Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer

 
Conformed to Federal Register version 
SECURITIES AND EXCHANGE COMMISSION 
17 CFR Part 276  
[Release No. IA-5249] 
Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer 
Exclusion from the Definition of Investment Adviser 
AGENCY:  Securities and Exchange Commission.  
ACTION:  Interpretation. 
SUMMARY: The Securities and Exchange Commission (the “SEC” or the “Commission”) is 
publishing an interpretation of a section of the Investment Advisers Act of 1940 (the “Advisers 
Act” or the “Act”), which excludes from the definition of “investment adviser” any broker or 
dealer that provides advisory services when such services are “solely incidental” to the conduct 
of the broker or dealer’s business and when such incidental advisory services are provided for no 
special compensation.  
DATES:  Effective July 12, 2019. 
FOR FURTHER INFORMATION CONTACT:  James McGinnis, Senior Counsel, 
Investment Adviser Regulation Office, at (202) 551-6787 or [email protected]; and Benjamin 
Kalish, Attorney-Advisor, or Parisa Haghshenas,  Branch Chief, Chief Counsel’s Office at (202) 
551-6825 or [email protected], Division of Investment Management, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-8549. 
SUPPLEMENTARY INFORMATION: 
 The Commission is publishing an interpretation of 
the solely incidental prong of the broker-dealer exclusion in section 202(a)(11)(C) of the 

    2 
 
Advisers Act [15 U.S.C. 80b].
1
 
 
TABLE OF CONTENTS 
I.
 Introduction 
II. Interpretation and Application 
A. Historical Context and Legislative History 
B. Scope of the Solely Incidental Prong of the Broker-Dealer Exclusion 
C. Guidance on Applying the Interpretation of the Solely Incidental Prong 
III. Economic Considerations 
A. Background 
B. Potential Economic Effects 
 
I. INTRODUCTION 
The Advisers Act regulates the activities of certain “investment advisers,” who are 
defined in section 202(a)(11) of the Advisers Act in part as persons who, for compensation, 
engage in the business of advising others about securities.  Section 202(a)(11)(C) excludes from 
the definition of investment adviser—and thus from the application of the Advisers Act—a 
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” for those 
services (the “broker-dealer exclusion”).  The broker-dealer exclusion shows, on the one hand, 
that at the time the Advisers Act was enacted Congress recognized broker-dealers commonly 
provided some investment advice to their customers in the course of their business as broker-
dealers and that it would be inappropriate to bring broker-dealers within the scope of the 
                                            
1
  15 U.S.C. 80b.  Unless otherwise noted, when we refer to the Advisers Act, or any paragraph of the 
Advisers Act, we are referring to 15 U.S.C. 80b of the United States Code, at which the Advisers Act is 
codified.   

    3 
 
Advisers Act because of this aspect of their business.
2
  On the other hand, the limitations of the 
exclusion show that Congress excluded broker-dealer advisory services from the scope of the 
Advisers Act only under certain circumstances—namely, when those services are solely 
incidental to the broker-dealer’s regular business as a broker-dealer (the “solely incidental 
prong”) and when the broker-dealer receives no special compensation (the “special 
compensation prong”).
3
   
On April 18, 2018, the Commission proposed a rulemaking intended to enhance the 
standard of conduct for broker-dealers when providing recommendations.
4
  The Commission 
also proposed an interpretation intended to reaffirm and in some cases clarify the standard of 
conduct for investment advisers,
5
 a s well as a rulemaking intended to provide retail investors 
with clear and succinct information regarding key aspects of their brokerage and advisory 
relationships.
6
  The Reg. BI Proposal discussed the broker-dealer exclusion and requested 
                                            
2
  Opinion of General Counsel Relating to Section 202(a)(11)(C) of the Investment Advisers Act of 1940, 
Investment Advisers Act Release No. 2 (Oct. 28, 1940) (“Advisers Act Release No. 2”).   
3
  See Regulation Best Interest, Securities Exchange Act Release No. 83062 (April 18, 2018) [83 FR 21574 
(May 9, 2018)] (“Reg. BI Proposal”), at n.343.  The broker-dealer exclusion is conjunctive—that is, the 
broker-dealer must both provide investment advice that is solely incidental to the conduct of his business as 
a broker-dealer and the broker-dealer must receive no special compensation.  In the event that a broker-
dealer’s investment advice fits within the guidance of this Release with respect to the solely incidental 
prong, that broker-dealer must also receive no special compensation for the advisory service to be 
consistent with the broker-dealer exclusion. 
4
  See id. 
5
  Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for 
Comment on Enhancing Investment Adviser Regulation, Investment Advisers Act Release No. 4889 (April 
18, 2018) [83 FR 21203 (May 9, 2018)] (the “Proposed Fiduciary Interpretation”). 
6
  See Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail 
Communications and Restrictions on the Use of Certain Names or Titles, Investment Advisers Act Release 
No. 4888 (April 18, 2018) [83 FR 21416 (May 9, 2018)] (“Relationship Summary Proposal”).  
Concurrently with this interpretation, we also are adopting the final versions of the rules and interpretations 
proposed in the Relationship Summary Proposal, the Reg. BI Proposal, and the Proposed Fiduciary 
Interpretation.  See Form CRS Relationship Summary; Amendments to Form ADV, Investment Advisers 
Act Release No. 5247 (June 5, 2019) (the “Relationship Summary Adoption”); Regulation Best Interest: 
The Broker-Dealer Standard of Conduct, Exchange Act Release No. 86031 (June 5, 2019) (“Reg. BI 
 

    4 
 
comment on the scope of the exclusion as applied to a broker-dealer’s exercise of investment 
discretion.
7
  While some commenters addressed when a broker-dealer’s advisory services are 
“solely incidental to the conduct of his business as a broker or dealer” in the context of the 
exercise of investment discretion, more commenters addressed this prong more generally.
8
  For 
example, many commenters requested general guidance on or expressed views about the 
meaning of the solely incidental prong
9
 and the permissibility under this prong of various  
broker-dealer activities that relate to the investment advice they provide in light of the Reg.  BI 
Proposal and the Relationship Summary Proposal.
10
  Other commenters suggested that our 
approach to the Reg. BI Proposal was inconsistent with the solely incidental prong of the broker-
dealer exclusion.  One commenter suggested that the Reg. BI Proposal, if adopted, would allow 
broker-dealers to provide investment advice beyond what the solely incidental prong should 
“reasonably be interpreted to permit,” arguing that to qualify for exclusion from regulation under 
                                                                                                                                             
Adoption”); and Commission Interpretation Regarding Standard of Conduct for Investment Advisers, 
Investment Advisers Act Release No. 5248 (June 5, 2019) (“Final Fiduciary Interpretation”). 
7
  See Reg. BI Proposal, supra footnote 3, at nn.342–67 and accompanying text. 
8
  We considered comments submitted in File No. S7-07-18 (Reg. BI Proposal, supra footnote 3); File No. 
S7-08-18 (Relationship Summary Proposal, supra footnote 6); and File No. S7-09-18 (Proposed Fiduciary 
Interpretation, supra footnote 5).  Those comments are available on the Commission’s website at 
https://www.sec.gov/comments/s7-07-18/s70718.htm, https://www.sec.gov/comments/s7-08-
18/s70818.htm, and https://www.sec.gov/comments/s7-09-18/s70918.htm, respectively.   
9
  See, e.g., Comment Letter of North American Securities Administrators Association, Inc. (Aug. 23, 2018) 
(“NASAA Letter”); Comment Letter of CFA Institute (Aug. 7, 2018) (“CFA Institute Letter”) (noting the 
“need to give guidance” on the broker-dealer exclusion and noting that the Commission has legal authority 
to provide needed clarification); Comment Letter of the Institute for the Fiduciary Standard (Aug. 6, 2018) 
(“IFS Letter”) (arguing that when a broker’s investment advice is solely incidental to its business is one of 
a number of “questions the SEC should address”); Comment Letter of the Consumer Federation of America 
(Aug. 7, 2018) (“CFA Letter”) (arguing that the Commission failed to “engage” on “just how far the ‘solely 
incidental’ exclusion stretches”); Comment Letter of the Investment Adviser Association (Aug. 6, 2018) 
(“IAA Letter”) (“[T]he Commission should reconsider when broker-dealers should be able to rely on the 
Solely Incidental [prong].”); Comment Letter of Michael Kitces (Aug. 2, 2018) (“Kitces Letter”) (arguing 
that the Commission’s prior interpretations of the solely incidental prong are inconsistent with the plain 
meaning and legislative history of the term). 
10
  See, e.g., CFA Letter; Kitces Letter. 

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the Advisers Act, broker-dealers should only “be able to provide very limited advice....”
11
  Two 
commenters thought that the Commission’s expressed support for maintaining the “broker-dealer 
model as an option for retail customers seeking investment advice”
12
 was inconsistent with the 
solely incidental prong.
13
  Another commenter called the Commission’s previously articulated 
interpretation of the solely incidental prong “vague.”
14
  The comments we received demonstrate 
that there is disagreement about when the provision of broker-dealer investment advice is 
consistent with the solely incidental prong.
15
  In light of these comments, we are adopting this 
interpretation to confirm and clarify the Commission’s position with respect to the solely 
incidental prong.  To illustrate how the interpretation functions, we discuss its application to two 
advisory services that a broker or dealer may provide, namely: (i) exercising investment 
discretion over customer accounts and (ii) account monitoring.
16
  Our interpretation 
complements each of the rules and forms we are adopting, which, among other things, are 
                                            
11
  See NASAA Letter. 
12
  See Reg. BI Proposal, supra footnote 3, at text accompanying n.31. 
13
  See CFA Letter (stating that certain aspects of the Relationship Summary Proposal and the Reg. BI 
Proposal indicated that broker-dealers were in an “advice relationship” in a manner that does not “remotely 
sound like advice that is ‘solely incidental to’ the conduct of their business as a broker or dealer”); Kitces 
Letter (arguing that referring to the broker-dealer model as a “model for advice” is in contravention of the 
broker-dealer exclusion because “advice can only be incidental if it occurs by chance, as a consequence of 
a product sale, or without intent to give advice”). 
14
  See Comment Letter of Securities Arbitration Clinic, St. Vincent DePaul Legal Program, Inc., St. John’s 
University School of Law (Aug. 7, 2018) (“St. John’s Clinic Letter”). 
15
  Furthermore, interested parties have for years expressed their views to the Commission on what they 
believe the broker-dealer exclusion requires, including disagreements with the Commission’s interpretation 
of the exclusion.  See, e.g., Comment Letter of Consumer Federation of America (Sept. 20, 2004) (arguing 
that the Commission should “define ‘solely incidental’ in a way that hews closely to what commenters 
described as Congress’s clear intent to provide only a very narrow exclusion”), available at 
https://www.sec.gov/rules/proposed/s72599/s72599-1101.pdf. 
16
  We received comments requesting guidance with respect to the solely incidental prong on both activities.  
See infra section II.C. 

    6 
 
intended individually and collectively to enhance investor understanding of the relationships and 
services offered by investment advisers and broker-dealers.
17
 
II. INTERPRETATION AND APPLICATION 
A.  Historical Context and Legislative History 
When the Advisers Act was enacted in 1940, broker-dealers regularly provided 
investment advice.
18
  They did so in two distinct ways: as an auxiliary part of traditional 
brokerage services for which their brokerage customers paid fixed commissions and, 
alternatively, as a distinct advisory service for which their advisory clients separately contracted 
and paid a fee.
19
  The advice that broker-dealers provided as an auxiliary component of 
traditional brokerage services was referred to as “brokerage house advice” in a leading study of 
                                            
17
  See Reg. BI Adoption; Relationship Summary Adoption; Final Fiduciary Interpretation, supra footnote 6.  
We also received a few comments in response to the Reg. BI Proposal and the Relationship Summary 
Proposal requesting that the Commission provide guidance on the special compensation prong.  See, e.g., 
CFA Letter (arguing, among other points, that special compensation would constitute any compensation 
other than commissions for trade execution); Comment Letter of Coalition of Mutual Fund Investors (Aug. 
8, 2018) (“Mutual Fund Investors Letter”) (arguing that special compensation should include all asset-
based compensation and third-party fees from mutual funds and their advisers).  We are not providing 
guidance on the special compensation prong in this Release as we do not believe our views on this prong 
require additional clarification.  The Commission has considered the meaning of the special compensation 
prong on previous occasions.  See, e.g., Interpretive Rule Under the Advisers Act Affecting Broker-Dealers, 
Investment Advisers Act Release No. 2652 (Sept. 24, 2007) (“2007 Proposing Release”); Certain Broker-
Dealers Deemed Not to Be Investment Advisers, Investment Advisers Act Release No. 2376 (Apr. 12, 
2005) (“2005 Adopting Release,” in which, as discussed infra at footnote 38 and accompanying text, the 
Commission adopted a rule that a court vacated on grounds that did not address our interpretive positions 
relating to the solely incidental prong).  The comments we received in response to requests for comment to 
the Reg. BI Proposal and the Relationship Summary Proposal did not demonstrate that there is significant 
disagreement with our interpretation of that prong. 
18
  For an extensive discussion of broker-dealer practice in the years leading up to enactment of the Advisers 
Act, from which this summary is drawn, see 2005 Adopting Release, supra footnote 17; Certain Broker-
Dealers Deemed Not to Be Investment Advisers, Investment Advisers Act Release No. 2340 (Jan. 6, 2005) 
(“2005 Proposing Release”).   
19
  See, e.g., Investment Trusts and Investment Companies:  Hearings on S. 3580 Before a Subcomm. of the 
Senate Committee on Banking and Currency, 76
th
 Cong., 3d Sess. 736 (1940) (“Hearings on S. 3580”) 
(testimony of Dwight C. Rose, president of the Investment Counsel Association of America) (“Most . . . 
investment dealers . . . and brokers advise on investment problems, either as an auxiliary service without 
charge, or for specific charges allocated to this specific function.”).   

