[Federal Register Volume 70, Number 179 (Friday, September 16, 2005)]
[Rules and Regulations]
[Pages 54629-54631]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-18384]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 275

[Release Nos. 34-52407; IA-2426; File No. S7-25-99]
RIN 3235-AH78


Certain Broker-Dealers Deemed Not To Be Investment Advisers, 
Extension of Compliance Date

AGENCY: Securities and Exchange Commission.

ACTION: Final rule; extension of compliance date.

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SUMMARY: The Securities and Exchange Commission is extending the 
compliance date for the rule that identifies circumstances under which 
a broker-dealer's advice is not ``solely incidental to'' its brokerage 
business or to brokerage services provided to certain accounts and thus 
subjects the broker-dealer to the Investment Advisers Act of 1940.

DATES: The effective date for Sec.  275.202(a)(11)-1, issued on April 
12, 2005 (70 FR 20424, Apr. 19, 2005), remains April 15, 2005 (except 
for Sec.  275.202(a)(11)-1(a)(1)(ii), which was effective May 23, 
2005). Effective on September 19, 2005, the compliance date for Sec.  
275.202(a)(11)-1(b)(2) and Sec.  275.202(a)(11)-1(b)(3) is extended 
from October 24, 2005 to January 31, 2006.

FOR FURTHER INFORMATION CONTACT: Catherine E. Marshall, Senior Counsel, 
or Nancy M. Morris, Attorney-Fellow, at (202-551-6787), or 
[email protected], Office of Investment Adviser Regulation, Division of 
Investment Management, Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-0506.

SUPPLEMENTARY INFORMATION: On April 12, 2005, the Securities and 
Exchange Commission (``Commission'') issued its release adopting rule 
202(a)(11)-1 under the Investment Advisers Act of 1940 (``Advisers 
Act'') regarding the application of the Advisers Act to certain broker-
dealers. Paragraph (b)(2) of the rule provides that when a broker-
dealer provides advice as part of a financial plan or in connection 
with providing financial planning services, a broker-dealer provides 
investment advice that is not ``solely incidental to'' (a) the business 
of a broker or dealer within the meaning of the Advisers Act or (b) 
brokerage services within the meaning of the rule if it: (i) Holds 
itself out to the public as a financial planner or as providing 
financial planning services; or (ii) delivers to its customer a 
financial plan; or (iii) represents to the customer that the advice is 
provided as part of a financial plan or in connection with financial 
planning services. Paragraph (b)(3) provides that exercising investment 
discretion is not ``solely incidental to'' (a) the business of a broker 
or dealer within the meaning of the Advisers Act or (b) brokerage 
services within the meaning of the rule (except for investment 
discretion granted by a customer on a temporary or limited basis).
    The American Council of Life Insurers (``ACLI''), the Securities 
Industry Association (``SIA'') and the Financial Services Institute 
(``FSI'') each filed a petition for rulemaking under rule 192 of our 
Rules of Practice seeking an extension of certain compliance dates in 
rule 202(a)(11)-1.\1\ The ACLI expressed

[[Page 54630]]

