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Financial Planning > Charitable Giving

FPA Asks SEC for Formal Guidance

By Bob Keane

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Not content to wait for a ruling from a federal appeals court in its challenge to the “Merrill Lynch rule,” the FPA has opened up a new front by formally petitioning the SEC for clarification on the matter. In a formal letter to the commission, FPA has asked for regulatory guidance in understanding the differences between financial planning and fee-based brokerage services under the “Merrill Lynch rule” exemption that broker/dealers have from the Investment Advisers Act of 1940.

FPA notes that the rule has been in effect for more than a year, but that there are continuing problems regarding the interpretation of the financial planning restriction on brokerage firms. The FPA cites an investigative article in Smart Money (April 2007) that documents numerous violations of the rule.

“Regardless of whether FPA prevails in its legal challenge to this rule, there is a cloud of confusion surrounding its reach and implementation,” said Nicholas Nicolette, FPA’s president, in a statement released by the organization. “The SEC will ultimately need to clarify for investors and brokerage firms what financial planning services can and cannot be provided by brokerage firms, no matter what the services are called.”

In its letter to the SEC, FPA asks for clarification in three specific problem areas:

- Whether a broker/dealer would fall under the Advisers Act when an agent is providing elements of a financial plan, such as retirement plans, estate plans, and college education plans. FPA noted that some brokerage firms are intentionally avoiding the financial planning restrictions by offering customers segments of a plan that, when combined, amount to comprehensive financial planning, not brokerage services.

- Confirmation that a broker/dealer is subject to the Advisers Act when its registered representatives recommend specific stocks, bonds, or mutual funds to implement the asset allocation recommended in a financial plan. A broker is prohibited from offering advice as part of a financial plan if it also delivers the plan to the client.

- Clarification as to when the fee-based account disclosures required by the rule must be made to the client. FPA noted that some brokerage firms are not giving prospective customers an opportunity to review the disclosure prior to signing the account agreement.

FPA’s letter to the SEC can be viewed online here.

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