Model Portfolios, Flat Fees, and the Publisher Exclusion
A firm publishes model portfolios on its website and charges 150 retail clients a flat monthly fee of $99. The firm has $40 million in assets under advisement, no personalized advice, and says it is a 'publisher' protected by the publisher exclusion. The portfolios are updated monthly and are identical for all clients, except that clients can choose one of three risk profiles. The firm's marketing says 'we tell you what to buy.' The regulator sends a request for information about registration. The firm's general counsel asks whether the firm is acting as an investment adviser and whether the publisher exclusion applies.
1. Apply the definition of investment adviser to these facts. Is the firm in the business of advising others about securities for compensation?
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The definition of investment adviser: (1) advises others about securities; (2) is in the business of doing so; (3) for compensation; (4) not excluded. The firm gives model portfolios - specific securities - for a flat fee to 150 clients. It is in the business because it holds itself out as providing advice, and the advice is not incidental. Compensation is the $99 monthly fee. The fact that advice is not personalized does not remove it from the definition; impersonal advice can still be advice. The firm likely meets the definition.
2. Does the publisher exclusion apply? Explain the conditions and why they may fail.
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The publisher exclusion is narrow: it applies to bona fide publications of general and regular circulation, not tailored to individual clients. The firm's three risk profiles and client-specific selection may make the advice tailored. The marketing 'we tell you what to buy' suggests personalized guidance. The monthly updates and flat fee also suggest an ongoing advisory relationship. The exclusion likely does not apply.
3. If the firm is unregistered, what are the consequences and how should it remediate?
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If unregistered, the firm may face regulatory action: cease-and-desist, fines, disgorgement, and reputational harm. Remediation: stop providing advice until registered or restructure to fit an exclusion; register if eligible; conduct a look-back; notify clients; remediate marketing; implement compliance policies; and cooperate with the regulator.