    7 
 
the time.
20
  “Brokerage house advice” was extensive and varied,
21
 and included information 
about various corporations, municipalities, and governments;
22
 broad analyses of general 
business and financial conditions;
23
 market letters and special analyses of companies’ 
situations;
24
 information about income tax schedules and tax consequences;
25
 and “chart 
reading.”
26
  The second way in which broker-dealers dispensed advice was to charge a distinct 
fee for advisory services, which typically were provided through special “investment advisory 
departments” within broker-dealer firms that advised customers for a fee in the same manner as 
firms whose sole business was providing “investment counsel” services.
27
   
                                            
20
  See Twentieth Century Fund, THE SECURITY MARKETS (1935) (“SECURITY MARKETS”) at 633–46 
(discussing “brokerage house advice”); see also Charles F. Hodges, W
ALL STREET (1930) (“WALL 
STREET”) at 253–85; SEC, REPORT ON INVESTMENT COUNSEL, INVESTMENT MANAGEMENT, INVESTMENT 
SUPERVISORY, AND INVESTMENT ADVISORY SERVICES (1939) (H.R. Doc. No. 477) (“INVESTMENT 
COUNSEL REPORT”) at n.1.   
21
  See, e.g., REPORT OF PUBLIC EXAMINING BD. ON CUSTOMER PROTECTION TO N.Y. STOCK EXCHANGE (Aug. 
31, 1939), at 3: 
The customer entrusts the broker with information regarding his financial affairs and dealings 
which he expects to be kept in strict confidence. Frequently he looks to the broker to perform 
a whole series of functions relating to the investment of his funds and the care of his 
securities. Although he could secure similar services at his bank, he asks his broker, as a 
matter of choice and convenience, to hold credit balances of cash pending instructions; to 
retain securities in safekeeping and to collect dividends and interest; to advise him respecting 
investments; and to lend him money on suitable collateral.  
22
  SECURITY MARKETS, supra footnote 20, at 633; WALL STREET, supra footnote 20, at 254 (“This 
information includes current and comparative data for a number of years on earning and earnings records, 
capitalization, financial position, dividend record, comparative balance sheets and income statements . . . 
production and operating statistics, territory and markets served, officers and directors of the company and 
much other information of value to the investor in appraising the value of a security.”).   
23
  SECURITY MARKETS, supra footnote 20, at 634; WALL STREET, supra footnote 20, at 254. 
24
  SECURITY MARKETS, supra footnote 20, at 640–43; WALL STREET, supra footnote 20, at 277–85. 
25
  SECURITY MARKETS, supra footnote    20, at 641. 
26
  Id. at 643 (defining “chart reading” as “the study of the charted course of prices and volume of trading over 
a long period of time in order to discover typical conformations recurring in the past with sufficient 
frequency to be utilized in the present as a basis of judgment as to impending price changes”). 
27
  See Advisers Act Release No. 2, supra footnote 2; see also SECURITY MARKETS, supra footnote 20, at 646, 
653 (referring to “investment supervisory departments” and “special investment management departments” 
of broker-dealers).  In general, contemporaneous literature used the term “investment counsel” or 
“investment counselor” to refer to those who provided investment advice for a fee and whose advisory 
 

    8 
 
Between 1935 and 1939, the Commission conducted a congressionally mandated study of 
investment trusts and investment companies and in connection with this study surveyed 
investment advisers, including broker-dealers with investment advisory departments.
28
   In a 
report to Congress (the “Investment Counsel Report”), the Commission informed Congress that 
the Commission’s study had identified two broad classes of problems relating to investment 
advisers that warranted legislation:  “(a) the problem of distinguishing between bona fide 
investment counselors and ‘tipster’ organizations; and (b) those problems involving the 
organization and operation of investment counsel institutions.”
29
  Based on the findings of the 
Investment Counsel Report, representatives of the Commission testified at the congressional 
hearings on what ultimately became the Advisers Act in favor of regulating the persons engaged 
in the business of providing investment advice for compensation.   
Congress responded by passing the Advisers Act.  Section 202(a)(11) of the Act defined 
“investment adviser”—those subject to the requirements of the Act—broadly to include “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 regular business, 
issues or promulgates analyses or reports concerning securities....”  In adopting this broad 
definition, Congress necessarily rejected arguments presented during its hearings that legitimate 
                                                                                                                                             
relationship with clients had a supervisory or managerial character.  See id. at 646 (defining “investment 
counselor” as “an individual, institution, organization, or department of an institution or organization which 
undertakes for a fee to advise or to supervise the investment of funds by, and on occasion to manage the 
investment accounts of, clients”).  Under the Advisers Act, “investment counsel” is a defined subset of the 
“investment advisers” to whom the Act applies.  See section 208(c) of the Act. 
28
  INVESTMENT COUNSEL REPORT, supra footnote 20, at 1.  The study was conducted pursuant to section 30 
of the Public Utility Holding Company Act of 1935 [15 U.S.C. 79z-4]; see Hearings on S. 3580, supra 
footnote 19, at 995–96. 
29
  INVESTMENT COUNSEL REPORT, supra footnote 20, at 27. 

    9 
 
investment counselors
30
 should be free from any oversight except, perhaps, by the few states that 
had passed laws regulating investment counselors and by private organizations, such as the 
Investment Counsel Association of America.
31
  Instead, in responding to such views, 
congressional committee members repeatedly observed that those whose business was limited to 
providing investment advice for compensation were subject to little if any regulatory oversight, 
and questioned why they should not be subject to regulation even though other professionals 
were.
32
  
Conversely, the Advisers Act specifically excluded persons, among others, from the 
broad definition of “investment adviser” to the extent that such persons rendered investment 
advice incidental to their primary business.
33
  Broker-dealers were among these excluded 
                                            
30
  Hearings on S. 3580, supra footnote 19, at 745–48; see also 2005 Adopting Release, supra footnote 17, at 
n.62. 
31
  Hearings on S. 3580, supra footnote 19, at 716–18, 736–38, 740-41, 744–45, 760, 763. 
32
  Id. at 738–39, 745–49, 751–53 (Senators Wagner and Hughes).  David Schenker, chief counsel for the 
Commission’s study, offered the following observations in response to investment counselors’ arguments 
against the registration and regulation required by the Act:  
Then there is another curious thing, Senator, that those people who are subject to supervision 
by some authoritative body of some kind, such as securities dealers or investment bankers 
have to register with us as brokers and dealers.  People, who are brokers and members of 
stock exchanges and are supervised by the stock exchanges.  Curiously enough, the people in 
the investment-counsel business who are supervised are not eligible for membership in the 
investment counsel association; because the association says that if you are in the brokerage 
or banking business you cannot be a member of the association.  
So the situation is that if you take their analysis, the only ones who would not be subject to 
regulation by the S.E.C. would be the people who are not subject to regulation by anybody at 
all.  These investment counselors who appeared here are no different from the over-the-
counter brokers and dealers or the members of the New York Stock Exchange. 
Id. at 995–96.  Eventually, members of the investment counsel industry agreed with the proposed 
legislation.  See id. at 1124; Investment Trusts and Investment Companies:  Hearings on H.R. 10065 Before 
a Subcomm. of the House Committee on Interstate and Foreign Commerce, 76
th
 Cong., 3d Sess. (1940) 
(“Hearings on H.R. 10065”); see also S.
 REP. NO. 76-1775, 76
th
 Cong., 3d Sess. 21 (1940); H.R. REP. NO. 
76-2639, 76th Cong., 3d Sess. 27 (1940). 
33
  The exclusion for certain professionals in Advisers Act section 202(a)(11) is very similar to certain state-
law provisions governing investment counselors at the time, which excepted “brokers, attorneys, banks, 
savings and loan associations, trust companies, and certified public accountants.”  See S
TATUTORY 
REGULATION OF INVESTMENT ADVISERS (prepared by the Research Department of the Illinois Legislative 
 

   10 
 
persons, as section 202(a)(11)(C) of the Act excludes from the definition of “investment adviser” 
a broker-dealer who provides investment advice that is “solely incidental to the conduct of his 
business as a broker or dealer and who receives no special compensation therefor”—i.e., the 
broker-dealer exclusion.  
B.  Scope of the Solely Incidental Prong of the Broker-Dealer Exclusion 
The Commission and its staff have on several occasions discussed the scope of the 
broker-dealer exclusion.
34
  In adopting a rule regarding fee-based brokerage accounts in 2005, 
for example, the Commission stated that investment advisory services are “solely incidental to” 
the conduct of a broker-dealer’s business when the services are offered in connection with and 
are reasonably related to the brokerage services provided to an account.
35
  The interpretation was 
consistent with the Commission’s contemporaneous construction of the Advisers Act as 
excluding broker-dealers whose investment advice is given “solely as an incident of their regular 
business.”
36
  The 2005 interpretation stated that the importance or frequency of the investment 
advice was not a determinant of whether the solely incidental prong was satisfied; the 
Commission rejected the view that only minor, insignificant, or infrequent advice qualifies for 
                                                                                                                                             
Council) reprinted in Hearings on S. 3580, supra footnote 19, at 1007.  That report stated that “the 
investment advice furnished by these excepted groups would seem to be merely incidental to some other 
function being performed by them.”  Id. 
34
  See, e.g., Advisers Act Release No. 2, supra footnote 2; Applicability of the Investment Advisers Act to 
Certain Brokers and Dealers; Interpretation of the Term ‘Special Compensation’, Investment Advisers Act 
Release No. 640 (Oct. 5, 1978); 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).   
35
  2005 Adopting Release, supra footnote 17; 2005 Proposing Release, supra footnote 18.  
36
  See Advisers Act Release No. 2, supra footnote 2; see also 2005 Adopting Release, supra footnote 17.   

   11 
 
the broker-dealer exclusion, noting that the advice broker-dealers gave as part of their brokerage 
services in 1940 was often substantial and important to customers.
37
   
On March 30, 2007, the Court of Appeals for the District of Columbia Circuit in 
Financial Planning Association v. SEC vacated the rule regarding fee-based brokerage accounts, 
but not on grounds that addressed our interpretive positions relating to the solely incidental 
prong.
38
  In September 2007, we proposed to reinstate these interpretive positions.
39
   
Since that time, a federal appellate court has addressed the solely incidental prong.  In 
2011, in Thomas v. Metropolitan Life Insurance Company, the Court of Appeals for the Tenth 
Circuit addressed the scope of the broker-dealer exclusion in the context of a private suit alleging 
that a broker had violated the Advisers Act by failing to disclose incentives to sell proprietary 
products.
40
  As part of its analysis of the exclusion, the court looked to the interpretation of the 
solely incidental prong that we advanced in 2005 and 2007.  The court found these 
interpretations to be “persuasive” in light of its own analysis of the text of the solely incidental 
prong of the broker-dealer exclusion as well as the legislative history and historical background 
of the Advisers Act.
41
  The court concluded that a broker-dealer’s investment advice is solely 
incidental to its conduct as a broker-dealer if the advice is given “only in connection with the 
primary business of selling securities.”
42
  Thus, the court explained, “broker-dealers who give 
advice that is not connected to the sale of securities—or whose primary business consists of 
                                            
37
  See 2005 Adopting Release, supra footnote 17, at nn.139–42 and accompanying text. 
38
  See 482 F.3d 481 (D.C. Cir. 2007). 
39
  2007 Proposing Release, supra footnote 17.   
40
 631 F.3d 1153 (10
th
 Cir. 2011). 
41
  Id. at 1163–64.  
42
  Id. at 1164.  

   12 
 
giving advice—do not meet the [solely incidental] prong” of the broker-dealer exclusion.
43
  The 
court also agreed with the Commission’s interpretations that the solely incidental prong does not 
hinge upon “the quantum or importance” of a broker-dealer’s advice but on its relationship to the 
broker-dealer’s primary business.
44
  In the court’s view, “[t]he quantum or importance of the 
broker-dealer’s advice is relevant only insofar as the advice cannot supersede the sale of the 
product as the ‘primary’ goal of the transaction or the ‘primary’ business of the broker-dealer.”
45
   
Based on the text and history of the solely incidental prong, our previous interpretations 
of the prong, the Thomas decision, and the comments we have received, we are providing the 
following interpretation.
46
  We interpret the statutory language to mean that a broker-dealer’s 
provision of advice as to the value and characteristics of securities or as to the advisability of 
transacting in securities
47
 is consistent with the solely incidental prong if the advice is provided 
in connection with and is reasonably related to the broker-dealer’s primary business of effecting 
securities transactions.
48
  If a broker-dealer’s primary business is giving advice as to the value 
                                            
43
  Id.   
44
  Id. at 1163.  
45
  Id. at 1166.  In Thomas, the brokerage firm’s representative had conducted an analysis of the plaintiffs’ 
financial situation and advised them to purchase a particular financial product based in part on that analysis.  
The plaintiffs alleged that the firm’s policy “required [representatives] to provide investment advice to 
potential customers as a means to sell more proprietary products” and that this policy was “so pervasive 
that [representatives] allegedly gave financial advice to every customer to whom they sold a product.”  Id. 
at 1157.  The Court rejected the plaintiffs’ contention that these facts rendered the advice so central to the 
transaction that it could not be considered “solely incidental” to it.  Because the representative’s advice 
“was closely related to the sale of the [product] and selling the [product] was the primary object of the 
transaction,” the Court concluded, the advice was “solely incidental” to the representative’s conduct as a 
broker.  Id. at 1167.
 
46
  To the extent that this interpretation is inconsistent with the Commission’s prior interpretations with respect 
to the solely incidental prong, this interpretation supersedes those interpretations. 
47
  See Advisers Act section 202(a)(11) (definition of “investment adviser”). 
48
  Cf. 2005 Adopting Release, supra footnote 17 (“In general, investment advice is ‘solely incidental to’ the 
conduct of a broker-dealer’s business within the meaning of section 202(a)(11)(C) and to ‘brokerage 
services’ provided to accounts... when the advisory services rendered are in connection with and 
reasonably related to the brokerage services provided.”).  We have modified the wording of our 
 

   13 
 
and characteristics of securities or the advisability of transacting in securities, or if the advisory 
services are not offered in connection with or are not reasonably related to the broker-dealer’s 
business of effecting securities transactions, the broker-dealer’s advisory services are not solely 
incidental to its business as a broker-dealer.
49
  Whether advisory services provided by a broker-
dealer satisfy the solely incidental prong is assessed based on the facts and circumstances 
surrounding the broker-dealer’s business, the specific services offered, and the relationship 
between the broker-dealer and the customer.   
The quantum or importance of investment advice that a broker-dealer provides to a client 
is not determinative as to whether or not the provision of advice is consistent with the solely 
incidental prong.  Advice need not be trivial, inconsequential, or infrequent to be consistent with 
the solely incidental prong.   Indeed, our simultaneous adoption of ( i) Regulation Best Interest, 
which raises the standard of conduct that applies to broker-dealer recommendations, and (ii) the 
relationship summary, which provides information about broker-dealer recommendation services 
to customers, underscores that broker-dealer investment advice can be consequential even when 
it is offered in connection with and reasonably related to the primary business of effecting 
securities transactions.   
                                                                                                                                             
interpretation to make clear that the broker-dealer’s primary business must also be effecting securities 
transactions. 
49
  Nothing in this interpretation alters the Commission’s 2006 interpretation of section 28(e) of the Exchange 
Act, which, in the context of a client commission arrangement that otherwise satisfies section 28(e), 
permits a broker-dealer to be paid out of a pool of commissions for its research even if that broker-dealer 
did not effect a securities transaction.  See Commission Guidance Regarding Client Commission Practices 
Under Section 28(e) of the Securities Exchange Act of 1934, Securities Exchange Act Release No. 54165 
(July 18, 2006), 71 FR 41978 (July 24, 2006). 
 

