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§ 5.9 PLANNED GIVING AND SECURITIES LAWSThe Securities Exchange Act was also amended to provide that a charitableorganization is not subject to the Act’s broker-dealer regulation solely becausethe organization trades in securities on its own behalf, or on behalf of a charitableincome fund, or the settlers, potential settlers, or beneficiaries of either. Thisprotection is also extended to trustees, directors, officers, employees, or volunteersof a charitable organization, acting within the scope of their employment orduties with the organization. Similar exemptions are provided for charitableorganizations and certain persons associated with them, in connection with theprovision of advice, analyses, or reports, from the reach of the Investment AdvisorsAct of 1940 (other than its antifraud elements). 36Interests in charitable income funds excluded from the definition of aninvestment company, and any offer or sale of these interests, are exempt fromany state law that requires registration or qualification of securities. No charitableorganization or trustee, director, officer, employee, or volunteer of a charity(acting within the scope of his or her employment or duties) is subject to regulationas a dealer, broker, agent, or investment adviser under any state securitieslaw because the organization or person trades in securities on behalf of a charity,charitable income fund, or the settlers, potential settlers, or beneficiaries ofeither. These rules do not alter the reach or scope of state antifraud laws.There was an opt-out provision, in that a state had the opportunity to enact astatute specifically stating that this federal law does not prospectively preemptthe laws of the state. 37 This statute had to be enacted at any time during thethree-year period ending on December 7, 1998.Prior to the enactment of this legislation, the applicability of the SecuritiesAct, the Securities Exchange Act, and the Investment Company Act to charitableincome funds was addressed by the staff of the SEC. This administrativeapproach can be traced back to 1972, when the American Council on Educationreceived a no-action letter as to pooled income funds, which was predicated onthe fact that these entities are the subject of federal tax law and are subject to theoversight of the IRS. 38 One of the principal conditions of this no-action assurancewas that each prospective donor receive written disclosures fully and fairlydescribing the fund’s operations. (Also, the SEC staff has consistently maintainedthat the antifraud provisions of the securities laws apply to the activitiesof these funds and their associated persons.) This no-action position has alwaysbeen rationalized by the view that the primary purpose of those who transfermoney and property to these funds do so to make a charitable gift, rather than tomake an investment.Until this litigation ensued, the oversight by the IRS and the no-action positionof the SEC worked in tandem rather nicely. As the lawsuit illustrated, however,a favorable letter from the SEC staff does not insulate the recipient of itfrom liability asserted by a private litigant who alleges that the same transactionviolates the securities laws. For the most part, this legislation codifies theapproach taken over the past 23 years by the staff of the SEC.36 15 U.S.C. § 80b-3(b)(4).37 15 U.S.C. § 80a-3a.38 See H. Rep. 104-333, 104th Cong., 1st Sess. (1995), at 6–7. 167