The Securities and Exchange Commission has asked the U.S. Court of Appeals for the District of Columbia Circuit to delay until Oct. 1 the implementation of a ruling that throws out the agency’s broker-dealer exemption.
The request is reasonable and should be granted by the court.
The ruling means that hundreds of thousands of accounts at the major financial firms that were fee-based brokerage accounts will have to be converted into advisory accounts or back to commission-based brokerage accounts.
Trying to accomplish that virtually overnight is dangerous to the financial health of clients. There is no need to rush.
In fact, haste may lead to waste — an outcome the court surely would like to avoid.
Before any changes are made, companies should be allowed — in fact required — to contact clients to determine their wishes. The court shouldn’t force companies to push clients into, say, advisory accounts when they wish to return to brokerage accounts.
The court, the SEC and the companies all may think fee-based advisory accounts are best for all clients, but not every client will agree. Some will opt for a different arrangement.
As the SEC argued in its request for a delay in implementation, clients need a “meaningful opportunity to make informed decisions” about their options.
Communicating with clients, explaining the effect of the court’s decision, and determining and implementing the clients’ wishes will take time. And some clients may need education and hand-holding before they make a decision.
That is the first concern, but there are other issues.
Some companies don’t have in place appropriate alternatives to fee-based brokerage accounts; they will have to build them.
Some will have to revise their marketing, communications and disclosure documents to remove references to the fee-based brokerage options.
Most firms will have to modify their record-keeping, compliance and operations systems. They will have to train brokers how to explain the changes and what actions the clients need to take as a result.
Some will have to get their brokers registered as advisers so they can handle advisory accounts.
The court’s ruling was the correct one. Now there will not be two classes of financial “advisers,” only one, and anyone giving investment advice will be acting as a fiduciary.
Brokers once again will be brokers. Their function will be to facilitate a transaction on behalf of a client, not to provide investment advice.
The potential for confusion on the part of clients as to who is acting solely in their interests when they deal with an adviser has been significantly reduced, if not eliminated.
The court, having made the right decision, shouldn’t mess it up and open up clients to harm by insisting on immediate implementation.
