The Financial Planning Association will be popping the bubbly tonight. Three years after suing the SEC over the controversial “Broker Dealer Exemption” rule, a federal court has ruled that the SEC exceeded its authority in adopting the rule.

“It’s very surprising,” says Don Trone, founder of Fiduciary 360, and a frequent critic of the Broker-Dealer Exemption. “Frankly, I thought the suit was a bad idea, it’s the SEC they were suing,” says Trone, reflecting a widespread belief that taking on the powerful regulator wasn’t going to lead anywhere.

The FPA’s Dan Moisand said he thinks it will be a really uphill battle for the SEC to challenge the latest ruling. “It’s a big win for the consumer,” said Moisand, FPA Chairman, “and we look forward to engaging in constructive dialogue with the rest of the financial services industry about coming up with a better arrangement for their consumers.” (To view the US Court of Appeals ruling and the case history, click here.)

The FPA filed the lawsuit in July 2004, five years after the SEC adopted the “temporary” B/D Exemption rule, officially entitled “Certain Broker Dealers Deemed Not to be Investment Advisers.” The suit challenged the SEC’s authority to adopt the rule, which effectively allowed registered reps to be compensated by clients with fees—an arrangement that until then was only allowed to investment advisers—but avoid being regulated as investment advisers under the Investment Adviser Act of 1940 –as long as any advice they gave was “incidental” to the brokerage services they provided.

The Investment Adviser Act of 1940 differs from the Securities Exchange Act of 1934, which regulates broker/dealers, in the standard of care with which advice providers must approach clients. The former requires that an advisor act as a fiduciary, while the latter has only a “suitability” requirement. In other words, whereas an investment adviser must always act in the client’s best interest, a broker can choose an investment that is just good enough, but pays a higher commission than the investment that would have been “best” for the client.

Sound confusing? Unless you’ve been following the matter closely, it is. Chief among the FPA’s concerns and reasons for the suit was the fact that the line separating brokers from investment advisers had become exceedingly blurry in the time since the exemption first took effect in 1999 (click here to read Rep.’s February 2005 story on the topic). Today, commissioned brokerage services (trading for a client) are much less lucrative than they were, and providing investment advice for a fee is where it’s at.

Even so, and much to the chagrin of the FPA and other opponents of the exemption, like AARP and the Consumer Federation of America, the SEC adopted—with Congressional encouragement—a final version of the Broker-Dealer exemption in April 2005 (click here to read the industry’s take on the issue at that time). The only major change the SEC made to the new final version of the rule was that the broker could not “hold himself out as a financial planner” if he wanted to qualify for the exemption, and he had to disclose to the client that his interests, and the interests of his firm, might not always be the same as the client’s.

It’s unclear whether today’s court ruling settles the protracted battle over who can provide financial advice, how they can be paid, and what standard of care they must use. The SEC’s spokesman, John Heine, would not comment on today’s ruling or what the SEC plans to do in response. But the SEC can request that the Supreme Court review the decision.

Of course, the FPA is hoping—and asking—that the regulator not take that path. “This rule should have died a quick and merciful death six years ago,” said Nicholas Nicolette, the sitting president of the FPA in an official statement. “It would not be the best use of taxpayer dollars to prolong a policy that is contrary to the public interest.” He called on the SEC to propose a rule within 30 days and set a 90-day deadline for brokerage firms to convert fee-based accounts over to the advisory side of the business. “There is no need for delay after six-years of rulemakings…the securities industry…should easily convert them to commission or advisory accounts in a matter of weeks, not months,” he said.

Delighted opponents of the Exemption are saying the court’s ruling should put to bed some longstanding arguments from the securities industry. “Clearly, the traditional argument used by the Securities Industry Association that the structure of the payment arrangement was the only thing that changed, and not the nature of the relationship [from brokerage to advice], has been dismissed by this ruling,” says Trone. “With this ruling there is no way a wirehouse brokerage firm can avoid creating a fiduciary division within the firm,” he says.

And while most of the brokerage firms already have Registered Investment Advisor divisions, today's ruling—should it stand—will require advisors to act as fiduciaries any time they are providing fee-based financial advice. Merrill Lynch said it was too early to comment on the ruling and a Morgan Stanley spokesperson said, “Like the rest of the industry, we’re still evaluating the decision.”