   14 
 
To illustrate the application of this interpretation i n practice, we provide the following 
guidance on the application of the interpretation to (i) exercising investment discretion over 
customer accounts and (ii) account monitoring.     
C.  Guidance on Applying the Interpretation of the Solely Incidental Prong 
 
1. Investment Discretion 
The Commission has for many years considered issues related to a broker-dealer’s 
exercise of investment discretion over customer accounts and the extent to which such practices 
could be considered solely incidental to the business of a broker-dealer.
50
  The Commission has 
stated that discretionary brokerage relationships “have many of the characteristics of the 
relationships to which the protections of the Advisers Act are important.”
51
  In particular, the 
Commission has explained that when a broker-dealer exercises investment discretion, it is not 
providing advice to customers that is in connection with and reasonably related to effecting 
securities transactions; rather, the broker-dealer is making investment decisions relating to the 
purchase or sale of securities on behalf of customers on an ongoing basis.
52
  At the same time, 
the Commission has taken the position that some limited exercise of discretionary authority by 
broker-dealers could be considered solely incidental to their business.
53
   
We requested comment in the Reg. BI Proposal on a broker-dealer’s exercise of 
investment discretion over customer accounts and the extent to which the exercise of investment 
                                            
50
  See Reg. BI Proposal, supra footnote 3, at nn.343–62 and accompanying text. 
51
  Final Extension of Temporary Exemption from the Investment Advisers Act for Certain Brokers and 
Dealers, Investment Advisers Act Release No. 626 (Apr. 27, 1978) (“Advisers Act Release No. 626”).   
52
 See 2005 Proposing Release, supra footnote 18.   
53
  See Reg. BI Proposal, supra footnote 3, at nn.355–62 and accompanying text.  Cf. NASD rule 2510 
(allowing discretion only if a customer “has given prior written authorization to a stated individual or 
individuals... in accordance with [FINRA] rule 3010”). 

   15 
 
discretion should be considered solely incidental to the business of a broker-dealer.
54
  
Commenters agreed that the exercise of unlimited discretion should not be considered “solely 
incidental” investment advice.
55
  Commenters expressed varying views, however, on the extent 
to which the exercise of temporary or limited discretion could be considered solely incidental to 
the business of a broker-dealer.  Several commenters suggested that the exercise of any 
investment discretion should be governed by the Advisers Act.
56
  One commenter suggested that 
the Commission should interpret the solely incidental prong through the lens of the definition of 
“investment discretion” in section 3(a)(35) of the Securities Exchange Act of 1934 (the 
“Exchange Act”),
57
 noting that section 3(a)(35) focuses on “the level of authority, decision-
making ability, influence – and ultimately, control – an intermediary has over another’s money” 
and arguing that those with section 3(a)(35) investment discretion have a heightened likelihood 
of mismanagement and abuse of another’s money.
58
  Another commenter suggested that, while 
                                            
54
  See Relationship Summary Proposal, supra footnote 6, at nn.363–67 and accompanying text; see also id. at 
nn.343–62 and accompanying text for a description of the Commission’s historical approaches. 
55
  See, e.g., Comment Letter of Financial Planning Coalition (Aug. 7, 2018) (“FPC Letter”) (“[A] broker-
dealer’s provision of unfettered discretionary investment advice should never be considered ‘solely 
incidental’ to its business as a broker-dealer.” (emphasis removed)); CFA Letter; IFS Letter. 
56
  See, e.g., Comment Letter of Invesco Advisers, Inc. (Aug. 7, 2018) (“Discretionary management over an 
account, whether or not temporary, is not within the scope of the ‘solely incidental’ exclusion.”); IAA 
Letter; CFA Institute Letter.  
57
  Under Exchange Act section 3(a)(35), a person exercises “investment discretion” with respect to an account 
if, directly or indirectly, such person (A) is authorized to determine what securities or other property shall 
be purchased or sold by or for the account, (B) makes decisions as to what securities or other property shall 
be purchased or sold by or for the account even though some other person may have responsibility for such 
investment decisions, or (C) otherwise exercises such influence with respect to the purchase and sale of 
securities or other property by or for the account as the Commission, by rule, determines, in the public 
interest or for the protection of investors, should be subject to the operation of the provisions of this title 
and the rules and regulations thereunder.
  15 U.S.C. 78c(a)(35).   
58
  See FPC Letter (noting also that several federal and state courts have used factors similar to those in section 
3(a)(35) to impose a fiduciary standard).  Another commenter also suggested using Exchange Act section 
3(a)(35) “investment discretion” as a basis for establishing whether discretion is not solely incidental for 
purposes of the broker-dealer exclusion, with an exception for investment discretion “that a customer grants 
on a temporary or limited basis.”  See Comment Letter of Pickard Djinis and Pisarri (Aug. 14, 2018) 
(“Pickard Letter”). 

   16 
 
discretion generally should subject a broker-dealer to the Advisers Act, there are certain cases 
where temporary or limited discretion does not have the supervisory or managerial character of 
the investment discretion warranting the protections of the Advisers Act.
59
  
 
Applying our interpretation of the solely incidental prong, a broker-dealer’s exercise of 
unlimited discretion
60
 would not be solely incidental to the business of a broker-dealer consistent 
with the meaning of section 202(a)(11)(C).
61
  It would be inconsistent with the solely incidental 
prong for broker-dealers to exercise “investment discretion” as that term is defined in section 
3(a)(35) of the Exchange Act with respect to any of its accounts, except for certain instances of 
investment discretion granted by a customer on a temporary or limited basis, as discussed below.  
A broker-dealer with unlimited discretion to effect securities transactions possesses ongoing 
authority over the customer’s account indicating a relationship that is primarily advisory in 
nature; such a level of discretion by a broker-dealer is so comprehensive and continuous that the 
provision of advice in such context is not incidental to effecting securities transactions.   
We recognize, however, that there are situations where a broker-dealer may exercise 
temporary or limited discretion in a way that is not indicative of a relationship that is primarily 
advisory in nature.  Generally, these are situations where the discretion is  limited in time, scope, 
or other manner and lacks the comprehensive and continuous character of investment discretion 
                                            
59
  See Comment Letter of the Securities Industry and Financial Markets Association (Aug. 7, 2018) (“SIFMA 
Letter”). 
60
  We view unlimited investment discretion as a person having the ability or authority to buy and sell 
securities on behalf of a customer without consulting the customer—i.e., having responsibility for a 
customer’s trading decisions. 
61
  The Commission has in the past stated that the quintessentially supervisory or managerial character of 
investment discretion warrants the protection of the Advisers Act. See Amendment and Extension of 
Temporary Exemption from the Investment Advisers Act for Certain Brokers and Dealers, Investment 
Advisers Act Release No. 471 (Aug. 20, 1975); see also 2005 Proposing Release, supra footnote 18; 2005 
Adopting Release, supra footnote 17.   

   17 
 
that would suggest that the relationship is primarily advisory.  The totality of the facts and 
circumstances would be relevant to determining whether temporary or limited discretion is 
consistent with the solely incidental prong.  Taking into consideration specific examples that 
commenters have suggested in the past, instances of temporary or limited investment discretion 
that, standing alone, would not support the conclusion that a relationship is primarily advisory—
and therefore outside the scope of the solely incidental prong—include discretion: (i) as to the 
price at which or the time to execute an order given by a customer for the purchase or sale of a 
definite amount or quantity of a specified security; (ii) on an isolated or infrequent basis, to 
purchase or sell a security or type of security when a customer is unavailable for a limited period 
of time; (iii) as to cash management, such as to exchange a position in a money market fund for 
another money market fund or cash equivalent;
62
 (i v) to purchase or sell securities to satisfy 
margin requirements, or other customer obligations that the customer has specified; (v) to sell 
specific bonds or other securities and purchase similar bonds or other securities in order to 
permit a customer to realize a tax loss on the original position; (vi  ) to purchase a bond with a 
specified credit rating and maturity; and (vi  i) to purchase or sell a security or type of security 
limited by specific parameters established by the customer.  We view these examples of 
temporary or limited discretion as typically consistent with the broker-dealer exclusion because 
                                            
62
  Certain changes to money market fund regulation and operations have been implemented since our prior 
interpretations.  See Money Market Fund Reform; Amendments to Form PF, Investment Company Act 
Release No. 31166 (Jul. 23, 2014) (removing an exemption that permitted institutional non-government 
money market funds to maintain a stable net asset value, while maintaining such exemption for certain 
other money market funds, and applying certain fees and gates reforms to institutional non-government 
money market funds and retail money market funds but not to government money market funds, among 
other changes).  In light of these changes, differently categorized money market funds may have different 
investment characteristics.  Accordingly, we anticipate that FINRA will be reviewing the application of the 
rules that apply to the exercise of broker-dealer discretion in this context.  The Commission staff also will 
evaluate broker-dealer exercise of discretionary cash management to consider whether additional measures 
may be necessary. 

   18 
 
they are in connection with and reasonably related to a broker-dealer’s business of effecting 
securities transactions and do not suggest that the broker-dealer’s primary business is providing 
investment advice.  
We have previously described a similar list of situations that we would consider 
temporary or limited discretion that may be consistent with the solely incidental prong.
63
  We 
make three refinements.   
First, we are not including authority for a period “not to exceed a few months” relating to 
the time a broker-dealer may purchase or sell a security or type of security when a customer is 
unavailable for a limited period of time.  Depending on the facts and circumstances, a period of 
discretion lasting a few months may be indicative of a business or customer relationship that is 
primarily advisory in nature.  
Second, we would view it as consistent with our interpretation of the solely incidental 
prong for broker-dealers to purchase or sell securities to satisfy margin requirements, or other 
customer obligations that the customer has specified (new wording italicized).  In our view, there 
may be similar obligations to a broker-dealer or a third party whereby a broker-dealer may be 
authorized to make a purchase or sale, such as a sale to satisfy a collateral call. 
Third, we would view it as consistent with our interpretation of the solely incidental 
prong for broker-dealers to sell specific bonds or other securities in order to permit a customer to 
realize a tax loss on the original position (new wording italicized).  We see no distinction 
between bonds or other securities in this particular context. 
2. Account Monitoring 
                                            
63
  See 2005 Adopting Release, supra footnote 17, at nn.178–81 and accompanying text; 2007 Proposing 
Release, supra footnote 17, at n.13 and accompanying text. 

   19 
 
We received several comments regarding the extent to which a broker-dealer may 
monitor the status and performance of a customer’s account while relying on the broker-dealer 
exclusion.  Some commenters suggested that a broker-dealer’s agreement to provide ongoing 
monitoring for the purpose of recommending changes to a customer’s investments is not an 
advisory service that is solely incidental to the primary securities transaction business of a 
broker-dealer and thus the broker-dealer exclusion should not be available to broker-dealers who 
provide such services.
64
  Another commenter suggested that broker-dealers providing 
personalized investment advice about securities on an ongoing basis should not be able to rely on 
the broker-dealer exclusion.
65
  Commenters also suggested that providing services that cause 
overseen assets to meet the definition of “regulatory assets under management” under Form 
ADV (i.e., securities portfolios for which the broker-dealer provides “continuous and regular 
supervisory or management services”) should subject a broker-dealer to the Advisers Act.
66
 
  We disagree with commenters who suggested that any monitoring of customer accounts 
would not be consistent with the solely incidental prong.  A broker-dealer that agrees to 
                                            
64
  See FPC Letter (“[B]roker-dealers that enter into agreements with retail customers to provide ongoing 
monitoring for purposes of recommending changes in investments should be considered investment 
advisers and subject to fiduciary obligations under the Advisers Act.  Entering into an agreement to provide 
ongoing monitoring... goes beyond advice that is solely incidental to the conduct of business as a broker-
dealer....”); IAA Letter (same quotation as the FPC Letter); IAA Letter (“[A] broker-dealer that agrees to 
provide a retail customer ongoing monitoring for purposes of recommending changes in investments would 
not be providing services that are solely incidental to its business as a broker-dealer under the 2007 
interpretation.”); Fisher Letter (“Brokers can give ongoing investment advice... yet still not be required to 
register as an investment adviser.... [T]he boundaries [between brokers and investment advisers] have 
practically been erased.”). 
65  
See Mutual Fund Investors Letter (“[The SEC] should... subject broker-dealers to the Advisers Act when 
they are providing personalized investment advice about securities on an ongoing basis... The term ‘solely 
incidental’ should be interpreted narrowly and only include personalized investment advice that is one-
time, temporary, or limited in scope.”).
 
