Banks and Investment Advisers – Regulatory Considerations

Introduction

Investment advisers employed at banking institutions occupy a complex regulatory position. Unlike their counterparts at standalone advisory firms, bank-based advisers must navigate the intersection of two distinct regulatory regimes — the banking regulatory framework administered by state and federal banking regulators and the investment advisory framework managed by the Securities and Exchange Commission (SEC) or state securities regulators. Bankers are accustomed to checking the requirements of the former but sometimes forget to check the latter, leading to compliance missteps and potential enforcement exposure.

Who Must Register?

The Investment Advisers Act of 1940 defines an “investment adviser” broadly as any person who, for compensation, engages in the business of advising others about securities. Bank employees who provide investment advisory services — whether to retail customers, high-net-worth individuals, or institutional clients — generally fall within this definition unless a specific exemption applies.

Critically, the fact that an individual works for a bank does not, by itself, exempt them from adviser registration requirements. The exemption available under the Advisers Act runs to the bank itself as an institution, not to individual employees acting in an advisory capacity. This distinction is a frequent source of confusion and a recurring compliance gap.

The Bank Exemption – and Its Limits

Section 202(a)(11)(A) of the Advisers Act exempts banks from the definition of “investment adviser,” meaning the bank itself typically need not register as an investment adviser with the SEC. However, this exemption does not extend to:

• Individual employees who provide advisory services to clients outside the bank’s formal trust or fiduciary departments;
• Separately identifiable departments or divisions of a bank that hold themselves out as investment advisers; or
• Bank holding companies and nonbank subsidiaries.

As a result, a bank employee who advises clients on the purchase or sale of securities for compensation may be required to register as an investment adviser representative (IAR) under applicable state law, even if the bank itself is exempt at the federal level.

Federal vs. State Registration

The threshold for SEC registration versus state registration turns primarily on the amount of assets under management (AUM):

• Advisers managing $110 million or more in AUM are generally required to register with the SEC.
• Advisers below that threshold register with the securities regulator in the state(s) where they maintain a principal office and conduct business.

For bank-based advisers, the analysis can be complicated by the aggregation of assets managed across multiple employees or departments, questions about whether advisory activity is incidental to banking services, and the allocation of advisory responsibilities between the bank and affiliated broker-dealers or trust companies.

The ‘Solely Incidental’ Defense

One exemption frequently invoked — and frequently misapplied — by bank personnel is the so‑called “solely incidental” exemption under the Advisers Act. This provision excludes from the definition of investment adviser any broker or dealer whose performance of advisory services is “solely incidental” to the conduct of their business as a broker or dealer, and who receives no special compensation for such advice.

Bank employees who are also registered representatives of an affiliated broker-dealer sometimes attempt to rely on this exemption. However, the SEC has consistently interpreted it narrowly. Advisory services are not “solely incidental” where the employee holds themselves out as providing financial planning or investment advisory services, charges a separate advisory fee, or manages client assets on a discretionary basis.

Dual Registration and Conflicts of Interest

Many bank-based advisers carry dual registrations — as both registered representatives (broker-dealer) and IARs. This dual status creates heightened obligations, including the need to disclose which “hat” the adviser is wearing in a given client interaction and to manage the conflicts of interest that inevitably arise when the same individual can earn both commissions (as a registered representative) and advisory fees (as an IAR).

Regulators have paid increasing attention to these conflicts, particularly in the wake of Regulation Best Interest (Reg BI) for broker-dealers and the SEC’s ongoing focus on investment adviser fiduciary obligations. Bank-based advisers should be familiar with the differing standards of conduct that apply depending on whether they are acting in a brokerage or advisory capacity at any given moment.

Key Compliance Considerations

Bank-based investment advisers and their compliance teams should pay attention to the following areas:

• Identification of advisory activity. Banks should identify employees whose activities may constitute investment advisory services, even if those services are bundled with other banking products.
• State IAR registration. Even where the bank itself is exempt from federal or state adviser registration, individual employees providing advisory services may need to register as IARs in relevant states.
• Supervision and recordkeeping. Bank-based advisers are subject to the same recordkeeping and supervisory requirements as other registered advisers. Compliance programs must be structured to address advisory activity occurring within the bank environment, where oversight structures are often designed around banking rather than securities regulation.
• Disclosure obligations. Form ADV and related disclosure requirements apply to advisory activities conducted by registered entities within banking groups. Advisers must ensure that clients receive accurate and complete disclosures about services, fees, and conflicts.

Bank Regulatory Requirements

The requirements of the securities regulators represent only one side of the compliance coin. Banks engaging in investment advisory or broker-dealer activities cannot overlook the web of licensing requirements, exemptions, and permissible activities outlined in the banking statutes, regulations, and guidance. For example, the bank’s activities could require the authorization of trust or fiduciary powers from the OCC or a state regulator. Maybe the Regulation R exemption the bank relies upon — such as the networking arrangements exemption or the trust and fiduciary activities exemption — does not neatly align with the securities registration exemptions. Or perhaps the advisory services are housed at the holding company or nonbank affiliate level instead of the bank level, thus complicating reliance on the securities registration exemptions. Analyzing all requirements holistically and strategically is critical.

Conclusion

The regulatory framework applicable to investment advisers working within banks is a patchwork of federal and state requirements that does not always align neatly with the structure or other regulatory requirements of banking institutions. In order to lessen regulatory and reputational risk, bank compliance programs should identify advisory functions, ensure appropriate individual registrations, and address the conflicts of interest that arise in a dual-registered environment.