From the June 2007 issue of Investment Advisor • Subscribe!

June 1, 2007

SEC Won't Appeal Court Ruling

The Securities and Exchange Commission has decided not to appeal the March 30 ruling by the U.S. Court of Appeals for the D.C. Circuit, which exempted brokers from being subject to regulation as investment advisors in fee-based brokerage accounts, on the basis that the SEC had exceeded its authority under the Investment Advisers Act of 1940. The SEC instead announced May 14 that it will ask a court to allow a 120-day stay of the Appeals court's ruling so that investors and their brokers could respond. The Commission estimates that one million fee-based brokerage accounts are affected by the ruling.

The Financial Planning Association, which filed the suit that successfully challenged the broker/dealer exemption rule, also known as the Merrill Lynch rule, had earlier estimated that about $300 billion was residing in those B/D fee-based brokerage accounts. Dan Moisand, FPA's chairman, says that "the SEC made a wonderful choice not to pursue what the court clearly described as a bad position." As for allowing the 120-day stay, Moisand says the FPA is "not surprised the SEC asked for some more time to transition--we think it's enough time. We've just gone back to the state of the world that existed in 1999, and everybody was able to get along back then."

The SEC said it will consider whether further rulemaking or interpretations are necessary regarding the application of the Advisers Act to these accounts and the issues resulting from the court's decision.

In its statement announcing its decision to forego an appeal, the Commission said that Chairman Christopher Cox has also approved "additional emergency funding to accelerate" the Rand Corp. study of how consumers are served by the brokerage and advisory industry. That additional funding will allow the study to be delivered to the Commission by December 2007, months ahead of schedule.

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