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Regulation and Compliance > Federal Regulation > SEC

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“To be, or not to be?” a fiduciary (with all apologies to Bill Shakespeare) is the question of the hour for broker/dealers. While nobody is naive enough to say that a recent federal appeals court ruling is the final word on the subject of fiduciary duty to investors, a positive development for all parties out of the Financial Planning Association’s (FPA) lawsuit against the SEC over the broker/dealer exemption is a discussion of what is right for the investor and how to balance that with existing or yet-to-be-made law, and running a brokerage business.

The March 30 ruling by the U.S. Court of Appeals in Washington, D.C, vacating Rule 202(a) (11)-1, seems to have surprised many in the independent B/D community, and opened passionate discussion about what happens next.

“It’s very interesting that it turns the clock back and lets us do over. Not many times do you get a do-over,” says John Simmers, the CEO of ING Advisors Network who also is an NASD governor and chairman of the Financial Services Institute. “We’ve got a chance to do it right, and [it's] unprecedented, in terms of who is at the table. You now have the advisors, the planners, the brokers, the custodians, a regulator which represents all of those groups, and an SEC that is talking about making regulation simpler and is challenged with competing globally.”

Some big independent B/Ds don’t think the rollback will affect them, but surely what happens at the wirehouses as a result of eliminating the rule will have an impact on independent B/Ds one way or another. “We’ve never offered fee-based brokerage because we never thought it was a good product for consumers,” says Mark Casady, chairman and CEO of LPL Financial. “I think it’s good for the industry because it’s hard to distinguish when it’s someone offering financial advice as a part time, or incidental, piece of what they do, versus when they are offering financial advice as a key part of what they do. Our view is quite simple: Financial advice should be the hallmark, the reason why a client’s working with you, and then there are a whole range of ways to help them that are brought up in a financial planning process.”

“Most of us already operate as investment advisors; very few of us deal with fee-based brokerage” Simmers notes of independent B/Ds. “The interesting part will be the financial planning aspects of what is or is not a plan–that could shift some of the ways we do business, but not from a problematic perspective.”

The wirehouses could head in several possible directions as a result of the ruling. Collectively, they could use their lobbying heft to push hard for the SEC to keep the issue in the courts. The Securities Industry and Financial Markets Association (SIFMA) has already urged the SEC to ask the Court of Appeals to rehear the case. At issue is some $300 billion in fee-based assets that fall under the exemption. Obviously, in terms of financial and political firepower, the B/D lobby and the SEC have an enormous advantage over the FPA.

Looking back “to 2004, when the suit was first filed by the FPA, I was shocked,” as Donald Trone puts it. He is founder and CEO of FI360 in Sewickley, Pennsylvania, a widely respected educational firm specializing in fiduciary best practices. “It was the classic David and Goliath.” He predicts that the SEC will not go to the Supreme Court because they “haven’t in the other cases that were overturned against them either.” Rather, he expects the Commision to “reexamine their rationale for the rule” and see if there’s a way to restate the rule so it would pass muster with the court. Trone hopes that this ignites a reevaluation “of the whole regulatory structure of the industry,” allowing lawmakers to “define a new set of regulations, perhaps even identify a new body to oversee this new profession that has emerged in the last 30 years. Where this gets tricky is whether this ‘profession’ is referring to investment advisors and/or financial planners.” He sees “significant overlap” between investment advisors and financial planners but there are also real differences, and he would argue that planners “deserve their own regulatory body.”

Trone makes a distinction between a consumer who wants “unbiased, competent, continuous investment advice,” who “deserves the highest standard of care defined by law” and one who is, say, rolling over a 401(k) and is simply asking “‘What should I do with the money?’ and that’s the end of the engagement.” Does this become a catalyst at the wirehouses for cleaving an investment advisor arm away from an agency arm? “Yes, absolutely,” Trone asserts. What’s holding that back is “the triggering of unintended prohibited transactions.” Current law and regulation about these transactions and principal trading can trip up wirehouses, even if “they follow all of the fiduciary best practices that we preach about.” The legislation has to catch up with reality here, he says. “You know the system is broken when you can’t find the right solution for the client.”

Trone adds that he believes that the wirehouses “want to provide the appropriate level of services to their clients but they can’t because of the current regulatory structure.” Trone notes that he is not a securities lawyer, so he cannot say whether it is law that has to change, or if “it’s as simple as the SEC defining exemptions for these prohibited transactions similar to what we saw with the Pension Protection Act.”

Bertram Schaeffer, managing principal of Verus Advisors, LLC, a fiduciary consulting firm in Galloway Township, New Jersey, says that to make this work, the law has to change. In his opinion, “proprietary products would constitute principal transactions” for B/Ds, and with that plus the dealer side, “the whole business model goes down the tubes.” With current law, “the issues are so pervasive,” he says, “the ability of these firms to execute an advice model is on a wide scale [retail] basis is very, very limited.”


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