The House Committee on Financial Services has urged SEC Chairman William Donaldson to continue to allow Series 7 holders to call themselves financial advisors as defined by the Investment Advisers Act of 1940. Coincidentally, the House’s recommendation on the so-called Merrill Lynch Rule was sent on March 29, the same day the SEC released its own survey that shows the investing public is confused over what a broker (registered rep) is and what a financial advisor is. [To read the House Financial Services Committee’s letter, go to http://financialservices.house.gov/media/pdf/031705obsec.pdf.]
At issue, at least as far as financial planners are concerned, is that registered reps are presenting themselves as fiduciaries, when in fact they are brokers with a less-than-fiduciary responsibility to their clients.
But the House Financial Services Committee doesn’t agree. “The proposal represents a sensible and balanced approach that does not subject broker/dealers to additional and duplicative regulation under the [Investment] Advisers Act [of 1940] as a result of their providing professional advice, guidance and planning services to their customers,” says the letter, signed by Chairmans Michael Oxley (R-Ohio) and Richard Baker (R-La.).
For opponents of the rule’s final adoption, this may be the death knell. “My gut feeling is that this rule has been put to bed,” says Duane Thompson, the head of government relations for the Financial Planning Association. The FPA has lead the charge in trying to have the rule repealed and was instrumental in getting the SEC to deal with it by filing a lawsuit last July.
James Barnash, president of the FPA, says, “I have a feeling there are going to be a lot of lawyers running around [if the SEC approves the Committee’s recommendation to approve]. I’m very concerned. It sets a bad precedent,” he says, arguing that it would not suitably protect investors from unscrupulous reps. He also says that the staff of New York Attorney General Eliot Spitzer wants to be kept informed on the FPA position, and the FPA is hoping he might write a letter of support, which they said could make a big difference.
With the broker-dealer exemption rule (SEC Rule 34-5980 of 1999), the SEC chose to temporarily allow brokers (registered reps) to charge fees for services (not commissions) and be exempt from the Investment Advisers Act of 1940 as long as they followed three criteria: the advice is provided on a nondiscretionary basis; the advice is solely incidental to the brokerage services; and the b/d prominently discloses that fee-based accounts are brokerage accounts.
Since then, the FPA and numerous consumer groups, such as the Consumer Federation of America, have been up in arms about the gradual blurring of the lines between brokers (who only need meet a suitability standard) and investment advisors (who are fiduciaries), saying that commonly used marketing materials advertising “financial planning” and “financial advice” have confused investors as to what the roles and obligations of the two different professions are; they further argue that disclosure has been reduced to fine print and not easily understood by retail investors.
The SEC study, conducted in Baltimore and Memphis in February, found that retail investors are not only confused about what the roles of a broker and of a financial advisor, but also are confused by the proposed amended disclosure item. In the Baltimore groups, the study found that “in general, both groups seemed to blur their understanding of the roles/terms [of brokerage and advisory accounts] … finding the roles to be indistinct,” says the report ( http://www.sec.gov/rules/proposed/s72599/fcrpt031005.pdf). In addition, while respondents felt the disclosure “was important and relevant,” the statement itself “failed to provide clarity around the issue.”
Despite these findings, yesterday’s events seem to show the rule is headed for adoption. Thompson says he expects the SEC will adopt the rule in the coming weeks, at which point the FPA will decide what it wants to do with the lawsuit that it filed last summer. The court currently has the lawsuit on “hold” since the SEC has acted on the rule, and the FPA will now have 30 days from the time of adoption to decide on whether it wishes to pursue the case.
But the FPA says it isn’t hopeful it will win the SEC to its argument. Indeed, in an interview, Barnash says the FPA is frustrated because it doesn’t have the lobbying power that the SIA does. “They’re listening to the big money,” Barnash says of the SEC.
