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Regulation and Compliance > Federal Regulation > SEC

FPA Wins Appeal on Merrill/BD Rule; SEC Concedes

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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?

I think many could be affected, but I think it will be a positive thing for consumers and the financial planning profession. In light of the ruling, it may be harder to hold these designations and not be deemed as holding out as a financial planner.

For 20 years or so the SEC has held that holding out as a planner triggers registration. I agree with that position, and I hope that people who use designations simply to market themselves without actually doing any planning or meeting a fiduciary standard will find other ways to market. If this happens, designations that expect a fiduciary standard of care will grow in value. Certified Financial Planner could be the biggest winner and is more likely to continue to serve as the mark of the financial planning profession.

Could the ruling affect $250 billion-plus of assets?

Certainly. It means these fee-based brokerage accounts either need to become advisory accounts or go back to a commissioned account. That’s a choice each firm has to make.

Will broker-dealers give clients new information?

I don’t expect much change from firm marketing materials. They’ll keep selling the advice element, because that’s what the market responds to best. Hopefully, the SEC will enforce the law and go after those engaged in bait and switch – sell the advice but only deliver brokerage sales. Sadly, the SEC does not have a very strong record in this regard.

Why is this decision significant?

One of the pitches for this exemption was that so many people need advice, so the SEC should lighten up on advice providers. In other words, conflicted advice is better than no advice.

Hopefully, this ruling will encourage the SEC to stand firm. Brokerage firms will step up to the higher standards if regulators require it, because if they don’t they will lose business to those that will meet a fiduciary duty. A fiduciary standard is the only standard appropriate for advice givers.

Did you expect to win the case?

We always knew it could go either way. There has been a lot of rhetoric thrown around about this rule. Some paint it as independents vs. wirehouses; others as RIAs vs. registered reps; others still as fees vs. commissions.

But it is about something much more fundamental: every advisor needs to adjust their operations, processes, support team and mindset to meet a fiduciary standard of care. Anything less weakens their future. A value proposition that ends with “but don’t hold me to that” is of no value at all.

Janet Levaux is the managing editor of Research; reach her at [email protected].


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