concerns about its members' ability to fulfill the enterprise-wide 
transformation necessary to comply with the financial planning 
provision of rule 202(a)(11)-1(b)(2) by the October 24, 2005, 
compliance date. The SIA and the FSI expressed concerns about their 
members' ability to comply with the financial planning and investment 
discretion provisions of rule 202(a)(11)-1(b)(2) and (b)(3) by the 
October 24, 2005, compliance date. All three organizations state that, 
to comply with the rule, many of their members face requirements that 
will make it difficult to complete their compliance efforts by the 
October compliance date.
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    \1\ American Council of Life Insurers, Petition for Rulemaking 
Under Rule 192 of the SEC's Rules of Practice Concerning Extended 
Implementation Date in Rule 202(a)(11)-1(b)(2) Under the Investment 
Advisers Act of 1940, July 27, 2005, File No. 4-507 (available at: 
http://www.sec.gov/rules/petitions/4-507a.pdf) (The ACLI is seeking 
an extension of the compliance date for rule 202(a)(11)-1(b)(2) 
until April 24, 2006.); Securities Industry Association, Petition 
for Rulemaking; Request for Extension of Certain Compliance Dates 
for Rule 202(a)(11)-1 (S7-25-99), July 28, 2005, File No. 4-507 
(available at: http://www.sec.gov/rules/petitions/petn4-507.pdf) 
(The SIA is seeking an extension of compliance dates for rule 
202(a)(11)-1(b)(2) and (b)(3) until April 1, 2006.); Securities 
Industry Association, Request for Extension of Certain Compliance 
Dates for Rule 202(a)(11)-1 (S7-25-99), August 25, 2005, File No. 4-
507 (supplementing the SIA's petition for rulemaking) (available at: 
http://www.sec.gov/rules/petitions/4-507b.pdf); Financial Services 
Institute Inc., Request for Extension of Compliance Dates for 
Certain Aspects of Rule 202(a)(11)-1 (S7-25-99), Aug. 25, 2005, File 
No. 4-507 (available at: http://www.sec.gov/rules/petitions/4-507c.pdf) (The FSI is seeking an extension of the compliance dates 
for rule 202(a)(11)-1(b)(2) and (b)(3) until April 24, 2006.) 
Although the FSI did not expressly petition for rulemaking, we so 
construe its extension request.
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    Specifically, with respect to subparagraph (b)(2), the ACLI and the 
SIA note that, among other things, the detailed personnel training and 
system enhancements (which need to be coded and tested) required by the 
rule will add to compliance complexities. The ACLI states, for example, 
that its members need time to ascertain the application of the rule to 
their activities, train their employees to fulfill their Advisers Act 
obligations, and license their employees as investment adviser 
representatives under state law. The SIA and the FSI state that their 
member firms need time to make judgments about their activities, 
products and services that are, and are not, subject to the Advisers 
Act and to develop and disseminate meaningful disclosures about 
brokerage and advisory relationships which, they state, will require 
substantial computer programming changes.
    With respect to subparagraph (b)(3), the SIA and the FSI state that 
broker-dealers must evaluate each account currently classified as 
``discretionary'' to determine whether it is discretionary within the 
meaning of the rule, to discuss with each affected client the 
investment options available for each account and to provide those 
clients with time to choose whether they want to maintain their 
accounts as non-discretionary brokerage accounts or investment 
discretion advisory accounts. According to the SIA, the volume of 
accounts, coupled with associated recordkeeping requirements and time 
spent waiting for customer responses, will cause the process to take a 
longer time to complete than currently permitted by the rule. In this 
regard, the SIA notes that this process will be labor intensive and 
time-consuming and will involve functions other than merely 
categorizing accounts. For example, for those clients who elect to have 
their accounts be advisory accounts, the SIA states that the broker-
dealers will need time to create and finalize advisory agreements, 
prepare ADV filings and related adviser disclosures, adopt internal 
policies and procedures, and implement internal system infrastructure 
and trade processing so that the accounts comply with the Advisers Act. 
For accounts that will become non-discretionary brokerage accounts, the 
SIA states that its members likewise will need to consult with clients 
about the clients' options, document the new brokerage services, and 
develop systems to document that the account is a non-discretionary 
brokerage account. Further complicating the compliance process, 
according to the SIA, due to year-end reporting requirements, many 
member firms ``black-out'' their systems to changes from late-November 
through the end of the year. Finally, the SIA states that some broker-
dealers who provide services that will be deemed to be investment 
advice under the rule are not currently registered as investment 
advisers and will need time to register as advisers and comply with the 
Advisers Act. The FSI similarly states that its members need additional 
time to review accounts and to consult with their clients about the 
clients' options and choices.
    The ACLI, the SIA, and the FSI thus seek an extension of the 
compliance date so that their members have more time to take the 
actions necessary to bring them into compliance with the rule.
    We have received three letters in opposition to the rulemaking 
petitions filed by the ACLI and the SIA. We have not received any 
letters that directly oppose the FSI's rulemaking petition.
    The Investment Adviser Association (``IAA'') filed a letter in 
opposition to the SIA's petition to extend the compliance date for 
paragraph (b)(3) of rule 202(a)(11)-1 concerning investment discretion 
advisory accounts.\2\ The Consumer Federation of America, Fund 
Democracy, Consumer Action, and Consumers Union (collectively, ``CFA'') 
and Joseph Capital Management, LLC (``JCM'') each filed a letter in 
opposition to the ACLI's and the SIA's petitions to extend the 
compliance dates for the financial planning and investment discretion 
provisions of rule 202(a)(11)-1.\3\
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    \2\ Letter of Investment Adviser Association to Jonathan G. Katz 
(Aug. 4, 2005), File No. 4-507 (available at: http://www.sec.gov/rules/petitions/4-507/dgtittsworth080405.pdf).
    \3\ Letter from Barbara Roper, Director of Investor Protection, 
Consumer Federation of America; Mercer Bullard, Founder and 
President, Fund Democracy; Kenneth McEldowney, Executive Director, 
Consumer Action; and Sally Greenberg, Senior Counsel, Consumers 
Union, to Jonathan G. Katz, Secretary, Commission (Aug. 11, 2005), 
File No. 4-507 (available at: http://www.sec.gov/rules/petitions/4-507/4507-2.pdf); Letter from Ron A. Rhoades, Chief Compliance 
Officer, Joseph Capital Management, LLC, to Jonathan G. Katz, 
Secretary, Commission (Aug. 18, 2005), File No. 4-507 (available at: 
http://www.sec.gov/rules/petitions/4-507/4507-3.pdf).
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    The IAA and CFA assert that determining whether a broker-dealer 
exercises investment discretion over an account is neither difficult 
nor time-consuming and that the SIA never indicated in its comment 
letter to this rulemaking that this determination would be difficult or 
time consuming. In a similar vein, JCM asserts that the final rule was 
``liberal'' in the time constraints originally imposed and that the 
petitioners have not adequately justified their extension requests. The 
IAA and the CFA further assert that the SIA and its members have long 
been aware that the final rule would require broker-dealers to treat 
investment discretion accounts as advisory accounts. With respect to 
financial planning, while the CFA acknowledges that ``brokers and 
insurance agents will be required to undertake a significant effort to 
come into compliance with the rule in the allotted time,'' the CFA 
further states that investor protection concerns ``justify that 
effort.'' JCM challenges the SIA's assertion that its members will be 
required to develop and disseminate disclosure once they determine 
whether a given activity is financial planning within the meaning of 
the rule. JCM asserts that financial planning activities have always 
triggered application of the Advisers Act.\4\ According to JCM, the 
SIA's and ACLI's requests thus are inconsistent with our emphasis on 
compliance with the federal securities laws.
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    \4\ JCM cites our staff's interpretive release on financial 
planning. 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 (Oct. 8, 1987) 
[52 FR 38400 (Oct. 16, 1987)]. We note, however, that the release 
expressly contemplated that, under appropriate circumstances, 
broker-dealers who provide financial planning services may have been 
able to avail themselves of the statutory exception set out in 
section 202(a)(11)(C).
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    The Commission is persuaded that extending the compliance date for 
rule 202(a)(11)-1(b)(2) and (b)(3) for a short period of time is 
appropriate. While we have concerns about the effect of the

