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SEC Responds To Court Decision

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The U.S. Securities and Exchange Commission has agreed to adopt a temporary rule that will help financial services companies cope with a court ruling that affects the boundary between investment advisors and broker-dealers.

The U.S. Appeals Court for the District of Columbia recently agreed with the Financial Planning Association, Denver, that the SEC lacks the authority to ease requirements for broker-dealers that want to compete with investment advisors by offering fee-based accounts.

As a result of the ruling, fee-based brokerage customers will have to decide whether they will convert their accounts to fee-based accounts that are subject to the federal Advisers Act or to commission-based brokerage accounts, SEC officials say.

New Temporary Rule 206(3)-3T, which is set to expire Dec. 31, 2009, will permit an advisor to comply with Section 206(3) of the Advisers Act by writing to clients with non-discretionary accounts to warn about conflicts that might exist if broker-dealers perform principal trades for the clients.

The advisors that perform broker-dealer functions also must get written, revocable consents for the transactions from the clients, and they must send confirmation statements explaining whether they were acting as advisors or as broker-dealers, officials say.

“Compliance with the temporary rule will not relieve an investment advisor from its fiduciary obligations imposed by the Advisers Act or by other applicable provisions of federal law,” officials note.

Advisors that also act as broker-dealers must seek the best execution of client transactions, and they also have a duty to disclose material facts necessary to alert clients to the advisor’s potential conflicts of interest, officials say.

Public comments on the temporary rule are due Nov. 30.

The SEC also is proposing rule amendments to reinstate some provisions that were knocked down by the FPA ruling.

The amendments would redefine when broker-dealers are offering “solely incidental” advice; state that broker-dealers that charge separate fees for advisory services are giving more than “solely incidental” advice; and make it clear that broker-dealers that exercise investment discretion are doing more than providing “solely incidental” advice.

Comments on the proposed rules are due Nov. 2.