“The Dog That Didn’t Bark: Investment Research, Hard Dollars and Special Compensation under the Investment Adviser Act of 1940”
On October 26, 2017, the SEC staff issued three no-action letters intended to facilitate the ability of registered investment advisers and broker-dealers to comply both with the requirements of the Investment Advisers Act of 1940 (Advisers Act) and with the requirements of MiFID II. One letter, issued to the Securities Industry and Financial Markets Association (SIFMA Letter) enabled broker-dealers to accept hard dollar payments for investment research from money managers that were either directly or contractually required to comply with MiFID II, as MiFID II effectively prohibited soft dollar payments for research. The unstated assumption behind the SIFMA Letter was that a broker-dealer that accepted a hard dollar payment for investment research that constituted investment advice under the Advisers Act would be required to register as an investment adviser absent the relief.
But does the Advisers Act truly require a broker-dealer to register as an investment adviser if it accepts hard dollars for investment research? Ethan Corey’s article argues that: (1) until recently, the SEC has never contemplated requiring a broker-dealer to register as an investment adviser solely because it accepts a hard dollar payment for research that could constitute investment advice, even in instances where the SEC has specifically contemplated that a hard dollar payment would be required; and (2) a close examination of applicable SEC and Supreme Court precedent helps to explain why the SEC has never done so.