66
  See IAA Letter; Pickard Letter. 

   20 
 
monitor
67
 a retail customer’s account on a periodic basis for purposes of providing buy, sell, or 
hold recommendations may still be considered to provide advice in connection with and 
reasonably related to effecting securities transactions.
68
  In contrast, when a broker-dealer, 
voluntarily and without any agreement with the customer, reviews the holdings in a retail 
customer’s account for the purposes of determining whether to provide a recommendation to the 
customer—and, if applicable, contacts that customer to provide a recommendation based on that 
voluntary review—the broker-dealer’s actions are in connection with and reasonably related to 
the broker-dealer’s primary business of effecting securities transactions.  Absent an agreement 
with the customer (which would be required to be disclosed pursuant to Regulation Best 
Interest), we do not consider this voluntary review to be “account monitoring.”
69
   
We decline to delineate every circumstance where agreed-upon monitoring is and is not 
solely incidental to a broker-dealer’s brokerage business.  Broker-dealers may consider adopting 
policies and procedures that, if followed, would help demonstrate that any agreed-upon 
monitoring is in connection with and reasonably related to the broker-dealer’s primary business 
                                            
67
  The guidance in this section applies when a broker-dealer agrees to monitor a customer’s account. See Reg. 
BI Adoption, supra footnote 6, at section II.B.2 for a discussion of what constitutes such an agreement.   
68
  See id.  Monitoring agreed to by the broker-dealer would result in a recommendation to purchase, sell, or 
hold a security each time the agreed-to monitoring occurs and would be covered by Regulation Best 
Interest.  See id. (“For example, if a broker-dealer agrees to monitor the retail customer’s account on a 
quarterly basis, the quarterly review and each resulting recommendation to purchase, sell, or hold, will be a 
recommendation subject to Regulation Best Interest.”).   
In agreeing to provide any monitoring services, broker-dealers should also consider that a broker-dealer 
that separately contracts or charges a separate fee for advisory services is providing investment advice that 
is inconsistent with the broker-dealer exclusion.  See, e.g., 2005 Adopting Release, supra footnote 17.  
Broker-dealers should also consider that, even where such monitoring is consistent with the solely 
incidental prong, the broker-dealer must also receive no special compensation for the activity to be eligible 
for the broker-dealer exclusion.  Broker-dealers receive special compensation where there is a clearly 
definable charge for investment advice.  See Advisers Act Release No. 626, supra footnote 51; see also 
Advisers Act Release No. 2, supra footnote 2; 2007 Proposing Release, supra footnote 17 (describing this 
interpretation as the Commission’s “longstanding view”). 
69
  See Reg. BI Adoption, supra footnote 6, at section II.B.2.b.  Any recommendation made to the retail 
customer as a result of such voluntary review would be subject to Regulation Best Interest.  See id. 

   21 
 
of effecting securities transactions.  For example, broker-dealers may include in their policies 
and procedures that a registered representative may agree to monitor a customer’s account at 
specific time frames (e.g., quarterly) for the purpose of determining whether to provide a buy, 
sell, or hold recommendation to the customer.
70
  However, such policies and procedures should 
not permit a broker-dealer to agree to monitor a customer account in a manner that in effect 
results in the provision of advisory services that are not in connection with or reasonably related 
to the broker-dealer’s primary business of effecting securities transactions, such as providing 
continuous monitoring.
71
  Additionally, dually registered firms may similarly consider adopting 
policies and procedures that distinguish the level and type of monitoring in advisory and 
brokerage accounts.
72
 
The Commission will consider further comment on its interpretation of the solely 
incidental prong of the broker-dealer exclusion and its application to certain brokerage activities 
                                            
70
  As noted in the Reg. BI Adoption, and consistent with the relationship summary adopted in the 
Relationship Summary Adoption, the scope and frequency of a broker-dealer’s monitoring is a material fact 
relating to the type and scope of services provided to a retail customer and thus is required to be disclosed 
under Regulation Best Interest.  See id. at   section II.B.2; cf. Relationship Summary Adoption, supra 
footnote 6.  A broker-dealer disclosing to a customer that the broker-dealer will provide monitoring 
constitutes an agreement to monitor.  See supra footnote 67. 
71
  The two examples of advisory services we discuss in this Release—investment discretion and monitoring—
cannot be viewed and interpreted in isolation.  For example, it would not be consistent with the solely 
incidental prong for a broker-dealer to exercise unlimited investment discretion over a customer account 
even if its monitoring activities do comport with the solely incidental prong.  Thus, any policies and 
procedures that a broker-dealer adopts to ensure that the broker-dealer’s activities are in connection with 
and reasonably related to the broker-dealer’s primary business of effecting securities transactions similarly 
should not grant the broker-dealer the ability or authority to buy and sell securities on behalf of a customer 
as part of periodic account monitoring, except in circumstances of temporary or limited discretion that 
would be consistent with the solely incidental prong, as discussed above. 
72
  In the Final Fiduciary Interpretation, we note that investment advisers may consider whether written 
policies and procedures relating to monitoring would be appropriate under Advisers Act rule 206(4)-7.  See 
Final Fiduciary Interpretation, supra footnote 6, at section II.B.3. 
 Additionally, the Reg. BI Adoption confirms that a dual registrant is an investment adviser solely with 
respect to those accounts for which a dual registrant provides investment advice or receives compensation 
that subjects it to the Advisers Act.  See Reg. BI Adoption, supra footnote 6, at section II.B.3.d.  
Determining the capacity in which a dual registrant is making a recommendation is a facts and 
circumstances test.  See id. 

   22 
 
to evaluate whether additional guidance might be appropriate in the future.  Based on any 
comments received, the Commission may, but need not, supplement this interpretation. 
III. E
CONOMIC CONSIDERATIONS 
The Commission’s interpretation above is intended to advise the public of its 
understanding of the solely incidental prong of the broker-dealer exclusion.  The interpretation 
does not itself create any new legal obligations for broker-dealers.  Nonetheless, the Commission 
recognizes that to the extent a broker-dealer’s practices are not consistent with this interpretation 
of the solely incidental prong, the interpretation could have potential economic effects.  We 
discuss these effects below.  
A.  Background 
The Commission’s interpretation regarding the solely incidental prong of the broker-
dealer exclusion would affect broker-dealers and their associated persons as well as the 
customers of those broker-dealers, and the market for financial advice more broadly.
73
  As of 
December 2018, there were approximately 3,764 registered broker-dealers with over 140 million 
customer accounts.  In total, these broker-dealers have over $4.3 trillion in total assets, which are 
total broker-dealer assets as reported on Form X-17a-5.
74
  Of the broker-dealers registered with 
the Commission as of December 2018, 363 broker-dealers were dually registered with the 
Commission as investment advisers.
75
  Dual registrant firms hold over 90 million (63%) of the 
                                            
73
  See Relationship Summary Adoption, supra footnote 6, at section IV.B (discussing the market for financial 
advice generally). 
74
  Assets are estimated by Total Assets (allowable and non-allowable) from Part II of the FOCUS filings 
(Form X-17A-5 Part II, available at https://www.sec.gov/files/formx-17a-5_2.pdf) and correspond to 
balance sheet total assets for the broker-dealer.  The Commission does not have an estimate of the total 
amount of customer assets for broker-dealers.  We estimate broker-dealer size from the total balance sheet 
assets as described above. 
75
           For purposes of this analysis, a dual registrant is any firm that is dually registered with the Commission as 
an investment adviser and a broker-dealer.
  Because this number does not include the number of broker-
 

   23 
 
overall 140 million customer accounts held by broker dealers.
76
  As part of the Reg. BI Proposal, 
we requested data and other information related to the nature and magnitude of discretionary 
services offered by broker-dealers,
77
 but did not receive any data or information to inform our 
analysis of potential economic effects stemming from this interpretation. 
B.  Potential Economic Effects 
Broker-dealers currently incur ongoing costs related to compliance with their legal and 
regulatory obligations, including costs related to understanding their practices and structuring 
their practices to be consistent with the solely incidental prong of the broker-dealer exclusion. 
This interpretation generally confirms the scope of the solely incidental prong of the broker-
dealer exclusion.   
Generally, we believe that few, if any, broker-dealers take the view that they act 
consistently with the solely incidental prong with respect to any accounts over which the broker-
dealer exercises more than temporary or limited investment discretion.
78
  As with other 
circumstances in which the Commission speaks to the legal obligations of regulated entities, we 
                                                                                                                                             
dealers who are also registered as state investment advisers, the number undercounts the full number of 
broker-dealers that operate in both capacities.  
 
76
  Some broker-dealers may be affiliated with investment advisers without being dually registered.  From 
Question 10 on Form BD, 2,098 broker-dealers report that directly or indirectly, they either control, are 
controlled by, or under common control with an entity that is engaged in the securities or investment 
advisory business. Comparatively, 2,691 (19.57%) SEC-registered investment advisers report an affiliate 
that is a broker-dealer in Section 7A of Schedule D of Form ADV, including 1,916 SEC-registered 
investment advisers that report an affiliate that is a registered broker-dealer.  Approximately 74% of total 
assets under management of investment advisers are managed by these 2,691 investment advisers. 
77
  See Reg. BI Proposal, supra footnote 3. 
78
  See Comment Letter of UBS (noting that broker-dealers have existing arrangements where they exercise 
temporary or limited discretion, such as discretion as to time and price, and that those types of discretion 
“do not present the sort of risks about which the SEC is concerned with respect to the exercise of unfettered 
discretion”) (emphasis added); SIFMA Letter (noting that there are instances in which temporary or limited 
discretion, such as discretion as to prices at which securities can be purchased, does not have the 
supervisory or managerial character of the investment discretion warranting the protections of the Advisers 
Act).     

   24 
 
acknowledge that affected firms, including those whose practices are consistent with the 
Commission’s interpretation, incur costs to evaluate the Commission’s interpretation and assess 
its applicability to them.  Further, to the extent certain broker-dealers currently understand the 
scope of permissible monitoring or other permissible advisory activities under the solely 
incidental prong to be different from what is set forth in this interpretation, there could be some 
economic effects.
79
  
This interpretation may produce economic effects to the extent that it causes any broker-
dealers to recognize that their practices are inconsistent with the solely incidental prong and to 
adjust their practices to make them consistent.  In particular, broker-dealers that have interpreted 
the solely incidental prong to conduct more advisory activities than this interpretation permits 
may choose to no longer provide such services to customers.  This could result in a loss of 
certain customers, a reduction in certain business activities, and could preclude those broker-
dealers from further developing certain services for their customers, except to the extent those 
broker-dealers are dually registered firms and their customers are also advisory clients.  This 
may, in turn, result in decreased competition in the market for certain services, increased fees for 
those services, or a diminished number of broker-dealers offering commission-based services to 
investors.
80
   
                                            
79
  The above application of our interpretation of the solely incidental prong to the exercise of investment 
discretion is generally consistent with the position taken in the 2005 Adopting Release and preliminarily 
taken in the 2007 Proposing Release. We believe that many broker-dealers changed their practices with 
respect to investment discretion in light of those releases, and thus those practices likely are consistent with 
our interpretation of the solely incidental prong.  
80
  For example, to the extent that broker-dealers respond to the interpretation by limiting the levels of 
discretion that they provide for their customers, execution quality (including the execution price) may be 
affected due to the delays encountered when the broker-dealer must contact a customer to proceed with a 
transaction. 

   25 
 
To the extent any broker-dealers have been providing advisory services beyond the scope 
of this interpretation, their customers may receive fewer advisory services if these broker-dealers 
choose not to register as investment advisers and adjust their business practices in light of this 
interpretation.  To the extent that this interpretation would lead to a decline in the supply of 
certain services offered by broker-dealers (or a decline in broker-dealers offering services to 
particular customers), it could reduce the efficiency of portfolio construction for those investors 
who might otherwise benefit from broker-dealers providing investment advice with respect to 
their account and would find similar advice from investment advisers to be too costly or 
unattainable (e.g., due to account minimum requirements).  For example, certain broker-dealers 
may incur costs to adopt or revise policies and procedures to ensure that the account monitoring 
that they may agree to provide their customers is consistent with this interpretation and may 
choose instead to stop offering such monitoring services.  Further, to the extent that any broker-
dealers determine that their services are not consistent with this interpretation, they may choose 
to register as investment advisers with the Commission, or one or more states, as applicable.  
Such broker-dealers would bear costs in choosing to register as investment advisers to continue 
providing those services, and their clients may face higher fees as a result.  Alternatively, broker-
dealers that have investment adviser affiliates may seek to place existing customers in advisory 
accounts instead of brokerage accounts.   
Broker-dealers that determine they must change business practices as a result of this 
interpretation will choose their responses based on their circumstances.  For example, if broker-
dealers with affiliated advisers are able to utilize their existing regulatory infrastructure and 
compliance policies and procedures to account for activities that are inconsistent with the solely 
incidental exclusion they may face lower costs associated with migration of brokerage accounts 

   26 
 
and activities to investment advisory accounts.  By contrast, we expect the costs of regulatory 
registration and compliance to be greater for any standalone broker-dealers that choose to 
become registered investment advisers, as they are more likely to need to undertake new 
systems, procedures, and policies. 
To the extent that broker-dealers choose to discontinue providing certain services, 
register as investment advisers, or encourage migration of customer’s brokerage accounts to 
advisory accounts of affiliates, this interpretation could result in a shift in the demand for the 
services of different types of financial service providers, decreasing the demand for services of 
broker-dealers and increasing the demand for the services of investment advisers.
81
 
This interpretation may also produce some overall economic effects to the extent that it 
causes any broker-dealers that to date have avoided performing limited discretion and other 
activities to recognize that they may perform such activities consistent with the solely incidental 
prong of the broker-dealer exclusion.  Such broker-dealers may respond to this interpretation by 
increasing the amount of limited discretionary services or monitoring services that they agree to 
provide to their customers.  Investors that have established relationships with such broker-dealers 
may benefit from more efficient access to these services and may demand these services from 
broker-dealers rather than becoming clients of investment advisers.  While additional provision 
of these services by broker-dealers also raises the risk of regulatory arbitrage because similar 
activities would be regulated under different regimes, we believe this risk will be mitigated by 
                                            
81
  To the extent this interpretation results in altered compliance costs for standalone broker-dealers, non-
affected standalone broker-dealers (i.e., those standalone broker-dealers that already are in compliance with 
the solely incidental prong as we have interpreted it), dual registrants, investment advisers, and other 
financial intermediaries that are not required to register as investment advisers (such as banks, trust 
companies, insurance companies, commodity trading advisers, and municipal advisors) may to a varying 
degree gain business at these affected broker-dealers’ expense.  

   27 
 
the adoption of rules that enhance the standard of conduct that applies to broker-dealer 
recommendations. 
List of Subjects in 17 CFR Part 276 
Securities. 
Amendments to the Code of Federal Regulations 
For the reasons set out above, the Commission is amending title 17, chapter II of the 
Code of Federal Regulations as set forth below: 
PART 276–INTERPRETATIVE RELEASES RELATING TO THE INVESTMENT 
ADVISERS ACT OF 1940 AND GENERAL RULES AND REGULATIONS 
THEREUNDER 
1.   Part 276 is amended by adding Release No. IA–5249 and the release date of June 
5, 2019, to the end of the list of interpretive releases to read as follows: 
Subject Release No. Date Fed. Reg. Vol. and Page 
*     * 
Commission Interpretation 
Regarding the Solely 
Incidental Prong of the 
Broker-Dealer Exclusion 
from the Definition of 
Investment Adviser 
* 
IA-5249 
*   * 
June 5, 2019 
*    * 
[Insert FR Volume 
Number] FR [Insert FR 
Page Number] 
 
 
By the Commission. 

