Like Emily Litella, the old “Saturday Night Live” character, at the end of one of her confused ramblings, the U.S. Court of Appeals for the District of Columbia Circuit essentially said “never mind” to brokers when it threw out the broker-dealer exemption rule.
Known by some critics as the “Merrill Lynch Rule,” the exemption let brokers use fee-based brokerage accounts without coming under the purview of the Investment Advisers Act of 1940.
Not any more. If the Securities and Exchange Commission doesn’t appeal the ruling, representa-
tives soon will have to move fee-brokerage clients into commission accounts or advisory accounts.
About 1 million customers will be affected.
In 1995, the Tully Committee on Compensation Practices pointed out that, in many cases, the best advice a rep could give a client was to “do nothing.”
But under a commission arrangement, brokers don’t get paid for doing “nothing.” So the general consensus was that the industry should move toward fees.
Brokers were told that fee-based brokerage was the right thing to do and were pushed to put assets into the accounts.
Unfortunately, many oversold the fee idea to the detriment of inactive clients.
That might not have happened had Wall Street adopted the fiduciary standards of the Advisers Act for fee-based accounts.
But no. Wall Street instead carved out an exemption to preserve sales-practice regulation.
The Financial Planning Association of Denver said that the exemption was illegal rule making. The appeals court agreed.
The ironic thing is, many brokers agree, as well.
Registered reps tend to think of themselves as fiduciaries. And they really are fiduciaries when they put clients into advisory programs or do full
financial planning.
But their employers don’t want to go that route. There is more liability, and fiduciary duty conflicts with the hugely profitable businesses of product manufacturing and proprietary trading.
In the wake of the court decision, one has to wonder what other product will be outlawed next. Brokers still smart from the regulatory attacks on B and C fund shares: One day they were great, the next day they were outlawed for many clients.
Not a pretty picture
Meanwhile, in a separate development, New York’s highest court last month ruled that for brokers covered under the state’s law, brokerage firms have absolute legal immunity for statements they make on U-5 termination forms.
This ruling follows a similar finding in 2005 by a California appeals court.
The upshot: Brokers in New York and California who are targeted on their U-5s by vindictive managers or made scapegoats by their firms may not be able to sue for defamation and certainly won’t get any damages if they do.
The Securities Industry and Financial Markets Association of New York and Washington called the New York decision “a win for investors.”
In another case, which the SEC has cooked up — but has yet to file — against a Texas broker-dealer, the commission claims it is a violation of privacy rules for firms to use any client information to transfer accounts.
This isn’t a pretty picture.
The freedom to select investments and account types is becoming more restricted. So is the ability to change employers and basic employment rights.
No wonder there is a move afoot to dump the securities license and become an investment adviser. No wonder many veteran reps simply are calling it quits.
It isn’t that policymakers aren’t concerned about heavy-handed regulation. They are.
They blame regulation for Wall Street investment banks’ loss of initial public offering market share to overseas competitors. Terrible, really.
So why is no one asking if the regulatory morass is adversely affecting retail financial advisers? Isn’t this happening at the very time the investing public needs advisers most?
Someone needs to mind this mess.
