A federal court of appeals has ruled in favor of the Financial Planning Association (FPA) in its case against the Securities and Exchange Commission over the so-called "Merrill rule" or "BD rule." The court says the SEC exceeded its statutory authority under Section 202(a)(11)(F) of the Investment Advisers Act of 1940 when it adopted Rule 202(a) (11)-1, which exempts broker-dealers offering fee-based brokerage accounts from registering as advisors.
That prompted the Securities Industry and Financial Markets Association (or SIFMA) to urge the SEC to ask for a rehearing on the issue of fee-based brokerage accounts.
The SEC, however, does not plan to challenge the court ruling or ask for a re-hearing. It would like to see implementation begin in four months rather than immediately.
FPA Chair Daniel B. Moisand, CFP, expands on the FPA's views below.
Why did the FPA first start the lawsuit?
We believed [the rule] created two standards for services the consumer would view as identical. In our view this was going to unnecessarily confuse the consumer. Virtually every characteristic people say is good about fee-based brokerage was already available to clients via an advisory account. With the exemption, however, clients lost out on critical disclosures and a fiduciary standard of care.
Why is the FPA pleased with the decision?
The consumer gets back the fiduciary protections and disclosure they never should have lost. Everyone offering fee-based services should be giving the same disclosure forms (ADV) and has the same standard of care. That is a much clearer landscape for a client to navigate.
Which groups stand to benefit and when?
I think the independent broker/dealers (IBD) are most likely to benefit. Most IBDs already have a registered investment advisor arm or allow their reps to set up their own RIAs. With everyone required to deliver an ADV Form, they will be in a better position to show that they don't have some of the conflicts of interests some of the Wall Street firms present. A clear understandable ADV could be a great client confidence booster.
Which groups could be hurt?
Anyone who has been selling themselves as advisors or planners or as providing advice or planning that hasn't been delivering much more than sales may find themselves in an awkward position as they start disclosing details in an ADV for an advisory account or try to explain why the fees that were so good for clients suddenly aren't.
What may be the long-term results?
The trend toward giving clients the transparency they want and being accountable to the clients' interest should continue to grow from this case, but I think this is [also] going to continue growing because of consumer demand, particularly from the baby boom generation. They want to know what is going on, and they want assurances that their advisor is looking out for them. Ultimately, and this is certainly long-term, I hope it will lead to separate regulation for financial planners. Financial planners practice a unique discipline that deserves a unique set of rules. A fiduciary standard and full disclosure are just foundational elements for the financial planning profession.
Which certifications may be most affected?
