Seite - 110 - in Austrian Law Journal, Band 1/2015

ALJ 1/2015 Brian Carroll 110 broker-dealer exception to the definition of an investment adviser.75 Initially the court reviewed Elliot’s any economic benefit language of SEC Release 1092 to note that the compensation ele- ment has been “defined broadly.”76 Thomas went on to view the compensation component of the “special compensation” branch under the broker-dealer exception as a “subset of the economic benefit received from a transaction involving investment advice.”77 With Thomas, the economic benefit approach gained further acceptance as the Eleventh Circuit’s primary approach for inter- preting not only the compensation element in the definition of an investment adviser but the special compensation component of the broker-dealer exception to this definition. In contrast, no other circuits have explicitly considered the economic benefit approach when interpreting any provision under § 202(a)(11). 2. Advisers Act Support for Developing the Economic Benefit Approach Under the Advisers Act, Form ADV requires an investment adviser to disclose its receipt of an “economic benefit” from a source other than the client in connection with giving investment advice. This disclosure requirement seeks to reveal whether an adviser has a conflict of interest created by the adviser receiving an economic benefit from another party for recommending an invest- ment to a client.78 An adviser’s failure to meet this requirement may violate § 207, Material Mis- statements,79 which prohibits an adviser from making an untrue statement of material fact or omitting a required material fact in certain Commission filings, including Form ADV. Judicial analysis of this economic benefit language in deciding whether a violation of § 207 is established may prove helpful in developing the economic benefit approach for interpreting compensation under § 202(a)(11). In Vernazza v. SEC,80 an enforcement action, the court held that an investment adviser violated § 207 by failing to disclose on its Form ADV,81 among other places, the existence of two intertwined financial incentives offered by another investment adviser spon- soring investment funds. Under the first incentive, the adviser’s clients had to invest at least a total of $ 1 million in certain investment funds in order for the adviser to be eligible to receive a success fee.82 The second incentive was the actual success fee based on a percentage of client funds invested in the investment funds.83 In Vernazza, both forms of incentive were viewed by the court as requiring disclosure under the economic benefit language of Form ADV. This is important because the first incentive-meeting the 75 The broker-dealer exception to the definition of an investment adviser reads as follows: “any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation thereof.” Section 202(a)(11)(C), 15 U.S.C. § 2(a)(11)(C). 76 See Thomas 631 F.3d at 1160 (quoting Elliott, 62 F.3d at 1311 n.8 (citation omitted)). 77 Id. at 1165. 78 Rule 203-1, Application for Investment Adviser Registration, 17 C.F.R. § 275.3-1. See, e.g., Amendments to Form ADV, Investment Advisers Release No. 3060 (July 28, 2010), 75 FR 49234 (Aug. 12, 2010). 79 See § 207, Material Misrepresentations, 15 U.S.C. § 80b-7, which reads as follows: “It shall be unlawful for any person willfully to make any untrue statement of a material fact in any registration application or report filed with the Commission under Section 203 or 204, or willfully to omit to state in any such application or report any material fact which is required to be stated therein.” 80 Vernazza v. Sec. & Exch. Comm’n, 327 F.3d 851, 861 (9th Cir. 2003). 81 Id. at 856 (Form ADV, Part II, Question 13(A) requests information concerning “whether the investment adviser, or a related person, ‘receives some economic benefit [...] from a non-client in connection with giving advice to the client.’”). 82 Id. at 859. 83 Id. at 859.