   28 
 
Dated: June 5, 2019 
Vanessa A. Countryman, 
Acting Secretary. 
 

Conformed to Federal Register version 

SECURITIES AND EXCHANGE COMMISSION 

17 CFR Part 276  

[Release No. IA-5249] 

Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer 

Exclusion from the Definition of Investment Adviser 

AGENCY:  Securities and Exchange Commission.  

ACTION:  Interpretation. 

SUMMARY: The Securities and Exchange Commission (the “SEC” or the “Commission”) is 

publishing an interpretation of a section of the Investment Advisers Act of 1940 (the “Advisers 

Act” or the “Act”), which excludes from the definition of “investment adviser” any broker or 

dealer that provides advisory services when such services are “solely incidental” to the conduct 

of the broker or dealer’s business and when such incidental advisory services are provided for no 

special compensation.  

DATES:  Effective July 12, 2019. 

FOR FURTHER INFORMATION CONTACT:  James McGinnis, Senior Counsel, 

Investment Adviser Regulation Office, at (202) 551-6787 or [email protected]; and Benjamin 

Kalish, Attorney-Advisor, or Parisa Haghshenas, Branch Chief, Chief Counsel’s Office at (202) 

551-6825 or [email protected], Division of Investment Management, Securities and Exchange 

Commission, 100 F Street NE, Washington, DC 20549-8549. 

SUPPLEMENTARY INFORMATION:  The Commission is publishing an interpretation of 

the solely incidental prong of the broker-dealer exclusion in section 202(a)(11)(C) of the 



  2 
 

Advisers Act [15 U.S.C. 80b].1 

 
TABLE OF CONTENTS 

I. Introduction 

II. Interpretation and Application 

A. Historical Context and Legislative History 

B. Scope of the Solely Incidental Prong of the Broker-Dealer Exclusion 

C. Guidance on Applying the Interpretation of the Solely Incidental Prong 

III. Economic Considerations 

A. Background 

B. Potential Economic Effects 

 
I. INTRODUCTION 

The Advisers Act regulates the activities of certain “investment advisers,” who are 

defined in section 202(a)(11) of the Advisers Act in part as persons who, for compensation, 

engage in the business of advising others about securities.  Section 202(a)(11)(C) excludes from 

the definition of investment adviser—and thus from the application of the Advisers Act—a 

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” for those 

services (the “broker-dealer exclusion”).  The broker-dealer exclusion shows, on the one hand, 

that at the time the Advisers Act was enacted Congress recognized broker-dealers commonly 

provided some investment advice to their customers in the course of their business as broker-

dealers and that it would be inappropriate to bring broker-dealers within the scope of the 

                                            
1  15 U.S.C. 80b.  Unless otherwise noted, when we refer to the Advisers Act, or any paragraph of the 

Advisers Act, we are referring to 15 U.S.C. 80b of the United States Code, at which the Advisers Act is 
codified.   



  3 
 

Advisers Act because of this aspect of their business.2  On the other hand, the limitations of the 

exclusion show that Congress excluded broker-dealer advisory services from the scope of the 

Advisers Act only under certain circumstances—namely, when those services are solely 

incidental to the broker-dealer’s regular business as a broker-dealer (the “solely incidental 

prong”) and when the broker-dealer receives no special compensation (the “special 

compensation prong”).3   

On April 18, 2018, the Commission proposed a rulemaking intended to enhance the 

standard of conduct for broker-dealers when providing recommendations.4  The Commission 

also proposed an interpretation intended to reaffirm and in some cases clarify the standard of 

conduct for investment advisers,5 as well as a rulemaking intended to provide retail investors 

with clear and succinct information regarding key aspects of their brokerage and advisory 

relationships.6  The Reg. BI Proposal discussed the broker-dealer exclusion and requested 

                                            
2  Opinion of General Counsel Relating to Section 202(a)(11)(C) of the Investment Advisers Act of 1940, 

Investment Advisers Act Release No. 2 (Oct. 28, 1940) (“Advisers Act Release No. 2”).   
3  See Regulation Best Interest, Securities Exchange Act Release No. 83062 (April 18, 2018) [83 FR 21574 

(May 9, 2018)] (“Reg. BI Proposal”), at n.343.  The broker-dealer exclusion is conjunctive—that is, the 
broker-dealer must both provide investment advice that is solely incidental to the conduct of his business as 
a broker-dealer and the broker-dealer must receive no special compensation.  In the event that a broker-
dealer’s investment advice fits within the guidance of this Release with respect to the solely incidental 
prong, that broker-dealer must also receive no special compensation for the advisory service to be 
consistent with the broker-dealer exclusion. 

4  See id. 
5  Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for 

Comment on Enhancing Investment Adviser Regulation, Investment Advisers Act Release No. 4889 (April 
18, 2018) [83 FR 21203 (May 9, 2018)] (the “Proposed Fiduciary Interpretation”). 

6  See Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail 
Communications and Restrictions on the Use of Certain Names or Titles, Investment Advisers Act Release 
No. 4888 (April 18, 2018) [83 FR 21416 (May 9, 2018)] (“Relationship Summary Proposal”).  
Concurrently with this interpretation, we also are adopting the final versions of the rules and interpretations 
proposed in the Relationship Summary Proposal, the Reg. BI Proposal, and the Proposed Fiduciary 
Interpretation.  See Form CRS Relationship Summary; Amendments to Form ADV, Investment Advisers 
Act Release No. 5247 (June 5, 2019) (the “Relationship Summary Adoption”); Regulation Best Interest: 
The Broker-Dealer Standard of Conduct, Exchange Act Release No. 86031 (June 5, 2019) (“Reg. BI 

 



  4 
 

comment on the scope of the exclusion as applied to a broker-dealer’s exercise of investment 

discretion.7  While some commenters addressed when a broker-dealer’s advisory services are 

“solely incidental to the conduct of his business as a broker or dealer” in the context of the 

exercise of investment discretion, more commenters addressed this prong more generally.8  For 

example, many commenters requested general guidance on or expressed views about the 

meaning of the solely incidental prong9 and the permissibility under this prong of various  

broker-dealer activities that relate to the investment advice they provide in light of the Reg. BI 

Proposal and the Relationship Summary Proposal.10  Other commenters suggested that our 

approach to the Reg. BI Proposal was inconsistent with the solely incidental prong of the broker-

dealer exclusion.  One commenter suggested that the Reg. BI Proposal, if adopted, would allow 

broker-dealers to provide investment advice beyond what the solely incidental prong should 

“reasonably be interpreted to permit,” arguing that to qualify for exclusion from regulation under 

                                                                                                                                             
Adoption”); and Commission Interpretation Regarding Standard of Conduct for Investment Advisers, 
Investment Advisers Act Release No. 5248 (June 5, 2019) (“Final Fiduciary Interpretation”). 

7  See Reg. BI Proposal, supra footnote 3, at nn.342–67 and accompanying text. 
8  We considered comments submitted in File No. S7-07-18 (Reg. BI Proposal, supra footnote 3); File No. 

S7-08-18 (Relationship Summary Proposal, supra footnote 6); and File No. S7-09-18 (Proposed Fiduciary 
Interpretation, supra footnote 5).  Those comments are available on the Commission’s website at 
https://www.sec.gov/comments/s7-07-18/s70718.htm, https://www.sec.gov/comments/s7-08-
18/s70818.htm, and https://www.sec.gov/comments/s7-09-18/s70918.htm, respectively.   

9  See, e.g., Comment Letter of North American Securities Administrators Association, Inc. (Aug. 23, 2018) 
(“NASAA Letter”); Comment Letter of CFA Institute (Aug. 7, 2018) (“CFA Institute Letter”) (noting the 
“need to give guidance” on the broker-dealer exclusion and noting that the Commission has legal authority 
to provide needed clarification); Comment Letter of the Institute for the Fiduciary Standard (Aug. 6, 2018) 
(“IFS Letter”) (arguing that when a broker’s investment advice is solely incidental to its business is one of 
a number of “questions the SEC should address”); Comment Letter of the Consumer Federation of America 
(Aug. 7, 2018) (“CFA Letter”) (arguing that the Commission failed to “engage” on “just how far the ‘solely 
incidental’ exclusion stretches”); Comment Letter of the Investment Adviser Association (Aug. 6, 2018) 
(“IAA Letter”) (“[T]he Commission should reconsider when broker-dealers should be able to rely on the 
Solely Incidental [prong].”); Comment Letter of Michael Kitces (Aug. 2, 2018) (“Kitces Letter”) (arguing 
that the Commission’s prior interpretations of the solely incidental prong are inconsistent with the plain 
meaning and legislative history of the term). 

10  See, e.g., CFA Letter; Kitces Letter. 



  5 
 

the Advisers Act, broker-dealers should only “be able to provide very limited advice….”11  Two 

commenters thought that the Commission’s expressed support for maintaining the “broker-dealer 

model as an option for retail customers seeking investment advice”12 was inconsistent with the 

solely incidental prong.13  Another commenter called the Commission’s previously articulated 

interpretation of the solely incidental prong “vague.”14  The comments we received demonstrate 

that there is disagreement about when the provision of broker-dealer investment advice is 

consistent with the solely incidental prong.15  In light of these comments, we are adopting this 

interpretation to confirm and clarify the Commission’s position with respect to the solely 

incidental prong.  To illustrate how the interpretation functions, we discuss its application to two 

advisory services that a broker or dealer may provide, namely: (i) exercising investment 

discretion over customer accounts and (ii) account monitoring.16  Our interpretation 

complements each of the rules and forms we are adopting, which, among other things, are 

                                            
11  See NASAA Letter. 
12  See Reg. BI Proposal, supra footnote 3, at text accompanying n.31. 
13  See CFA Letter (stating that certain aspects of the Relationship Summary Proposal and the Reg. BI 

Proposal indicated that broker-dealers were in an “advice relationship” in a manner that does not “remotely 
sound like advice that is ‘solely incidental to’ the conduct of their business as a broker or dealer”); Kitces 
Letter (arguing that referring to the broker-dealer model as a “model for advice” is in contravention of the 
broker-dealer exclusion because “advice can only be incidental if it occurs by chance, as a consequence of 
a product sale, or without intent to give advice”). 

14  See Comment Letter of Securities Arbitration Clinic, St. Vincent DePaul Legal Program, Inc., St. John’s 
University School of Law (Aug. 7, 2018) (“St. John’s Clinic Letter”). 

15  Furthermore, interested parties have for years expressed their views to the Commission on what they 
believe the broker-dealer exclusion requires, including disagreements with the Commission’s interpretation 
of the exclusion.  See, e.g., Comment Letter of Consumer Federation of America (Sept. 20, 2004) (arguing 
that the Commission should “define ‘solely incidental’ in a way that hews closely to what commenters 
described as Congress’s clear intent to provide only a very narrow exclusion”), available at 
https://www.sec.gov/rules/proposed/s72599/s72599-1101.pdf. 

16  We received comments requesting guidance with respect to the solely incidental prong on both activities.  
See infra section II.C. 



  6 
 

intended individually and collectively to enhance investor understanding of the relationships and 

services offered by investment advisers and broker-dealers.17 

II. INTERPRETATION AND APPLICATION 

A. Historical Context and Legislative History 

When the Advisers Act was enacted in 1940, broker-dealers regularly provided 

investment advice.18  They did so in two distinct ways: as an auxiliary part of traditional 

brokerage services for which their brokerage customers paid fixed commissions and, 

alternatively, as a distinct advisory service for which their advisory clients separately contracted 

and paid a fee.19  The advice that broker-dealers provided as an auxiliary component of 

traditional brokerage services was referred to as “brokerage house advice” in a leading study of 

                                            
17  See Reg. BI Adoption; Relationship Summary Adoption; Final Fiduciary Interpretation, supra footnote 6.  

We also received a few comments in response to the Reg. BI Proposal and the Relationship Summary 
Proposal requesting that the Commission provide guidance on the special compensation prong.  See, e.g., 
CFA Letter (arguing, among other points, that special compensation would constitute any compensation 
other than commissions for trade execution); Comment Letter of Coalition of Mutual Fund Investors (Aug. 
8, 2018) (“Mutual Fund Investors Letter”) (arguing that special compensation should include all asset-
based compensation and third-party fees from mutual funds and their advisers).  We are not providing 
guidance on the special compensation prong in this Release as we do not believe our views on this prong 
require additional clarification.  The Commission has considered the meaning of the special compensation 
prong on previous occasions.  See, e.g., Interpretive Rule Under the Advisers Act Affecting Broker-Dealers, 
Investment Advisers Act Release No. 2652 (Sept. 24, 2007) (“2007 Proposing Release”); Certain Broker-
Dealers Deemed Not to Be Investment Advisers, Investment Advisers Act Release No. 2376 (Apr. 12, 
2005) (“2005 Adopting Release,” in which, as discussed infra at footnote 38 and accompanying text, the 
Commission adopted a rule that a court vacated on grounds that did not address our interpretive positions 
relating to the solely incidental prong).  The comments we received in response to requests for comment to 
the Reg. BI Proposal and the Relationship Summary Proposal did not demonstrate that there is significant 
disagreement with our interpretation of that prong. 

18  For an extensive discussion of broker-dealer practice in the years leading up to enactment of the Advisers 
Act, from which this summary is drawn, see 2005 Adopting Release, supra footnote 17; Certain Broker-
Dealers Deemed Not to Be Investment Advisers, Investment Advisers Act Release No. 2340 (Jan. 6, 2005) 
(“2005 Proposing Release”).   

19  See, e.g., Investment Trusts and Investment Companies:  Hearings on S. 3580 Before a Subcomm. of the 
Senate Committee on Banking and Currency, 76th Cong., 3d Sess. 736 (1940) (“Hearings on S. 3580”) 
(testimony of Dwight C. Rose, president of the Investment Counsel Association of America) (“Most . . . 
investment dealers . . . and brokers advise on investment problems, either as an auxiliary service without 
charge, or for specific charges allocated to this specific function.”).   



