
the~r ability to execute recommended transactions through other brokers or
dealers. 	22/ 	A
~
financial planner who will recommend or use only the financial
iI
products offered by his broker or dealer employer when implementing financial
plans for clients should disclose this practice to clients l2I and inform
clients that the plan may be limited by the products offered by the broker or
dealer. 	Finally, 	the Commission has stated that nan investment adviser must
not effect transactions 	in which he has a personal interest in a manner that
could result in preferring his own interest to that of his advisory
clients." W
2lJ 	David P. 	Atkinson (pub. 	avail. 	Aug. 	1, 	1977). 	See also Corrine E. Wood,
supra note 14.
22/ 	Don P. 	Matheson (pub. 	avail. 	Sept. 	I, 	1976).
Z2/ 	Elmer D. 	Robinson, 	supra note 15.
W 	Kidder. 	Peabody &Co .. 	Inc., 	43 S.E.C. 	911, 	916 (1968).

- IS
Art investment: advIser Who structures His personal securftfes tratl's'ili::tiorts
to trade on the market imp'act caUSed' by li'fs r~coiriDieridat1ons td clients must
disclose this prB:ctfce to clients. 1!f./ 	Art irtves'tDient adviser 'geriera:lly also
must di"sclose it lit's· personal securitIes tr'ansltetldns are irtconsis~tent with the
advice giveri to c1'feri6;:. iJlJ 	rf:rialiy, 	an irtyestment adviser n'lt1~t disclose
compens-atioriiecelved from die is'suer~dfa s-ecurfty being recoiMteridE!'d. 	.iQ!
UriliKe othergene'ra'l ahti'fraudp~dvis1oris ttl the federal 	securities laws
which applyto conduct ';1n the· of1fer or sare of tiny securities" .ll/ or "in
connection with the purchase or sale of ariy sec1,1rfty," W 	the pertinent
provfsforisofS'ectiori 206 do not r,ef«t~ to dealfrigs' fri'sectirifie'S but are stated
., 	'., 	~
in tE~'tms of tH~ e'tfect oi' p'oteritfa:l effect of'prdhilJi'tedconduct on die cl'fent.
S'pedffcally, 	Section 206(1) prohibits' ,; ariy devlcE!", 	s'dreme, 	or arti'fic'Ef to
defraud, any cl1'erit or prospective ¢irent ,'i arid ,S~ctiort 2-06(2)' p'r6hi})it's "any
transact.iorij, praddce:, 	or cours'~ ofbu~ines's wIlle'lt op~rates as' a' fraud" or
deceit up.ort any cHent or prdspe'ct!ve c1.f~tit." . In' tiffs' regard, 	ihe Cdmmi'sSion
has applied Sections 206(1}artd (2) In clrcumstande's in which the fraudulent
conduct arose out ofcthe imtestmertt. advhory relationship b~tWeeri an investIftetit
w 	SEC v, 	Capital Gains Research BureaU, 	supra note 19, 	at 197.
w 	In-the Matter. of Dow Theory Le.tiers et al., 	Advisers Act ReI: No.
(Feb. 	2f~ 19i7).
571
W 	lri:tl1~: z.i§tt~t of 'Inves tmerlt Corttro>tledR~search et al"
~eh!as~fNo~iol (Sept. 	iT, 	1979'Y. Advisers Act
ll./sectiori l7(a) 	[15 U.S.C. 	77q{a>'J 	of the< S~cudties Act of 1933 	[15 U.S.C.
77a et seq. r.
RUle 1'06- 5 [17 cm 240.l0if. 5] \ittd~rthe;>SecttridesExchang'eAct of 1934
ri5 U:S.c. 	7Sa et~]. 	See~ls'(f Setd'on IS{e) 	[1'5 U.S'.C. 	7'8'b(c)] 	of the
Secu:r-td~s- ExchaRge Act of 1934.

- 19
adviser and its clients, 	even though the conduct does not involve a securities
transaction. 	For example, 	in an administrative proceeding brought by the
Commission against an investment adviser, 	the respondent consented to a finding
by the Commission that the respondent had violated Sections 206(1) 	and (2) by
persuading its clients to guarantee its bank loans and ultimately to post their
securities as collateral for its loans without disclosing the adviser's
deteriorating financial condition, 	negative net worth, 	and other outstanding
loans. 	d1/ 	Moreover. 	the staff has taken the position that an investment
adviser who' sells non-securities investments to clients must, 	under Sections
206(1) 	and (2), 	disclose to clients and prospective clients all its interests
in the sale to ~
them of such non-securities investments. ~
V. 	NEED FOR INTERPRETIVE ADVICE
The general interpretive guidance provided in this release should
facilitate greater compliance with the Advisers Act and the investment adviser
laws of the states. 	The staff of the Commission will respond to routine
requests for no-action or interpretive advice relating to the status of persons
engaged in the types of businesses described in this release by referring
persons making the requests to the release, 	unless the requests present noyel
factual or interpretive issues such as material departures fr~m the nature and
type of services and compensation arrangements discussed above. 	Requests for
no-action or interpretive advice from the staff of the Commission should be
111 	In the Matter of RonaldB. 	Donati. 	Inc. 	et al., 	Advisers Act Rel. 	Nos. 	666
and 683 	(February 8, 	1979 and July 2. 	1979 respectively). 	See also
Intersearch Technology. 	Inc. 	[1974-1975 Transfer Binder] 	Fed. 	Sec. 	L. 	Rep.
(CCH) 	Paragraph 80,139, 	at 85,189.
~ 	See Boston Advisory Group 	(pub. 	avail. 	Dec. 	5, 	1976).

- 20
submitted in aeeordance wIth the procedur'es set forth in Investment Advisers
Act Relea$e No. 	281 (Jan. 	2$, 	1971). 	,As to requests for no-action or
interp;ret-ive a,:lvice .f,rom the :states, 	persons should con'tact the varioul3 s,tate
se~tirities. dep,artJnen~e;;to inqu:ire 'as to ~heir p.rocedures.
~c,cQr4ing.lYl"~rt 276 of Chil.pte,r 110£ Title 17 of the Code of Federal
ReguLations lSaJ][~nded by ad4ittg IJflvest:~ent :Acivisers Act Release No. 	lA-IOn,
Statellientof the staff as 	to the applicabili.ty of the Investment Advis'ers Act
to financIal plantlerslp.ension consultants, 	and pther persons whQ provide
in'1estlllent a~visory servioesas acom.ponent of other financial servi'ces, which
f'
By the OOlDDlisslon.
Jonathan G. Katz
Secretary
DATE 	O~tQber 8 1 	1987