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Divided Appeals Court Backs FPA Appeal Of SEC Ruling

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The Financial Planning Association has won a battle in court against the U.S. Securities and Exchange Commission.

A 3-judge panel of the U.S. Court of Appeals for the District of Columbia today ruled 2-1 that the SEC lacks the authority to exempt broker-dealers who collect fees as well as commissions from the fiduciary requirements of the Investment Advisers Act of 1940.

The SEC has been trying since 1999 to use a section of the act that permits it to exempt “any other persons not within the intent of this paragraph” from the IAA fiduciary requirements.

Judge Brett Kavanaugh and Judge Judith Rogers agreed with the FPA, Denver, that another part of the paragraph that refers to brokers and dealers who receive “special compensation” clearly prohibits the SEC from exempting broker-dealers with fee-based compensation arrangements from the IAA.

The third judge, Judge Merrick Garland, filed a dissent agreeing with the SEC that the “any other persons” provision appears to give the SEC the right to exempt broker-dealers.

Concluding otherwise about the section “would undermine Congress’s purpose in enacting the IAA – to protect consumers and honest investment advisers and to establish fiduciary standards and require full disclosure of all conflicts of interests of ‘investment advisers,’ broadly defined,” Rogers writes in an opinion for the majority.

Garland contends that broker-dealers who receive some fee-based compensation closely resemble commission-only broker-dealers and notes that broker-dealers already are exempt from IAA fiduciary requirements.

FPA President Nicholas Nicolette has welcomed the ruling and urged the SEC and the securities industry from appealing to the U.S. Supreme Court.

“It would not be the best use of taxpayer dollars to prolong a policy that is contrary to the public interest,” Nicolette says in the statement.