After four years of internal debate and numerous unfruitful meetings with Securities & Exchange Commission members, the Financial Planning Association sued the federal agency in federal appeals court in Washington on July 20 to challenge the “Merrill Lynch” rule.
Proposed in 1999 but never adopted, the rule extends broker/dealers’ exemption from the 1940 Investment Advisers Act to fee-based brokerage accounts. Duane R. Thompson, the FPA group director for advocacy, contends that by not challenging firms that have followed the rule, which acquired its nickname after Merrill Lynch & Company unveiled its widely imitated “Unlimited Advantage” brokerage account, the SEC has allowed it to become a de facto standard. Critics of the proposed rule further maintain that it lets brokers evade fiduciary responsibilities by specifying that any advice they offer is incidental to the brokerage services provided in a fee-based account.
Thompson notes that when the Advisers Act was passed 64 years ago, “you could rely on the form of compensation to see whether someone was acting as a broker or advisor.” That is no longer the case, he says. Those calling themselves planners, adds FPA President Elizabeth Jetton “should be subject to appropriate standards.” Indeed, more than 80% of FPA members in a recent survey urged the association to take action to block the Merrill rule. That survey, says Jetton, moved the FPA to act. “Our members’ feelings were very clear,” she says. “They’re unhappy with the rule.” Adds Neal Solomon, managing director of WealthPro LLC in Gloversville, New York, and a member of the association’s government relations committee: “The FPA wants people to comply with the law, and we don’t think they are.”
The FPA may face a long and difficult legal fight over the issue. “There is a huge pile of money riding on not disturbing the rule,” concedes one FPA member. In the end, suggests Lawrenceville, New Jersey, securities lawyer Lawrence Cohen, the suit may actually prompt the SEC to adopt the rule in its current form. “The FPA might get the answer it doesn’t want,” he says. In that case, says Jetton, “we’d continue to challenge it, quite possibly in the courts.”