  7 
 

the time.20  “Brokerage house advice” was extensive and varied,21 and included information 

about various corporations, municipalities, and governments;22 broad analyses of general 

business and financial conditions;23 market letters and special analyses of companies’ 

situations;24 information about income tax schedules and tax consequences;25 and “chart 

reading.”26  The second way in which broker-dealers dispensed advice was to charge a distinct 

fee for advisory services, which typically were provided through special “investment advisory 

departments” within broker-dealer firms that advised customers for a fee in the same manner as 

firms whose sole business was providing “investment counsel” services.27   

                                            
20  See Twentieth Century Fund, THE SECURITY MARKETS (1935) (“SECURITY MARKETS”) at 633–46 

(discussing “brokerage house advice”); see also Charles F. Hodges, WALL STREET (1930) (“WALL 
STREET”) at 253–85; SEC, REPORT ON INVESTMENT COUNSEL, INVESTMENT MANAGEMENT, INVESTMENT 
SUPERVISORY, AND INVESTMENT ADVISORY SERVICES (1939) (H.R. Doc. No. 477) (“INVESTMENT 
COUNSEL REPORT”) at n.1.   

21  See, e.g., REPORT OF PUBLIC EXAMINING BD. ON CUSTOMER PROTECTION TO N.Y. STOCK EXCHANGE (Aug. 
31, 1939), at 3: 

The customer entrusts the broker with information regarding his financial affairs and dealings 
which he expects to be kept in strict confidence. Frequently he looks to the broker to perform 
a whole series of functions relating to the investment of his funds and the care of his 
securities. Although he could secure similar services at his bank, he asks his broker, as a 
matter of choice and convenience, to hold credit balances of cash pending instructions; to 
retain securities in safekeeping and to collect dividends and interest; to advise him respecting 
investments; and to lend him money on suitable collateral.  

22  SECURITY MARKETS, supra footnote 20, at 633; WALL STREET, supra footnote 20, at 254 (“This 
information includes current and comparative data for a number of years on earning and earnings records, 
capitalization, financial position, dividend record, comparative balance sheets and income statements . . . 
production and operating statistics, territory and markets served, officers and directors of the company and 
much other information of value to the investor in appraising the value of a security.”).   

23  SECURITY MARKETS, supra footnote 20, at 634; WALL STREET, supra footnote 20, at 254. 
24  SECURITY MARKETS, supra footnote 20, at 640–43; WALL STREET, supra footnote 20, at 277–85. 
25  SECURITY MARKETS, supra footnote 20, at 641. 
26  Id. at 643 (defining “chart reading” as “the study of the charted course of prices and volume of trading over 

a long period of time in order to discover typical conformations recurring in the past with sufficient 
frequency to be utilized in the present as a basis of judgment as to impending price changes”). 

27  See Advisers Act Release No. 2, supra footnote 2; see also SECURITY MARKETS, supra footnote 20, at 646, 
653 (referring to “investment supervisory departments” and “special investment management departments” 
of broker-dealers).  In general, contemporaneous literature used the term “investment counsel” or 
“investment counselor” to refer to those who provided investment advice for a fee and whose advisory 

 



  8 
 

Between 1935 and 1939, the Commission conducted a congressionally mandated study of 

investment trusts and investment companies and in connection with this study surveyed 

investment advisers, including broker-dealers with investment advisory departments.28  In a 

report to Congress (the “Investment Counsel Report”), the Commission informed Congress that 

the Commission’s study had identified two broad classes of problems relating to investment 

advisers that warranted legislation:  “(a) the problem of distinguishing between bona fide 

investment counselors and ‘tipster’ organizations; and (b) those problems involving the 

organization and operation of investment counsel institutions.”29  Based on the findings of the 

Investment Counsel Report, representatives of the Commission testified at the congressional 

hearings on what ultimately became the Advisers Act in favor of regulating the persons engaged 

in the business of providing investment advice for compensation.   

Congress responded by passing the Advisers Act.  Section 202(a)(11) of the Act defined 

“investment adviser”—those subject to the requirements of the Act—broadly to include “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 regular business, 

issues or promulgates analyses or reports concerning securities....”  In adopting this broad 

definition, Congress necessarily rejected arguments presented during its hearings that legitimate 

                                                                                                                                             
relationship with clients had a supervisory or managerial character.  See id. at 646 (defining “investment 
counselor” as “an individual, institution, organization, or department of an institution or organization which 
undertakes for a fee to advise or to supervise the investment of funds by, and on occasion to manage the 
investment accounts of, clients”).  Under the Advisers Act, “investment counsel” is a defined subset of the 
“investment advisers” to whom the Act applies.  See section 208(c) of the Act. 

28  INVESTMENT COUNSEL REPORT, supra footnote 20, at 1.  The study was conducted pursuant to section 30 
of the Public Utility Holding Company Act of 1935 [15 U.S.C. 79z-4]; see Hearings on S. 3580, supra 
footnote 19, at 995–96. 

29  INVESTMENT COUNSEL REPORT, supra footnote 20, at 27. 



  9 
 

investment counselors30 should be free from any oversight except, perhaps, by the few states that 

had passed laws regulating investment counselors and by private organizations, such as the 

Investment Counsel Association of America.31  Instead, in responding to such views, 

congressional committee members repeatedly observed that those whose business was limited to 

providing investment advice for compensation were subject to little if any regulatory oversight, 

and questioned why they should not be subject to regulation even though other professionals 

were.32  

Conversely, the Advisers Act specifically excluded persons, among others, from the 

broad definition of “investment adviser” to the extent that such persons rendered investment 

advice incidental to their primary business.33  Broker-dealers were among these excluded 

                                            
30  Hearings on S. 3580, supra footnote 19, at 745–48; see also 2005 Adopting Release, supra footnote 17, at 

n.62. 
31  Hearings on S. 3580, supra footnote 19, at 716–18, 736–38, 740-41, 744–45, 760, 763. 
32  Id. at 738–39, 745–49, 751–53 (Senators Wagner and Hughes).  David Schenker, chief counsel for the 

Commission’s study, offered the following observations in response to investment counselors’ arguments 
against the registration and regulation required by the Act:  

Then there is another curious thing, Senator, that those people who are subject to supervision 
by some authoritative body of some kind, such as securities dealers or investment bankers 
have to register with us as brokers and dealers.  People, who are brokers and members of 
stock exchanges and are supervised by the stock exchanges.  Curiously enough, the people in 
the investment-counsel business who are supervised are not eligible for membership in the 
investment counsel association; because the association says that if you are in the brokerage 
or banking business you cannot be a member of the association.  

So the situation is that if you take their analysis, the only ones who would not be subject to 
regulation by the S.E.C. would be the people who are not subject to regulation by anybody at 
all.  These investment counselors who appeared here are no different from the over-the-
counter brokers and dealers or the members of the New York Stock Exchange. 

Id. at 995–96.  Eventually, members of the investment counsel industry agreed with the proposed 
legislation.  See id. at 1124; Investment Trusts and Investment Companies:  Hearings on H.R. 10065 Before 
a Subcomm. of the House Committee on Interstate and Foreign Commerce, 76th Cong., 3d Sess. (1940) 
(“Hearings on H.R. 10065”); see also S. REP. NO. 76-1775, 76th Cong., 3d Sess. 21 (1940); H.R. REP. NO. 
76-2639, 76th Cong., 3d Sess. 27 (1940). 

33  The exclusion for certain professionals in Advisers Act section 202(a)(11) is very similar to certain state-
law provisions governing investment counselors at the time, which excepted “brokers, attorneys, banks, 
savings and loan associations, trust companies, and certified public accountants.”  See STATUTORY 
REGULATION OF INVESTMENT ADVISERS (prepared by the Research Department of the Illinois Legislative 

 



  10 
 

persons, as section 202(a)(11)(C) of the Act excludes from the definition of “investment adviser” 

a broker-dealer who provides investment advice that is “solely incidental to the conduct of his 

business as a broker or dealer and who receives no special compensation therefor”—i.e., the 

broker-dealer exclusion.  

B. Scope of the Solely Incidental Prong of the Broker-Dealer Exclusion 

The Commission and its staff have on several occasions discussed the scope of the 

broker-dealer exclusion.34  In adopting a rule regarding fee-based brokerage accounts in 2005, 

for example, the Commission stated that investment advisory services are “solely incidental to” 

the conduct of a broker-dealer’s business when the services are offered in connection with and 

are reasonably related to the brokerage services provided to an account.35  The interpretation was 

consistent with the Commission’s contemporaneous construction of the Advisers Act as 

excluding broker-dealers whose investment advice is given “solely as an incident of their regular 

business.”36  The 2005 interpretation stated that the importance or frequency of the investment 

advice was not a determinant of whether the solely incidental prong was satisfied; the 

Commission rejected the view that only minor, insignificant, or infrequent advice qualifies for 

                                                                                                                                             
Council) reprinted in Hearings on S. 3580, supra footnote 19, at 1007.  That report stated that “the 
investment advice furnished by these excepted groups would seem to be merely incidental to some other 
function being performed by them.”  Id. 

34  See, e.g., Advisers Act Release No. 2, supra footnote 2; Applicability of the Investment Advisers Act to 
Certain Brokers and Dealers; Interpretation of the Term ‘Special Compensation’, Investment Advisers Act 
Release No. 640 (Oct. 5, 1978); 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).   

35  2005 Adopting Release, supra footnote 17; 2005 Proposing Release, supra footnote 18.  
36  See Advisers Act Release No. 2, supra footnote 2; see also 2005 Adopting Release, supra footnote 17.   



  11 
 

the broker-dealer exclusion, noting that the advice broker-dealers gave as part of their brokerage 

services in 1940 was often substantial and important to customers.37   

On March 30, 2007, the Court of Appeals for the District of Columbia Circuit in 

Financial Planning Association v. SEC vacated the rule regarding fee-based brokerage accounts, 

but not on grounds that addressed our interpretive positions relating to the solely incidental 

prong.38  In September 2007, we proposed to reinstate these interpretive positions.39   

Since that time, a federal appellate court has addressed the solely incidental prong.  In 

2011, in Thomas v. Metropolitan Life Insurance Company, the Court of Appeals for the Tenth 

Circuit addressed the scope of the broker-dealer exclusion in the context of a private suit alleging 

that a broker had violated the Advisers Act by failing to disclose incentives to sell proprietary 

products.40  As part of its analysis of the exclusion, the court looked to the interpretation of the 

solely incidental prong that we advanced in 2005 and 2007.  The court found these 

interpretations to be “persuasive” in light of its own analysis of the text of the solely incidental 

prong of the broker-dealer exclusion as well as the legislative history and historical background 

of the Advisers Act.41  The court concluded that a broker-dealer’s investment advice is solely 

incidental to its conduct as a broker-dealer if the advice is given “only in connection with the 

primary business of selling securities.”42  Thus, the court explained, “broker-dealers who give 

advice that is not connected to the sale of securities—or whose primary business consists of 

                                            
37  See 2005 Adopting Release, supra footnote 17, at nn.139–42 and accompanying text. 
38  See 482 F.3d 481 (D.C. Cir. 2007). 
39  2007 Proposing Release, supra footnote 17.   
40 631 F.3d 1153 (10th Cir. 2011). 
41  Id. at 1163–64.  
42  Id. at 1164.  



  12 
 

giving advice—do not meet the [solely incidental] prong” of the broker-dealer exclusion.43  The 

court also agreed with the Commission’s interpretations that the solely incidental prong does not 

hinge upon “the quantum or importance” of a broker-dealer’s advice but on its relationship to the 

broker-dealer’s primary business.44  In the court’s view, “[t]he quantum or importance of the 

broker-dealer’s advice is relevant only insofar as the advice cannot supersede the sale of the 

product as the ‘primary’ goal of the transaction or the ‘primary’ business of the broker-dealer.”45   

Based on the text and history of the solely incidental prong, our previous interpretations 

of the prong, the Thomas decision, and the comments we have received, we are providing the 

following interpretation.46  We interpret the statutory language to mean that a broker-dealer’s 

provision of advice as to the value and characteristics of securities or as to the advisability of 

transacting in securities47 is consistent with the solely incidental prong if the advice is provided 

in connection with and is reasonably related to the broker-dealer’s primary business of effecting 

securities transactions.48  If a broker-dealer’s primary business is giving advice as to the value 

                                            
43  Id.   
44  Id. at 1163.  
45  Id. at 1166.  In Thomas, the brokerage firm’s representative had conducted an analysis of the plaintiffs’ 

financial situation and advised them to purchase a particular financial product based in part on that analysis.  
The plaintiffs alleged that the firm’s policy “required [representatives] to provide investment advice to 
potential customers as a means to sell more proprietary products” and that this policy was “so pervasive 
that [representatives] allegedly gave financial advice to every customer to whom they sold a product.”  Id. 
at 1157.  The Court rejected the plaintiffs’ contention that these facts rendered the advice so central to the 
transaction that it could not be considered “solely incidental” to it.  Because the representative’s advice 
“was closely related to the sale of the [product] and selling the [product] was the primary object of the 
transaction,” the Court concluded, the advice was “solely incidental” to the representative’s conduct as a 
broker.  Id. at 1167. 

46  To the extent that this interpretation is inconsistent with the Commission’s prior interpretations with respect 
to the solely incidental prong, this interpretation supersedes those interpretations. 

47  See Advisers Act section 202(a)(11) (definition of “investment adviser”). 
48  Cf. 2005 Adopting Release, supra footnote 17 (“In general, investment advice is ‘solely incidental to’ the 

conduct of a broker-dealer’s business within the meaning of section 202(a)(11)(C) and to ‘brokerage 
services’ provided to accounts… when the advisory services rendered are in connection with and 
reasonably related to the brokerage services provided.”).  We have modified the wording of our 

 



  13 
 

and characteristics of securities or the advisability of transacting in securities, or if the advisory 

services are not offered in connection with or are not reasonably related to the broker-dealer’s 

business of effecting securities transactions, the broker-dealer’s advisory services are not solely 

incidental to its business as a broker-dealer.49  Whether advisory services provided by a broker-

dealer satisfy the solely incidental prong is assessed based on the facts and circumstances 

surrounding the broker-dealer’s business, the specific services offered, and the relationship 

between the broker-dealer and the customer.   

The quantum or importance of investment advice that a broker-dealer provides to a client 

is not determinative as to whether or not the provision of advice is consistent with the solely 

incidental prong.  Advice need not be trivial, inconsequential, or infrequent to be consistent with 

the solely incidental prong.  Indeed, our simultaneous adoption of (i) Regulation Best Interest, 

which raises the standard of conduct that applies to broker-dealer recommendations, and (ii) the 

relationship summary, which provides information about broker-dealer recommendation services 

to customers, underscores that broker-dealer investment advice can be consequential even when 

it is offered in connection with and reasonably related to the primary business of effecting 

securities transactions.   

