In an open meeting on Dec. 22, the Securities & Exchange Commission unanimously voted to extend the comment period on adoption of the so-called “Merrill Lynch rule” for an additional 30 days, beginning with the formal posting of its proposed rule, which SEC staff says is likely to happen by the first week of January.

At the same time, the Commission pledged it would institute a final rule-making by April 15 on the staff “no-action” rule, an exemption to the Investment Advisers Act of 1940 that has been in place since 1999 that exempts broker/dealers from the provisions of the Act because the advice they provide to brokerage clients under a fee-based arrangement is deemed “incidental” to the relationship. Until the final rule-making, the Commission instituted a temporary rule under which broker/dealers will be exempt from the Act’s provisions until April 15.

Paul Roye, the director of the SEC’s Division of Investment Management, said the Commission had received over 1,700 statements during the previous comment period on the rule this fall. Roye said “virtually all” the comments that supported making the exemption permanent came from B/Ds, while most of the comments opposed to the rule came from investment advisors, financial planners, and consumer groups, whom he said argued that the exemption failed to protect consumers. In its final rule-making process, the SEC staff called on the commission to provide better guidance on what constituted “incidental advice,” to mandate that all relevant brokerage company documents should “prominently” display that the relationship is a brokerage account that may or may not constitute a fiduciary relationship, and that all consumer disclosures should clearly address the difference between a brokerage and an advisory relationship. In response to a request for clarification, Roye said that SEC Chairman Donaldson asked the “$64,000 question: When does providing financial planning services not constitute an advisory service?

Reflecting some frustration on the part of the commissioners on failing to come to some closure on the rule, SEC Commisisoner Paul Atkins noted that “we’re confronted today by the ghost of Commission action and inaction,” and that “only litigation has forced us to address the issue.” The Financial Planning Association sued the SEC in U.S. District Court this fall over the rule.