The Securities and Exchange Commission recently was knocked back on its heels when the U.S. Court of Appeals for the District of Columbia Circuit ruled that the SEC had “exceeded its authority” by exempting broker-dealers that offer fee-based brokerage accounts from registering as advisers under the Investment Advisers Act.
The Financial Planning Association may have claimed victory, but in the interest of investors and the promotion of consumer choice, the SEC should request a rehearing.
The Denver-based FPA called the court’s ruling a “major victory” for consumers. Not so.
The decision comes at the expense of consumers, reducing the range of choices available to them in the marketplace.
Investors benefit when they can choose from among a wide range of services offered by different types of investment professionals.
In addition, investors benefit when they can choose different methods to pay for these services. Eliminating the exemption for fee-based accounts from IAA regulation reduces choice at the expense of investors.
Fee-based accounts gained prominence in 1995 after Arthur S. Levitt, then SEC chairman, established the Tully Committee and instructed it to examine brokerage practices.
At the time, it was feared that some brokers had an incentive to “churn” accounts — making unnecessary trades so they could charge additional trading fees and increase the amount of commissions they collected.
To address that concern, the committee urged greater use of flat or asset-based fees for brokerage services. Ultimately, the committee concluded that these fee-based accounts were one way to align consumer and broker interests more closely.
Today, fee-based accounts make up 20% of all retail-brokerage accounts — held by about 1 million American investors.
Regulatory arbitrage
But the FPA has used the courts for regulatory arbitrage in an attempt to eliminate the regulatory and remunerative distinctions among these different types of services. Because we count among our members both broker-dealers and financial planning firms, the New York- and Washington-based Securities Industry and Financial Markets Association takes a more expansive view of the industry and the importance of choice for customers.
Although brokers are regulated differently than are investment advisers, it is misleading to suggest that they are regulated less stringently.
Investors receive robust protections from both.
Broker-dealers, but not investment advisers, are subject to a host of upfront protections such as continuing-education requirements, a raft of required disclosures to customers both upon account opening, as well as after each transaction in the account, and the ready availability of any broker’s disciplinary history through Washington-based NASD’s online Central Registration Depository database.
Perhaps most important, every trade by a broker on behalf of a customer is subject to a suitability requirement.
Financial advisers, on the other hand, offer investors “back end” protection: the ability to sue after the fact if the adviser didn’t exercise fiduciary responsibility.
Of course, brokers provide back-end protection, too, of a slightly different type: Their customers have the right to sue for a violation of their broker’s suitability duties.
Unintended consequence
These different types of services provide consumer choice, but if the court’s decision stands, the imposition of new regulations on broker-dealers will create a disincentive for firms to offer fee-based accounts, and limit investors’ choices in how they compensate their registered representative.
Of course, the distinction between brokers and financial planners isn’t the only thing that has been eliminated by the court’s decision. The court vacated all of SEC Rule 202.
In doing so, it also overturned the provisions in the rule that clarified that a broker-dealer has a fiduciary duty when providing financial planning services to a client — a principle that SIFMA members fully support.
Suddenly, the back-end protection that planners have touted so often as an important investor protection could be in jeopardy, as well.
Perhaps the FPA would like to support our call for a rehearing? SIFMA and America’s investors will be waiting.
Marc Lackritz is president and chief executive of the Securities Industry and Financial Markets Association of New York and Washington.
