Compliance May 14, 2007

SEC Won’t Challenge Broker Registration Ruling

The Securities and Exchange Commission has decided not to challenge a controversial court decision regarding broker registration.
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Instead the SEC announcedthat it will ask the court to extend the effective date of compliance another 120 days to allow investors and their brokers time to respond. Without the extension, the court’s ruling would take effect May 21.
“The Commission is committed to taking the opportunity provided by this decision to improve investors’ ability to make educated decisions about their investment accounts and their financial services providers,’ said SEC Chairman Christopher Cox in a press release.
The U.S. Court of Appeals for the District of Columbia Circuit on March 30 ruled in Financial Planning Association v. SEC, that the SEC exceeded its authority in granting a 2005 disclosure exemption to brokers who provide investment advice that is incidental to their business, but who nonetheless are paid a special fee for the advice (see SEC “Merrill Lynch Rule’ Governing Advice Struck Down).
The rule, commonly 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.
However, 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. The court ultimately agreed with that contention.

Affected Parties

The court’s decision primarily affects fee-based brokerage accounts, but not the traditional commission or advisory accounts that comprise the majority of accounts with brokers, according to the SEC. The SEC said that customers may ask their brokers if they are affected by this decision, and suggested that investors carefully consider changes to their accounts.
In announcing its decision, the SEC also said it would consider whether “further rulemaking or interpretations are necessary regarding the application of the Advisers Act to these accounts and the issues resulting from the court’s decision.’ The SEC said it will work with individual brokerage firms during the transition period as they respond to the March 30 decision.
Chairman Cox also announced that he has approved additional emergency funding to accelerate an on-going outside study of the marketing, sale, and delivery of financial products and services to investors in this area. The previously-commissioned study, by the RAND Corporation, will be delivered to the Commission no later than December 2007, several months ahead of schedule.
According to the SEC, the results of the study are expected to provide an important empirical foundation for considering improvements in regulatory and legislative rules that date back to the 1930s.

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