                                                                                                                                             
interpretation to make clear that the broker-dealer’s primary business must also be effecting securities 
transactions. 

49  Nothing in this interpretation alters the Commission’s 2006 interpretation of section 28(e) of the Exchange 
Act, which, in the context of a client commission arrangement that otherwise satisfies section 28(e), 
permits a broker-dealer to be paid out of a pool of commissions for its research even if that broker-dealer 
did not effect a securities transaction.  See Commission Guidance Regarding Client Commission Practices 
Under Section 28(e) of the Securities Exchange Act of 1934, Securities Exchange Act Release No. 54165 
(July 18, 2006), 71 FR 41978 (July 24, 2006). 

 



  14 
 

To illustrate the application of this interpretation in practice, we provide the following 

guidance on the application of the interpretation to (i) exercising investment discretion over 

customer accounts and (ii) account monitoring.   

C. Guidance on Applying the Interpretation of the Solely Incidental Prong 
 

1. Investment Discretion 

The Commission has for many years considered issues related to a broker-dealer’s 

exercise of investment discretion over customer accounts and the extent to which such practices 

could be considered solely incidental to the business of a broker-dealer.50  The Commission has 

stated that discretionary brokerage relationships “have many of the characteristics of the 

relationships to which the protections of the Advisers Act are important.”51  In particular, the 

Commission has explained that when a broker-dealer exercises investment discretion, it is not 

providing advice to customers that is in connection with and reasonably related to effecting 

securities transactions; rather, the broker-dealer is making investment decisions relating to the 

purchase or sale of securities on behalf of customers on an ongoing basis.52  At the same time, 

the Commission has taken the position that some limited exercise of discretionary authority by 

broker-dealers could be considered solely incidental to their business.53   

We requested comment in the Reg. BI Proposal on a broker-dealer’s exercise of 

investment discretion over customer accounts and the extent to which the exercise of investment 

                                            
50  See Reg. BI Proposal, supra footnote 3, at nn.343–62 and accompanying text. 
51  Final Extension of Temporary Exemption from the Investment Advisers Act for Certain Brokers and 

Dealers, Investment Advisers Act Release No. 626 (Apr. 27, 1978) (“Advisers Act Release No. 626”).   
52 See 2005 Proposing Release, supra footnote 18.   
53  See Reg. BI Proposal, supra footnote 3, at nn.355–62 and accompanying text.  Cf. NASD rule 2510 

(allowing discretion only if a customer “has given prior written authorization to a stated individual or 
individuals… in accordance with [FINRA] rule 3010”). 



  15 
 

discretion should be considered solely incidental to the business of a broker-dealer.54  

Commenters agreed that the exercise of unlimited discretion should not be considered “solely 

incidental” investment advice.55  Commenters expressed varying views, however, on the extent 

to which the exercise of temporary or limited discretion could be considered solely incidental to 

the business of a broker-dealer.  Several commenters suggested that the exercise of any 

investment discretion should be governed by the Advisers Act.56  One commenter suggested that 

the Commission should interpret the solely incidental prong through the lens of the definition of 

“investment discretion” in section 3(a)(35) of the Securities Exchange Act of 1934 (the 

“Exchange Act”),57 noting that section 3(a)(35) focuses on “the level of authority, decision-

making ability, influence – and ultimately, control – an intermediary has over another’s money” 

and arguing that those with section 3(a)(35) investment discretion have a heightened likelihood 

of mismanagement and abuse of another’s money.58  Another commenter suggested that, while 

                                            
54  See Relationship Summary Proposal, supra footnote 6, at nn.363–67 and accompanying text; see also id. at 

nn.343–62 and accompanying text for a description of the Commission’s historical approaches. 
55  See, e.g., Comment Letter of Financial Planning Coalition (Aug. 7, 2018) (“FPC Letter”) (“[A] broker-

dealer’s provision of unfettered discretionary investment advice should never be considered ‘solely 
incidental’ to its business as a broker-dealer.” (emphasis removed)); CFA Letter; IFS Letter. 

56  See, e.g., Comment Letter of Invesco Advisers, Inc. (Aug. 7, 2018) (“Discretionary management over an 
account, whether or not temporary, is not within the scope of the ‘solely incidental’ exclusion.”); IAA 
Letter; CFA Institute Letter.  

57  Under Exchange Act section 3(a)(35), a person exercises “investment discretion” with respect to an account 
if, directly or indirectly, such person (A) is authorized to determine what securities or other property shall 
be purchased or sold by or for the account, (B) makes decisions as to what securities or other property shall 
be purchased or sold by or for the account even though some other person may have responsibility for such 
investment decisions, or (C) otherwise exercises such influence with respect to the purchase and sale of 
securities or other property by or for the account as the Commission, by rule, determines, in the public 
interest or for the protection of investors, should be subject to the operation of the provisions of this title 
and the rules and regulations thereunder.  15 U.S.C. 78c(a)(35).   

58  See FPC Letter (noting also that several federal and state courts have used factors similar to those in section 
3(a)(35) to impose a fiduciary standard).  Another commenter also suggested using Exchange Act section 
3(a)(35) “investment discretion” as a basis for establishing whether discretion is not solely incidental for 
purposes of the broker-dealer exclusion, with an exception for investment discretion “that a customer grants 
on a temporary or limited basis.”  See Comment Letter of Pickard Djinis and Pisarri (Aug. 14, 2018) 
(“Pickard Letter”). 



  16 
 

discretion generally should subject a broker-dealer to the Advisers Act, there are certain cases 

where temporary or limited discretion does not have the supervisory or managerial character of 

the investment discretion warranting the protections of the Advisers Act.59  
 

Applying our interpretation of the solely incidental prong, a broker-dealer’s exercise of 

unlimited discretion60 would not be solely incidental to the business of a broker-dealer consistent 

with the meaning of section 202(a)(11)(C).61  It would be inconsistent with the solely incidental 

prong for broker-dealers to exercise “investment discretion” as that term is defined in section 

3(a)(35) of the Exchange Act with respect to any of its accounts, except for certain instances of 

investment discretion granted by a customer on a temporary or limited basis, as discussed below.  

A broker-dealer with unlimited discretion to effect securities transactions possesses ongoing 

authority over the customer’s account indicating a relationship that is primarily advisory in 

nature; such a level of discretion by a broker-dealer is so comprehensive and continuous that the 

provision of advice in such context is not incidental to effecting securities transactions.   

We recognize, however, that there are situations where a broker-dealer may exercise 

temporary or limited discretion in a way that is not indicative of a relationship that is primarily 

advisory in nature.  Generally, these are situations where the discretion is limited in time, scope, 

or other manner and lacks the comprehensive and continuous character of investment discretion 

                                            
59  See Comment Letter of the Securities Industry and Financial Markets Association (Aug. 7, 2018) (“SIFMA 

Letter”). 
60  We view unlimited investment discretion as a person having the ability or authority to buy and sell 

securities on behalf of a customer without consulting the customer—i.e., having responsibility for a 
customer’s trading decisions. 

61  The Commission has in the past stated that the quintessentially supervisory or managerial character of 
investment discretion warrants the protection of the Advisers Act. See Amendment and Extension of 
Temporary Exemption from the Investment Advisers Act for Certain Brokers and Dealers, Investment 
Advisers Act Release No. 471 (Aug. 20, 1975); see also 2005 Proposing Release, supra footnote 18; 2005 
Adopting Release, supra footnote 17.   



  17 
 

that would suggest that the relationship is primarily advisory.  The totality of the facts and 

circumstances would be relevant to determining whether temporary or limited discretion is 

consistent with the solely incidental prong.  Taking into consideration specific examples that 

commenters have suggested in the past, instances of temporary or limited investment discretion 

that, standing alone, would not support the conclusion that a relationship is primarily advisory—

and therefore outside the scope of the solely incidental prong—include discretion: (i) as to the 

price at which or the time to execute an order given by a customer for the purchase or sale of a 

definite amount or quantity of a specified security; (ii) on an isolated or infrequent basis, to 

purchase or sell a security or type of security when a customer is unavailable for a limited period 

of time; (iii) as to cash management, such as to exchange a position in a money market fund for 

another money market fund or cash equivalent;62 (iv) to purchase or sell securities to satisfy 

margin requirements, or other customer obligations that the customer has specified; (v) to sell 

specific bonds or other securities and purchase similar bonds or other securities in order to 

permit a customer to realize a tax loss on the original position; (vi) to purchase a bond with a 

specified credit rating and maturity; and (vii) to purchase or sell a security or type of security 

limited by specific parameters established by the customer.  We view these examples of 

temporary or limited discretion as typically consistent with the broker-dealer exclusion because 

                                            
62  Certain changes to money market fund regulation and operations have been implemented since our prior 

interpretations.  See Money Market Fund Reform; Amendments to Form PF, Investment Company Act 
Release No. 31166 (Jul. 23, 2014) (removing an exemption that permitted institutional non-government 
money market funds to maintain a stable net asset value, while maintaining such exemption for certain 
other money market funds, and applying certain fees and gates reforms to institutional non-government 
money market funds and retail money market funds but not to government money market funds, among 
other changes).  In light of these changes, differently categorized money market funds may have different 
investment characteristics.  Accordingly, we anticipate that FINRA will be reviewing the application of the 
rules that apply to the exercise of broker-dealer discretion in this context.  The Commission staff also will 
evaluate broker-dealer exercise of discretionary cash management to consider whether additional measures 
may be necessary. 



  18 
 

they are in connection with and reasonably related to a broker-dealer’s business of effecting 

securities transactions and do not suggest that the broker-dealer’s primary business is providing 

investment advice.  

We have previously described a similar list of situations that we would consider 

temporary or limited discretion that may be consistent with the solely incidental prong.63  We 

make three refinements.   

First, we are not including authority for a period “not to exceed a few months” relating to 

the time a broker-dealer may purchase or sell a security or type of security when a customer is 

unavailable for a limited period of time.  Depending on the facts and circumstances, a period of 

discretion lasting a few months may be indicative of a business or customer relationship that is 

primarily advisory in nature.  

Second, we would view it as consistent with our interpretation of the solely incidental 

prong for broker-dealers to purchase or sell securities to satisfy margin requirements, or other 

customer obligations that the customer has specified (new wording italicized).  In our view, there 

may be similar obligations to a broker-dealer or a third party whereby a broker-dealer may be 

authorized to make a purchase or sale, such as a sale to satisfy a collateral call. 

Third, we would view it as consistent with our interpretation of the solely incidental 

prong for broker-dealers to sell specific bonds or other securities in order to permit a customer to 

realize a tax loss on the original position (new wording italicized).  We see no distinction 

between bonds or other securities in this particular context. 

2. Account Monitoring 

                                            
63  See 2005 Adopting Release, supra footnote 17, at nn.178–81 and accompanying text; 2007 Proposing 

Release, supra footnote 17, at n.13 and accompanying text. 



  19 
 

We received several comments regarding the extent to which a broker-dealer may 

monitor the status and performance of a customer’s account while relying on the broker-dealer 

exclusion.  Some commenters suggested that a broker-dealer’s agreement to provide ongoing 

monitoring for the purpose of recommending changes to a customer’s investments is not an 

advisory service that is solely incidental to the primary securities transaction business of a 

broker-dealer and thus the broker-dealer exclusion should not be available to broker-dealers who 

provide such services.64  Another commenter suggested that broker-dealers providing 

personalized investment advice about securities on an ongoing basis should not be able to rely on 

the broker-dealer exclusion.65  Commenters also suggested that providing services that cause 

overseen assets to meet the definition of “regulatory assets under management” under Form 

ADV (i.e., securities portfolios for which the broker-dealer provides “continuous and regular 

supervisory or management services”) should subject a broker-dealer to the Advisers Act.66 

  We disagree with commenters who suggested that any monitoring of customer accounts 

would not be consistent with the solely incidental prong.  A broker-dealer that agrees to 

                                            
64  See FPC Letter (“[B]roker-dealers that enter into agreements with retail customers to provide ongoing 

monitoring for purposes of recommending changes in investments should be considered investment 
advisers and subject to fiduciary obligations under the Advisers Act.  Entering into an agreement to provide 
ongoing monitoring… goes beyond advice that is solely incidental to the conduct of business as a broker-
dealer….”); IAA Letter (same quotation as the FPC Letter); IAA Letter (“[A] broker-dealer that agrees to 
provide a retail customer ongoing monitoring for purposes of recommending changes in investments would 
not be providing services that are solely incidental to its business as a broker-dealer under the 2007 
interpretation.”); Fisher Letter (“Brokers can give ongoing investment advice… yet still not be required to 
register as an investment adviser…. [T]he boundaries [between brokers and investment advisers] have 
practically been erased.”). 

65  See Mutual Fund Investors Letter (“[The SEC] should… subject broker-dealers to the Advisers Act when 
they are providing personalized investment advice about securities on an ongoing basis… The term ‘solely 
incidental’ should be interpreted narrowly and only include personalized investment advice that is one-
time, temporary, or limited in scope.”). 

66  See IAA Letter; Pickard Letter. 



  20 
 

monitor67 a retail customer’s account on a periodic basis for purposes of providing buy, sell, or 

hold recommendations may still be considered to provide advice in connection with and 

reasonably related to effecting securities transactions.68  In contrast, when a broker-dealer, 

voluntarily and without any agreement with the customer, reviews the holdings in a retail 

customer’s account for the purposes of determining whether to provide a recommendation to the 

customer—and, if applicable, contacts that customer to provide a recommendation based on that 

voluntary review—the broker-dealer’s actions are in connection with and reasonably related to 

the broker-dealer’s primary business of effecting securities transactions.  Absent an agreement 

with the customer (which would be required to be disclosed pursuant to Regulation Best 

Interest), we do not consider this voluntary review to be “account monitoring.”69   

We decline to delineate every circumstance where agreed-upon monitoring is and is not 

solely incidental to a broker-dealer’s brokerage business.  Broker-dealers may consider adopting 

policies and procedures that, if followed, would help demonstrate that any agreed-upon 

monitoring is in connection with and reasonably related to the broker-dealer’s primary business 

                                            
67  The guidance in this section applies when a broker-dealer agrees to monitor a customer’s account. See Reg. 

BI Adoption, supra footnote 6, at section II.B.2 for a discussion of what constitutes such an agreement.   
68  See id.  Monitoring agreed to by the broker-dealer would result in a recommendation to purchase, sell, or 

hold a security each time the agreed-to monitoring occurs and would be covered by Regulation Best 
Interest.  See id. (“For example, if a broker-dealer agrees to monitor the retail customer’s account on a 
quarterly basis, the quarterly review and each resulting recommendation to purchase, sell, or hold, will be a 
recommendation subject to Regulation Best Interest.”).   

