On Wednesday, the SEC unanimously voted to allow Series 7 holders—registered reps—to position themselves as financial advisors—with certain caveats. But, once again with the “broker/dealer rule issue,” the SEC seemed to hedge its bet.

In one breath, SEC Chairman William Donaldson said that how a broker is compensated (i.e. fee-based business and not a traditional broker of securities) “shouldn’t serve as a bright-line boundary between these financial service providers.”

Then, Donaldson allowed, “It has, however, become clear through the course of this rulemaking that broader questions remain about whether there are material differences in the levels of protection afforded retail customers of financial service providers under the Securities Exchange Act [of 1933] and Investment Advisers Act [of 1940], and, if so, what can and should be done to either reconcile those differences or ensure that customers fully understand them.”

He then asked his staff to report back within 90 days about what should be done about this. In short, after six years and a unanimous vote to approve the measure, the debate rages on.

The rule, known as the Merrill Lynch exemption, lets b/ds that offer fee-based brokerage accounts avoid the fiduciary obligations required of advisors under the Investment Advisers Act of 1940. Registered reps have only “suitability” requirements, a standard looser than a fiduciary.

Under the new disclosure rules, financial professionals must advise clients that brokerage accounts are not advisory accounts and that firms’ interests may not always be aligned with the clients’. Firms must also make someone available to clients to discuss the differences between an investment advisor and a broker. And brokers’ financial planning advice must only be “incidental” to the traditional brokerage services they provide.

And that’s precisely the problem: confusion over the concept of a fiduciary among the investing public. Indeed, one of the questions posed by Donaldson to be included in the staff’s study would seem to contradict the rule the SEC had just ratified: “Should broker-dealers who provide investment advice but who are excepted from the Investment Advisers Act nonetheless be subject to the fiduciary obligations imposed by that Act on investment advisers?”

The Financial Planning Association, the lead critic of the inaction on the issue after the SEC first adopted the Merrill exemption in 1999, is pleased with the enhanced disclosure of requirements of the new rule, but is otherwise disheartened.

“The approach taken by this rule will be a disservice to the public over the long term if it only formalizes two different kinds of regulation for the same advisory service,” read an official FPA reaction to the rule adoption.

The FPA still has a lawsuit pending against the SEC. It filed the suit in July 2004 to prod the commission to make a permanent decision on the Merrill exemption, and the FPA says it plans to carefully review the new rule before deciding how to proceed.

SEC spokesman John Heine had this to say about the reason for the rule and the forthcoming study: “The commission’s rule deals with several discreet questions—the study will address the broader issues that surfaced during the rulemaking process.”

Jim Eccleston, a securities attorney in the Chicago law firm Shaheen Novoselsky Staat Filipowski & Eccleston, says that despite the SEC’s approval, “the ‘broader issues’ they’re planning on looking at are exactly what the FPA wants them to,” he says.

Bill Singer, a securities attorney with Gusrae Kaplan & Bruno and a vocal critic of the regulatory system, agrees and says the SEC appears to lack confidence in its rule, a clear sign, he says, that it should have taken more time. “Rulemaking is just as much about conveying confidence to the industry and the public about what you’re doing. This is like telling the paratrooper ‘if the chute doesn’t work, bring it back,” says Singer.

Eccleston adds: “All this says is that we’re not going to make brokers into fiduciaries just because they take fees for their services, but the ‘solely incidental’ bit will be the trick—the SEC could easily end up further defining that so that brokers are more limited in their practice, without the statutes needing to be changed.”