Compliance

SEC “Merrill Lynch Rule″ Governing Advice Struck Down

The Securities and Exchange Commission’s (SEC) rule exempting certain broker-dealers who offer investment planning advice from strict disclosure requirements was overturned Friday.
Reported by Alison Cooke

In its 2-1 ruling, in the case Financial Planning Association (FPA) vs. the Securities and Exchange Commission (SEC), the U.S. Court of Appeals for the District of Columbia Circuit said the SEC had overstepped its authority in issuing the 2005 rule.

The rule, referred to as “the Merrill Lynch rule,’ exempts broker-dealer firms that provide investment advice if the advice is “solely incidental to brokerage services provided on a customer’s account” and if specific disclosure is made to the customer, from regulation under the Investment Advisers Act of 1940. The exemption was issued to clear up regulatory confusion so that brokers could offer fee-based accounts without having to register as financial advisers, according to the Securities Industry and Financial Markets Association (SIFMA).

The Financial Planning Association (FPA), which represents accountants, bankers, attorneys, insurance agents and others who offer financial planning services, brought the suit arguing the SEC should not have adopted regulations which exempted certain broker-dealers from registering as advisers and allowed stock brokers to give advice to clients without having to disclose conflicts of interest, according to Reuters.

The court ruled that the SEC’s rule is inconsistent with the Act because, among the six exemptions from the definition of “investment adviser” provided for by the Act, is one that exempts any broker or dealer “whose performance of such services is solely incidental to the conduct of his business as a broker or dealer” and “who receives no special compensation therefor.” The Act also gave the SEC the power to exempt other persons not within the intent of the law’s other exemptions. Therefore, the court said that charging asset-based fees means they must register as advisers.

“Now that the SEC rules have been overturned, some regulatory uncertainty will exist until new rules are promulgated,’ SIFMA predicted, in a statement released Friday afternoon.

“In the wake of this decision, our highest priority must be to our investors – ensuring there is no disruption to our customers while we wait for the SEC to provide interim guidance which conforms to the court’s ruling,’ said Ira Hammerman, general counsel at SIFMA, in the statement; “In the meantime, we encourage firms affected by today’s verdict to comply with the decision while simultaneously working to provide customers as much disclosure as is reasonable, given the ruling.’