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News December 5, 2005 Issue

Family and Personal Relationships Not Subject to Advisers Act

The SEC staff has issued a no-action letter stating that despite the new fee-based brokerage rule, which requires that discretionary brokerage accounts be treated as advisory accounts, broker-dealer registered reps can manage money on a discretionary basis without being subject to the Advisers Act as long as the discretionary authority stems from a familial or personal relationship with the customer, not from the repís employment with the brokerage firm.

In a November 17 no-action letter, SEC Division of Investment Management chief counsel Douglas Scheidt told requestor Steven Stone of Morgan, Lewis & Bockius that a broker-dealer would not be deemed to exercise investment discretion for purposes of the new fee-based brokerage rule "as a result of the exercise of investment discretion by one of its associated persons over an account," where the personís discretionary authority stems from serving as "executor, conservator, trustee, attorney-in-fact or other agent as a result of a family or personal relationship, and not from employment with the broker-dealer." The staffís letter did not discuss what, exactly, a "personal relationship" consists of.

Stone, who had written in on behalf of his clients, had pointed out that there are a number of circumstances where an associated person of a broker-dealer may exercise discretion over an account maintained at the broker-dealer. For example: spousal accounts, childrenís UTMAs or UGMAs, trust accounts for "family members or family friends, where the associated person acts as custodian," and accounts where the associated person serves as executor under the will of a family member or family friend. Stone urged that discretionary authority granted in these sorts of situations not trigger application of the Advisers Act "because it does not reflect in any way the conduct of an advisory business by the employing broker-dealer."

In support of his request, Stone noted that the SEC has taken a similar position under the Advisers Act custody rule. Interestingly, in a Q&A on the custody rule, the staff noted that "a personal relationship developed as a result of providing advisory services to a client over many years" is not the type of "personal relationship" contemplated" by the SECís position, at least vis a vis the custody rule. That position, however, was not expressly stated in the recent no-action letter.

While Stoneís letter certainly will be welcome by the many firms that are grappling with the implementation of the new fee-based brokerage rule, the real question out there is whether the SEC will provide some sort of guidance or relief to firms (primarily dual registrants) grappling with the "two hats" issue. One investment management lawyer reported that a number of industry leaders are involved in a concerted effort to encourage the SEC staff to provide guidance on situations where a firm delivers a financial plan as adviser, but seeks to implement the plan solely as a broker-dealer.

In a recent speech, SEC Commissioner Paul Atkins hinted that yet another fee-based brokerage rulemaking could be in the works. Speaking before the SIAís Fall Compliance Seminar, Atkins noted that members of the industry have raised "excellent questions" about how the fee-based brokerage rule is supposed to work in the context of actual customer relationships. "This is an area in which we have provided murky guidance to no oneís satisfaction," he said. "Rather than perpetuating this turbidity, would we not be better served by getting this right even if it takes a little longer? Whatever we do should be by Commission action after all affected parties have a chance to weigh in through the notice and comment process."

Atkins also said that the shape of the SECís IA/BD study should be determined in the "near future."