[This story previously appeared in Securities Regulation Daily.]
By John Filar Atwood
The staff of the SEC’s Division of Investment Management has declined to express an opinion on whether a new website business that recommends securities available through LendingClub.com is an investment adviser. The staff said that no-action request on behalf of the Wyoming-based business did not include enough facts and legal analysis for the staff to determine whether the business meets the definition of “investment adviser” in Investment Advisers Act Section 202(a)(11).
New business plan. The new website will provide a list of securities available on LendingClub that the website’s operators believe are good investments. According to the request letter, which was submitted by Jonathon Hendricks, the list will be available all the time and will update based on securities currently available on LendingClub. Any user can create an account on the site at no charge.
Hendricks noted that all users see the same list, and it is not personalized for any particular user. The list provides partial information for free, but the site will charge a flat fee if users want to see complete details on the recommended securities. The website operators do not know if users purchased any reviewed securities, and do not receive any fees based upon a user’s purchase of securities. According to Hendricks, the website operators do not have access to a user’s account on LendingClub.
Newsletter exemption. Hendricks requested the SEC staff’s assurance that the new business does need to register with the Commission as an investment adviser. He believes that the business may rely on the exemption provided to investment newsletters.
In its response, the staff advised Hendricks that he did not provide enough facts and analysis to determine whether business meets the elements of an exclusion from the definition of investment adviser. However, the staff provided some guidance to assist the new business in making the determination itself.
The staff noted that Investment Advisers Act Section 202(a)(11)(D) excludes from the definition of investment adviser a “publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation.” The U.S. Supreme Court has interpreted this exclusion to include publications that offer impersonal investment advice to the general public on a regular basis, the staff stated.
Exemption criteria. To qualify for the Section 202(a)(11)(D) exclusion, the publication or website must meet three criteria. It must be of a general and impersonal nature, in that the advice provided is not adapted to any specific portfolio or any client’s particular needs. It must be “bona fide” or genuine, in that it contains disinterested commentary and analysis as opposed to promotional material, and it must be of general and regular circulation, in that it is not timed to specific market activity or to events affecting, or having the ability to affect, the securities industry.
The staff advised Hendricks that if the new website business meets the definition of investment adviser but qualifies for the publisher’s exclusion, it would not be required to register with the Commission. If the business meets the definition of investment adviser but does not qualify for the publisher’s exclusion, the staff added, then it would be required to register with the Commission because the State of Wyoming, which is the website’s principal place of business, does not regulate investment advisers.