All eyes are on the Securities and Exchange Commission now that a federal appeals court has overturned its controversial broker-dealer exemption rule.
DETROIT — All eyes are on the Securities and Exchange Commission now that a federal appeals court has overturned its controversial broker-dealer exemption rule.
The SEC has until May 14 to appeal a March 30 ruling by the U.S. Court of Appeals for the District of Columbia Circuit that it overstepped its authority by allowing registered reps to hold themselves out as investment advisers, without requiring them to act as fiduciaries — provided that any advice they dispense is “incidental.”
If no appeal is filed, the ruling will go into effect May 21.
Although an SEC spokesman said it’s too early to say how the commission will respond, legal experts don’t expect the agency to roll over and conform.
“I don’t think the SEC ever approached this issue in the right way, and if they continue to follow a failed strategy, they will appeal,” said Mercer Bullard, founder of Fund Democracy Inc., an Oxford, Miss., consumer group, and assistant professor of law at the University of Mississippi.
Big bucks at stake
Beyond the SEC, there is speculation that Congress may get pulled into the fray as the brokerage industry scrambles to address the ruling’s effect on the $277 billion that sat in nearly 1 million fee-based brokerage accounts at yearend, according to estimates from Boston-based Cerulli Associates Inc.
“The first question relates to what the SEC does, and that plays into what Congress will do,” said David Tittsworth, executive director of the Investment Adviser Association in Washington.
“I think it’s fairly likely that the brokerage community could go to Capitol Hill to say, ‘We want some relief,’” he added. “They’re going to want at least what the SEC was giving.”
The brokerage industry, as represented by the Securities Industry and Financial Markets Association in New York and Washington, declined to comment. But the general consensus seems to be that the fight is far from over.
“This is round one, and that’s all it is,” said Richard Bellmer, chairman of the National Association of Personal Financial Advisors in Arlington Heights, Ill.
“The brokerage industry is not just going to just say OK now,” he added. “At this point, any of us are just guessing on what they might do next, and they might not even know what they’re going to do, but it’s definitely not going to be nothing.”
One possible scenario is an appeal en banc to the D.C. Circuit, which would require a ruling by the full court. The current 2-1 ruling does not include opinions from six of the court’s nine judges.
“I would be very surprised if the SEC decided to appeal the ruling,” said Daniel Moisand, chairman of the Denver-based Financial Planning Association, which challenged the commission’s original rule proposal in a lawsuit in 2004. “And I would be stunned if they were successful in any appeal, given how closely aligned the court’s decision was with our arguments.”
The SEC also could bypass the circuit court and appeal directly to the U.S. Supreme Court, but a victory there would be a long shot, according to Mitchell Nichter, a San Francisco-based partner with Paul Hastings Janofsky & Walker LLP of Los Angeles.
Also, appealing to the Supreme Court without first appealing for a full circuit ruling might be seen as a snub to that circuit, he added.
“The long and short of it is that the Supreme Court accepts very few appeals,” Mr. Nichter added.
An appeal to Congress is more likely, he said.
“The SEC could either go to Congress to ask for authority to broaden the definition of the
broker-dealer exemption or they could just ask Congress to rewrite the rule,” Mr. Nichter said. “This is a huge deal for the brokerage community, and they have some pretty powerful lobbies.”
Assuming that Congress has the inclination to start rewriting 67-year-old securities laws, it could find itself balancing between two sets of constituents.
“It would be pretty interesting to see what would be put before lawmakers,” Mr. Moisand said. “I don’t know how many Congressmen are going to want to be telling constituents they don’t need the kind of disclosures in the Advisers Act or that advisers don’t need to put their clients’ interests first.”
Coalition support
But the lawmakers won’t be hearing only from the brokerage community, according to Mr. Tittsworth, who cited the support of the ruling from a “loose coalition,” including the Consumer Federation of America, the North American Securities Administrators Association Inc., the CFA Institute and the FPA, as well as his organization.
“There are different sides to this lobbying,” he said. “We’ve also got to go to Capitol Hill and at least educate the members of Congress.”
Regardless of what the SEC does at this point, the battle lines could be drawn for a long debate.
“On one side, you have the FPA standing for investor protection; the other side will argue that more options and choices are better for investors,” Mr. Nichter said. “So it’s almost a matter of being pro-
protection or pro-choice.”