In agreeing to provide any monitoring services, broker-dealers should also consider that a broker-dealer 
that separately contracts or charges a separate fee for advisory services is providing investment advice that 
is inconsistent with the broker-dealer exclusion.  See, e.g., 2005 Adopting Release, supra footnote 17.  
Broker-dealers should also consider that, even where such monitoring is consistent with the solely 
incidental prong, the broker-dealer must also receive no special compensation for the activity to be eligible 
for the broker-dealer exclusion.  Broker-dealers receive special compensation where there is a clearly 
definable charge for investment advice.  See Advisers Act Release No. 626, supra footnote 51; see also 
Advisers Act Release No. 2, supra footnote 2; 2007 Proposing Release, supra footnote 17 (describing this 
interpretation as the Commission’s “longstanding view”). 

69  See Reg. BI Adoption, supra footnote 6, at section II.B.2.b.  Any recommendation made to the retail 
customer as a result of such voluntary review would be subject to Regulation Best Interest.  See id.21 
 

of effecting securities transactions.  For example, broker-dealers may include in their policies 

and procedures that a registered representative may agree to monitor a customer’s account at 

specific time frames (e.g., quarterly) for the purpose of determining whether to provide a buy, 

sell, or hold recommendation to the customer.70  However, such policies and procedures should 

not permit a broker-dealer to agree to monitor a customer account in a manner that in effect 

results in the provision of advisory services that are not in connection with or reasonably related 

to the broker-dealer’s primary business of effecting securities transactions, such as providing 

continuous monitoring.71  Additionally, dually registered firms may similarly consider adopting 

policies and procedures that distinguish the level and type of monitoring in advisory and 

brokerage accounts.72 

The Commission will consider further comment on its interpretation of the solely 

incidental prong of the broker-dealer exclusion and its application to certain brokerage activities 

                                            
70  As noted in the Reg. BI Adoption, and consistent with the relationship summary adopted in the 

Relationship Summary Adoption, the scope and frequency of a broker-dealer’s monitoring is a material fact 
relating to the type and scope of services provided to a retail customer and thus is required to be disclosed 
under Regulation Best Interest.  See id. at section II.B.2; cf. Relationship Summary Adoption, supra 
footnote 6.  A broker-dealer disclosing to a customer that the broker-dealer will provide monitoring 
constitutes an agreement to monitor.  See supra footnote 67. 

71  The two examples of advisory services we discuss in this Release—investment discretion and monitoring—
cannot be viewed and interpreted in isolation.  For example, it would not be consistent with the solely 
incidental prong for a broker-dealer to exercise unlimited investment discretion over a customer account 
even if its monitoring activities do comport with the solely incidental prong.  Thus, any policies and 
procedures that a broker-dealer adopts to ensure that the broker-dealer’s activities are in connection with 
and reasonably related to the broker-dealer’s primary business of effecting securities transactions similarly 
should not grant the broker-dealer the ability or authority to buy and sell securities on behalf of a customer 
as part of periodic account monitoring, except in circumstances of temporary or limited discretion that 
would be consistent with the solely incidental prong, as discussed above. 

72  In the Final Fiduciary Interpretation, we note that investment advisers may consider whether written 
policies and procedures relating to monitoring would be appropriate under Advisers Act rule 206(4)-7.  See 
Final Fiduciary Interpretation, supra footnote 6, at section II.B.3. 

 Additionally, the Reg. BI Adoption confirms that a dual registrant is an investment adviser solely with 
respect to those accounts for which a dual registrant provides investment advice or receives compensation 
that subjects it to the Advisers Act.  See Reg. BI Adoption, supra footnote 6, at section II.B.3.d.  
Determining the capacity in which a dual registrant is making a recommendation is a facts and 
circumstances test.  See id. 



  22 
 

to evaluate whether additional guidance might be appropriate in the future.  Based on any 

comments received, the Commission may, but need not, supplement this interpretation. 

III. ECONOMIC CONSIDERATIONS 

The Commission’s interpretation above is intended to advise the public of its 

understanding of the solely incidental prong of the broker-dealer exclusion.  The interpretation 

does not itself create any new legal obligations for broker-dealers.  Nonetheless, the Commission 

recognizes that to the extent a broker-dealer’s practices are not consistent with this interpretation 

of the solely incidental prong, the interpretation could have potential economic effects.  We 

discuss these effects below.  

A. Background 

The Commission’s interpretation regarding the solely incidental prong of the broker-

dealer exclusion would affect broker-dealers and their associated persons as well as the 

customers of those broker-dealers, and the market for financial advice more broadly.73  As of 

December 2018, there were approximately 3,764 registered broker-dealers with over 140 million 

customer accounts.  In total, these broker-dealers have over $4.3 trillion in total assets, which are 

total broker-dealer assets as reported on Form X-17a-5.74  Of the broker-dealers registered with 

the Commission as of December 2018, 363 broker-dealers were dually registered with the 

Commission as investment advisers.75  Dual registrant firms hold over 90 million (63%) of the 

                                            
73  See Relationship Summary Adoption, supra footnote 6, at section IV.B (discussing the market for financial 

advice generally). 
74  Assets are estimated by Total Assets (allowable and non-allowable) from Part II of the FOCUS filings 

(Form X-17A-5 Part II, available at https://www.sec.gov/files/formx-17a-5_2.pdf) and correspond to 
balance sheet total assets for the broker-dealer.  The Commission does not have an estimate of the total 
amount of customer assets for broker-dealers.  We estimate broker-dealer size from the total balance sheet 
assets as described above. 

75           For purposes of this analysis, a dual registrant is any firm that is dually registered with the Commission as 
an investment adviser and a broker-dealer.  Because this number does not include the number of broker-

 



  23 
 

overall 140 million customer accounts held by broker dealers.76  As part of the Reg. BI Proposal, 

we requested data and other information related to the nature and magnitude of discretionary 

services offered by broker-dealers,77 but did not receive any data or information to inform our 

analysis of potential economic effects stemming from this interpretation. 

B. Potential Economic Effects 

Broker-dealers currently incur ongoing costs related to compliance with their legal and 

regulatory obligations, including costs related to understanding their practices and structuring 

their practices to be consistent with the solely incidental prong of the broker-dealer exclusion. 

This interpretation generally confirms the scope of the solely incidental prong of the broker-

dealer exclusion.   

Generally, we believe that few, if any, broker-dealers take the view that they act 

consistently with the solely incidental prong with respect to any accounts over which the broker-

dealer exercises more than temporary or limited investment discretion.78  As with other 

circumstances in which the Commission speaks to the legal obligations of regulated entities, we 

                                                                                                                                             
dealers who are also registered as state investment advisers, the number undercounts the full number of 
broker-dealers that operate in both capacities.   

76  Some broker-dealers may be affiliated with investment advisers without being dually registered.  From 
Question 10 on Form BD, 2,098 broker-dealers report that directly or indirectly, they either control, are 
controlled by, or under common control with an entity that is engaged in the securities or investment 
advisory business. Comparatively, 2,691 (19.57%) SEC-registered investment advisers report an affiliate 
that is a broker-dealer in Section 7A of Schedule D of Form ADV, including 1,916 SEC-registered 
investment advisers that report an affiliate that is a registered broker-dealer.  Approximately 74% of total 
assets under management of investment advisers are managed by these 2,691 investment advisers. 

77  See Reg. BI Proposal, supra footnote 3. 
78  See Comment Letter of UBS (noting that broker-dealers have existing arrangements where they exercise 

temporary or limited discretion, such as discretion as to time and price, and that those types of discretion 
“do not present the sort of risks about which the SEC is concerned with respect to the exercise of unfettered 
discretion”) (emphasis added); SIFMA Letter (noting that there are instances in which temporary or limited 
discretion, such as discretion as to prices at which securities can be purchased, does not have the 
supervisory or managerial character of the investment discretion warranting the protections of the Advisers 
Act).   



  24 
 

acknowledge that affected firms, including those whose practices are consistent with the 

Commission’s interpretation, incur costs to evaluate the Commission’s interpretation and assess 

its applicability to them.  Further, to the extent certain broker-dealers currently understand the 

scope of permissible monitoring or other permissible advisory activities under the solely 

incidental prong to be different from what is set forth in this interpretation, there could be some 

economic effects.79  

This interpretation may produce economic effects to the extent that it causes any broker-

dealers to recognize that their practices are inconsistent with the solely incidental prong and to 

adjust their practices to make them consistent.  In particular, broker-dealers that have interpreted 

the solely incidental prong to conduct more advisory activities than this interpretation permits 

may choose to no longer provide such services to customers.  This could result in a loss of 

certain customers, a reduction in certain business activities, and could preclude those broker-

dealers from further developing certain services for their customers, except to the extent those 

broker-dealers are dually registered firms and their customers are also advisory clients.  This 

may, in turn, result in decreased competition in the market for certain services, increased fees for 

those services, or a diminished number of broker-dealers offering commission-based services to 

investors.80   

                                            
79  The above application of our interpretation of the solely incidental prong to the exercise of investment 

discretion is generally consistent with the position taken in the 2005 Adopting Release and preliminarily 
taken in the 2007 Proposing Release. We believe that many broker-dealers changed their practices with 
respect to investment discretion in light of those releases, and thus those practices likely are consistent with 
our interpretation of the solely incidental prong.  

80  For example, to the extent that broker-dealers respond to the interpretation by limiting the levels of 
discretion that they provide for their customers, execution quality (including the execution price) may be 
affected due to the delays encountered when the broker-dealer must contact a customer to proceed with a 
transaction. 



  25 
 

To the extent any broker-dealers have been providing advisory services beyond the scope 

of this interpretation, their customers may receive fewer advisory services if these broker-dealers 

choose not to register as investment advisers and adjust their business practices in light of this 

interpretation.  To the extent that this interpretation would lead to a decline in the supply of 

certain services offered by broker-dealers (or a decline in broker-dealers offering services to 

particular customers), it could reduce the efficiency of portfolio construction for those investors 

who might otherwise benefit from broker-dealers providing investment advice with respect to 

their account and would find similar advice from investment advisers to be too costly or 

unattainable (e.g., due to account minimum requirements).  For example, certain broker-dealers 

may incur costs to adopt or revise policies and procedures to ensure that the account monitoring 

that they may agree to provide their customers is consistent with this interpretation and may 

choose instead to stop offering such monitoring services.  Further, to the extent that any broker-

dealers determine that their services are not consistent with this interpretation, they may choose 

to register as investment advisers with the Commission, or one or more states, as applicable.  

Such broker-dealers would bear costs in choosing to register as investment advisers to continue 

providing those services, and their clients may face higher fees as a result.  Alternatively, broker-

dealers that have investment adviser affiliates may seek to place existing customers in advisory 

accounts instead of brokerage accounts.   

Broker-dealers that determine they must change business practices as a result of this 

interpretation will choose their responses based on their circumstances.  For example, if broker-

dealers with affiliated advisers are able to utilize their existing regulatory infrastructure and 

compliance policies and procedures to account for activities that are inconsistent with the solely 

incidental exclusion they may face lower costs associated with migration of brokerage accounts 



  26 
 

and activities to investment advisory accounts.  By contrast, we expect the costs of regulatory 

registration and compliance to be greater for any standalone broker-dealers that choose to 

become registered investment advisers, as they are more likely to need to undertake new 

systems, procedures, and policies. 

To the extent that broker-dealers choose to discontinue providing certain services, 

register as investment advisers, or encourage migration of customer’s brokerage accounts to 

advisory accounts of affiliates, this interpretation could result in a shift in the demand for the 

services of different types of financial service providers, decreasing the demand for services of 

broker-dealers and increasing the demand for the services of investment advisers.81 

This interpretation may also produce some overall economic effects to the extent that it 

causes any broker-dealers that to date have avoided performing limited discretion and other 

activities to recognize that they may perform such activities consistent with the solely incidental 

prong of the broker-dealer exclusion.  Such broker-dealers may respond to this interpretation by 

increasing the amount of limited discretionary services or monitoring services that they agree to 

provide to their customers.  Investors that have established relationships with such broker-dealers 

may benefit from more efficient access to these services and may demand these services from 

broker-dealers rather than becoming clients of investment advisers.  While additional provision 

of these services by broker-dealers also raises the risk of regulatory arbitrage because similar 

activities would be regulated under different regimes, we believe this risk will be mitigated by 

                                            
81  To the extent this interpretation results in altered compliance costs for standalone broker-dealers, non-

affected standalone broker-dealers (i.e., those standalone broker-dealers that already are in compliance with 
the solely incidental prong as we have interpreted it), dual registrants, investment advisers, and other 
financial intermediaries that are not required to register as investment advisers (such as banks, trust 
companies, insurance companies, commodity trading advisers, and municipal advisors) may to a varying 
degree gain business at these affected broker-dealers’ expense.  



  27 
 

the adoption of rules that enhance the standard of conduct that applies to broker-dealer 

recommendations. 

List of Subjects in 17 CFR Part 276 

Securities. 

Amendments to the Code of Federal Regulations 

For the reasons set out above, the Commission is amending title 17, chapter II of the 

Code of Federal Regulations as set forth below: 

PART 276–INTERPRETATIVE RELEASES RELATING TO THE INVESTMENT 

ADVISERS ACT OF 1940 AND GENERAL RULES AND REGULATIONS 

THEREUNDER 

1.   Part 276 is amended by adding Release No. IA–5249 and the release date of June 

5, 2019, to the end of the list of interpretive releases to read as follows: 

Subject Release No. Date Fed. Reg. Vol. and Page 

*     * 

Commission Interpretation 

Regarding the Solely 

Incidental Prong of the 

Broker-Dealer Exclusion 

from the Definition of 

Investment Adviser 

* 

IA-5249 

*   * 

June 5, 2019 

*    * 

[Insert FR Volume 

Number] FR [Insert FR 

Page Number] 

 

 

By the Commission. 



  28 
 

Dated: June 5, 2019 

Vanessa A. Countryman, 

Acting Secretary.