A broker-dealer firm provides non-discretionary investment advice and recommendations to retail clients. To simplify billing, the firm decides to transition these clients from receiving per-trade commissions to paying a single flat annual fee calculated as a fixed percentage of assets under management, regardless of whether any trades are executed. Under federal securities regulations, which regulatory change occurs as a direct result of adopting this compensation structure?
- The firm loses its broker-dealer exclusion under the Investment Advisers Act of 1940 and becomes subject to regulation as an investment adviser due to receiving special compensation.Cevap
- BThe firm is required to execute all client transactions strictly in a principal capacity as a market maker rather than in an agency capacity.
- CThe firm forfeits its FINRA self-regulatory membership and falls under the exclusive direct regulatory jurisdiction of state blue sky administrators.
- DThe firm must relinquish carrying capacity and transfer all clearing and settlement responsibilities directly to the National Securities Clearing Corporation (NSCC).
Cevap
The firm loses its broker-dealer exclusion under the Investment Advisers Act of 1940 and becomes subject to regulation as an investment adviser due to receiving special compensation.
Under the Investment Advisers Act of 1940, broker-dealers are excluded from the definition of an investment adviser only if the investment advice provided is solely incidental to the conduct of their business as a broker-dealer and they receive no special compensation for that advice. Converting from trade-by-trade commissions to a flat asset-based fee is considered receiving 'special compensation,' which removes the exemption and requires registration as an investment adviser.
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Broker-Dealer Exclusion vs. Investment Adviser Registration Trigger (Special Compensation)
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