Special Compensation

Rathmell Brothers is a broker-dealer registered in State C whose representatives have always discussed securities selection with customers at no separate charge, earning only commissions on the resulting trades. In July the firm launches a service under which a customer pays a flat 1,500 dollar annual fee for a written financial plan, payable whether or not the customer ever places a trade. Under the Uniform Securities Act, Rathmell Brothers:

1. A.remains excluded so long as every plan it writes recommends only securities the firm can executeWhere the recommended securities are traded has nothing to do with the test. The fee itself is what breaks the exclusion.
2. B.must now register in State C as an investment adviser as well, because the separate planning fee is special compensation and the advice is no longer solely incidentalCorrect. Losing either prong of the exclusion pulls the firm into the investment adviser definition.
3. C.remains excluded from the investment adviser definition, because a registered broker-dealer is never also an investment adviserThe exclusion is conditional, not automatic. A broker-dealer that charges separately for advice is routinely required to register in both capacities.
4. D.must withdraw its broker-dealer registration and register solely as an investment adviserNothing forces the firm out of the brokerage business. Dual registration is the normal outcome.

Why: A broker-dealer is excluded from the investment adviser definition only while two conditions both hold: the advice is solely incidental to the brokerage business, and the firm receives no special compensation for it. A standalone planning fee that is owed regardless of any trade is special compensation, and the advice is no longer merely incidental to executing orders. The exclusion collapses and the firm must register as an investment adviser in addition to keeping its broker-dealer registration.

Thurlstone Reach Securities is a broker-dealer registered in State K. Its representatives have always discussed securities selection with customers as part of executing their orders, charging only commissions. Beginning in September the firm will offer a standalone financial planning service billed at a flat $2,500 per plan, separate from any commission, and clients may take the plan and trade elsewhere. Under the Uniform Securities Act, the firm:

1. A.Must register as an investment adviser only if clients act on the plans by trading through the firm.Incorrect. The trigger is the receipt of special compensation for advice, not whether the client trades.
2. B.Remains excluded, because the plans are prepared by personnel who are already registered agents.Incorrect. The registration status of the individuals does not cure the firm's loss of the exclusion.
3. C.Must register as an investment adviser, because the separate planning fee is special compensation and the broker-dealer exclusion is lost.Correct. The exclusion requires both that advice be solely incidental and that no special compensation be received.
4. D.Remains excluded from the definition of investment adviser, because it is a registered broker-dealer.Incorrect. Broker-dealer status does not by itself preserve the exclusion.

Why: A broker-dealer is excluded from the definition of investment adviser only where its advice is solely incidental to the conduct of its brokerage business AND it receives no special compensation for the advice. A separate, standalone planning fee is special compensation, so the exclusion is lost and the firm must register as an investment adviser (its planning personnel becoming investment adviser representatives).