[[Page 54631]]

extension in delaying the anticipated benefits of the rule, in our 
judgment a limited extension of the compliance date is, on balance, 
appropriate. Our judgment is based on the representations made by the 
SIA, the ACLI, and the FSI (whose members are required to comply with 
the rule and thus are in a position to assess the level of difficulty 
and time involved in their complying with the rule) and our experience 
in overseeing the industry. We are not, however, persuaded that a delay 
of up to an additional six months is necessary given that we already 
afforded broker-dealers approximately a six-month compliance period, 
and that these provisions will provide investors with important 
protections.\5\ Accordingly, the Commission believes it is appropriate 
to extend the compliance date for rule 202(a)(11)-1(b)(2) and (b)(3) 
until January 31, 2006. The rule's effective date of April 15, 2005 
remains unchanged.
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    \5\ JCM asserts that providing the requested relief will 
exacerbate and extend investor confusion with respect to fee-based 
accounts. We disagree. Broker-dealers already are required to comply 
with the specific disclosure provisions of rule 202(a)(11)-
1(a)(1)(ii).
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    The Commission for good cause finds that, for the reasons cited 
above, including the brief length of the extension we are granting, 
notice and solicitation of comment regarding the extension of the 
compliance date for rule 202(a)(11)-1(b)(2) and (b)(3) are 
impracticable, unnecessary, or contrary to the public interest.\6\ In 
this regard, the Commission notes that broker-dealers need to be 
informed as soon as possible of the extension and its length in order 
to plan and adjust their implementation processes accordingly.
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    \6\ See section 553(b)(3)(B) of the Administrative Procedure Act 
(5 U.S.C. 553(b)(3)(B)) (``APA'') (an agency may dispense with prior 
notice and comment when it finds, for good cause, that notice and 
comment are ``impracticable, unnecessary, or contrary to the public 
interest). The change to the compliance date is effective upon 
publication in the Federal Register, which is less than 30 days 
after publication. The APA allows effective dates less than 30 days 
after publication in the Federal Register for ``a substantive rule 
which grants or recognizes an exemption or relieves a restriction.'' 
See section 553(d)(1) of the APA.

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    Dated: September 12, 2005.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 05-18384 Filed 9-15-05; 8:45 am]
BILLING CODE 8010-01-P