On March 30, 2007, the U.S. Court of Appeals for the D.C. Circuit did something memorable in the world of professional investment advice: it vacated SEC Rule 202(a)(11)-1, which everyone (except the SEC) called the “Merrill Rule.” Writing in the pages of Investment Advisor’s May 2007 issue, Melanie Waddell wrote, “As many have proclaimed, the FPA’s victory is an outstanding win for the financial planning profession.” But as Melanie (then as now the Washington bureau chief for IA and now AdvisorOne) presciently predicted, “more legal maneuvering may be on the way.”
The ruling struck down the SEC rule first proposed in 1999 that exempted brokers from being regulated as investment advisors (under the Investment Advisers Act of 1940) in fee-based brokerage accounts.
In an interview on the anniversary of the court ruling, Duane Thompson (left) said that “the more things change the more they’re the same: we, meaning the industry, are still debating the same issue five years later.” At the time, Thompson was a managing director for government relations for the Financial Planning Association, which sued the SEC not once but twice (in July 2004 before the SEC formally adopted the rule in 2005, and then again in 2005) in its ultimately successful attempt to overturn the Merrill rule. Thompson left FPA in 2009 and now has his own consulting firm, Potomac Strategies, and is a senior policy analyst for Fi360.
Thompson says financial planners and FPA members continue to bring up the suit with him. “There was a lot of frustration” among planners, he recalled, over not getting the SEC to “listen to the financial planner’s viewpoint, not just Wall Street’s.” He says that while the successful suit led to much in the way of positive feelings “at least on the financial planner side, it also exacerbated and polarized feelings” between the broker-dealer and the investment advisor communities.
Recalling some uncertainty at the FPA over the wisdom of suing the SEC, Thompson says “it was a major decision” for FPA’s board “to come to grips with the idea.” Then as now, the FPA was composed primarily of “small-businesspeople,” and among such people, “ a lawsuit is the last thing you want to do.” By contrast, in the securities industry and among some other associations, filing suits “is a standard tool in the quiver of many associations; the AMA has an arm for litigation; the Chamber of Commerce has one,” and just this week, lawyers for the National Federation of Independent Businesses (NFIB) spoke against the Patient Protection and Affordable Care Act, aka Obamacare, before the Supreme Court.