Having had time to digest the March ruling by the U.S. Court of Appeals for the District of Columbia that overturned SEC Rule 202—the so-called “Merrill Lynch” rule—branch office managers still say they’re not sure what to expect. Some see Congress intervening, while others see mammoth compliance and paperwork burdens ahead. For eight years, the “Merrill Lynch” rule, as it was pejoratively called, allowed registered reps to offer fee-based brokerage accounts. But that game is changing.

Broker/dealers everywhere are still trying to figure out what to do. (On May 21, the SEC filed a 120-day stay to give firms more time to adapt to the vacating of the b/d exemption.) If the rule stands, reps offering these accounts will have to convert them to another compensation arrangement—or register as investment advisors. And, that should translate into a huge headache for Series 7 holders—and their managers.

The thing is, having brokers register as IARs with the b/ds’ RIA side of the house does not thrill many b/ds, since it bestows a fiduciary standard on the reps. That could translate into greater litigation risk, since fiduciary status carries a much higher legal responsibility than does suitability (the standard of care that registered reps have to adhere to). Plus, there are some securities laws that make it difficult for broker/dealers to allow too many of their reps to provide advice and fiduciary counsel.

Even though the SEC didn’t dispute the jurists, many insiders expect the brokerage industry will fight back somehow, before the rule kicks in the fall; after all, in the balance is $300 billion invested via 1 million fee-based brokerage accounts, according to Chip Roame, who heads Tiburon Strategic Advisors

Many BOMs we spoke to say they feel Congress will ultimately wind up having to intervene and re-write what they say are "antiquated" rules. And, while the anxiety level among the managers we interviewed about what the current ruling will entail varied, all seemed to find it a highly impractical—and unlikely—edict for the industry at large to be able to follow.

Until then, a mountain of paperwork required to convert fee-based brokerage accounts awaits.

One independent OSJ in New Jersey, who clears through LPL, thinks the ruling is a potential nightmare for the broker/dealers. There is no doubt about it, he says: "The average wirehouse broker doing fee-based business is clearly offering an advisory service—not just incidental advice while doing a trade" (as stipulated by the Merrill exemption).

There are two elements to the problem, he says. One is vulnerability to legal action. "A registered investment advisor [and its investment advisor representative, or IAR] is held to a higher standard than a broker, having to act in a client’s best interest, rather than simply ensuring that a trade is suitable." That, he says, opens the door to all kinds of lawsuits. "That’s probably the greatest concern to the broker/dealers," he says. "However, I think they should be just as worried about the regulatory burden. In my group [he manages a combined total of five reps and IARs], we act both as brokers and advisors. We need separate registrations and separate records. It is very burdensome, and I’m certain it would be especially so for a large wirehouse that would have to institute all these practices."

A wirehouse BOM in the south, who also asked not to be identified, says he is taking a "head-in-the-sand" approach to the recent decision, and operating on a "business as usual" approach. Still, he says, "my whole feeling is that brokerage firms have much to lose. Our industry has spent so much energy encouraging and educating FAs on planning and fee for advice, I find it impossible to believe that this one ruling will 'cease and desist' 10 years of evolution."

But at least one BOM said he thinks that most firms can get around the ruling, and if not, that it will probably be overturned. "In the end, I think it’s just a hollow victory for the CFPs," says a Wachovia BOM on the West Coast, who is himself a CFP. "Merrill Lynch alone has enough power to go to Congress and appeal this decision," said the manager, who, like others interviewed, wished to remain anonymous.

He says that Wachovia, for example, has Envision—a computer-based asset advisory system that—as one of the firm’s West Coast reps put it—"makes mince meat out of the Merrill Lynch rule." Clients are not charged for the output of the firm’s own, real-time version of the Monte Carlo calculator version, he explains.

Non-RIA Wachovia reps can simply convert their "Pilot Plus" accounts—which have a flat fee pricing—to asset advisor accounts by using Envision, which meets the fiduciary requirements of the rulings, the Wachovia manager says. "We don’t have much of a problem, because we’re able to beat them at their own game." And, most other wirehouses have similar ways of "getting around" the ruling, he says.

One Smith Barney rep is also optimistic: "If this ruling stands, this firm will probably convert its fee-based accounts [which the firm itself estimates hold some $20 billion in client assets] to Smith Barney Adviser, our wrap-account program," he says. "Since Smith Barney is the fiduciary—doing the asset allocation and portfolio management," he says, "brokers are free to sell the accounts. And the other large firms offer similar options."