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Victory for the FPA

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Is it any wonder that this issue includes four stories about the FPA winning its lawsuit against the SEC over the so-called Merrill Lynch rule? After all, as many have proclaimed, the FPA’s victory is an astounding win for the financial planning profession. But there are other observers who argue that the FPA’s victory has taken away planners’ competitive edge, and more legal maneuvering may be on its way.

On March 30, in a 2-1 decision, the U.S. Court of Appeals for the D.C. Circuit vacated SEC Rule 202(a)(11)-1, which exempted brokers from being subject to regulation as investment advisors in fee-based brokerage accounts, on the basis that the SEC had exceeded its authority under the Investment Advisers Act of 1940. It remains unclear what effect the ruling will have on broker/dealers’ ability to treat fee-based brokerage accounts, discount brokerage accounts, discretionary accounts, and financial planning services as brokerage services (see lead story in the B/D Briefing section on page 115). However, the rule remains effective until the court issues its mandate, which the Securities Industry and Financial Markets Association (SIFMA) says will occur on or shortly after May 14. The mandate could come later if the SEC seeks a rehearing, which SIFMA suggests it should.

Mark Tibergien, a principal with Moss Adams (and an Investment Advisor columnist), says that from a competitive standpoint, one has “to wonder what the FPA was thinking” when it sued the SEC in July 2004, because the argument that planners, unlike brokers, must adhere to a fiduciary standard of care when handling client accounts can no longer be used to planners’ advantage. RIAs “just let these people [brokers] in the tent–[they] had a competitive advantage!”

But Rudy Adolf of Focus Financial Partners says the brokerage industry has indeed been dealt a blow by the ruling, and predicts the industry will start losing top producers en masse. “Brokerage economics are very concentrated–20% of your brokers create 80% of your production,” he says. Those top producers “are running very heavily fee-based practices, but weren’t allowed to accept fiduciary responsibilities; there will be a massive outflow of top brokers” as a result of the ruling.

There are those among the brokerage ranks that have supported reversing the Merrill rule. Since his days at TD Waterhouse, Tom Bradley, president of TD Ameritrade Institutional, says he believed that brokers should adhere to a fiduciary standard. “I always say it was very clear for me to take the position that I took; it was something that I believed in personally but it was a much tougher decision for the firm to go along with it because the firm is a broker/dealer, and we were going against the rest of the broker/dealer community,” Bradley says. When TD Waterhouse merged with Ameritrade last year, Bradley says he questioned whether Ameritrade Chair Joe Moglia would support his stance, but Moglia “wholeheartedly supports it.”

Others in the industry are still awestruck at the FPA’s victory. “It’s astounding that the FPA beat the SEC–they’re all lawyers!” exclaims industry observer and IA columnist Bob Clark.

While one can only speculate at this point on the “tactical maneuvers” that may come next from the SEC and brokerage firms, says Dan Moisand, chairman of the Financial Planning Association (FPA), in a broader sense, the ruling “brings to the forefront yet again the idea of what an appropriate standard of care is when dealing with the public.” Call it the fiduciary debate, he continues, “but there’s a recognition that as the need for advice continues to grow in a increasingly complex financial world it makes more and more sense that persons be held accountable for the representations that they make.”

After the ruling was handed down, FPA President Nicholas Nicolette issued a statement urging the SEC not to pursue a review of the ruling by the Supreme Court. “This rule should have died a quick and merciful death six years ago,” Nicolette said. “It would not be the best use of taxpayer dollars to prolong a policy that is contrary to the public interest.” Before taking any action, Nicolette said, the SEC should await the outcome of its study by the Rand Corporation on the marketing practices of brokers and advisors, which is expected to be complete sometime next year.

Nicolette added that it’s critical for the SEC “not to delay in setting a prompt deadline for transition of these accounts to a clear legal status under the law.” He also called on the SEC to propose a rule within 30 days, as it did when the same court vacated the Commission’s hedge fund rule requiring hedge fund advisors to register. The FPA wants the SEC to set a 90-day deadline for brokerage firms to convert its fee-based brokerage accounts, he said, to either advisory accounts or commission accounts.


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