IRVINE, Calif. — The securities industry is coming to grips with the defeat of the broker-dealer exemption rule.
If the Securities and Exchange Commission doesn’t act quickly, the U.S. Court of Appeals for the District of Columbia Circuit’s ruling that the SEC doesn’t have the authority to allow some brokers to sidestep regulation as investment advisers will take effect May 21.
Should that happen, billions of dollars in fee-based brokerage accounts will have to be moved into traditional commission accounts or into advisory accounts.
The Securities Industry and Financial Markets Association of New York and Washington is awaiting “interim guidance” from the SEC, according to a prepared statement released by the organization after the ruling March 30.
In a later e-mail update to its members last week, SIFMA said “it is not immediately clear what effect the opinion will have” on fee-based brokerage accounts, discount brokerage accounts, discretionary accounts and
financial planning services offered by brokers.
SIFMA spokeswoman Melissa Buden declined further comment.
David Bellaire, general counsel at the Financial Services Institute Inc. of Atlanta, which represents independent-contractor firms, said that his members are trying to figure out their next step.
The FSI will hold a teleconference in the coming weeks to update members, he said.
The Denver-based Financial Planning Association, which legally challenged the SEC’s rule, disagrees with the notion that the court ruling has caused confusion among brokers.
Prior to the rule, “there was a bright line, a special compensation test, and the industry pretty much understood that if you charge a fee for advice, you’re an investment adviser,” said Duane Thompson, managing director of the FPA’s Washington office. “So [eliminating the rule] will bring greater clarity.”
Firms assess situation
Since pushing brokers to use the accounts when they were rolled out in the late 1990s, many firms have de-emphasized fee-based brokerage programs due to regulatory scrutiny and the pending litigation.
Nevertheless, moving clients from existing accounts will be a paperwork hassle, brokers said.
At yearend, $277 billion resided in nearly 1 million fee-based brokerage accounts, according to research firm Cerulli Associates Inc. of Boston.
Merrill Lynch & Co. Inc. of New York has the largest share of that total in its Unlimited Advantage program, with $102 billion, according to Cerulli.
Other top sponsors are Morgan Stanley of New York with $33 billion in its Choice account and
UBS Financial Services Inc. of New York with $30 billion in its InsightOne program.
“We’ll have to resell [clients on a new account] and have new paperwork signed,” said a rep with Wachovia Securities LLC of Richmond, Va. “It’ll be a hassle,” said the broker, who asked not to be identified.
This broker expects that most of his clients who use Wachovia’s Pilot Plus account will move to the advisory version of the program, called Asset Advisor, where they will pay equivalent fees.
Clients moving into advisory accounts will have to sign advisory agreements and receive Part II of the ADV disclosure form. In addition, brokers not registered with states as investment advisers will have to complete required testing and registration.
Brokers at several wirehouses said that their firms haven’t alerted them to any impending need to switch accounts.
“Morgan Stanley is in the process of evaluating the ramifications of the court ruling,” said spokesman Jim Wiggins.
The firm is about to test a non-discretionary advisory version of its Choice account, according to a broker at the firm who asked not to be identified.
A.G. Edwards & Sons Inc. of St. Louis, Merrill Lynch,
UBS and Wachovia didn’t respond to requests for comment. A spokesman for
Citigroup Inc. of New York’s Smith Barney brokerage unit declined comment.
In 2005,
Raymond James Financial Services Inc. of St. Petersburg, Fla., converted all assets in its fee-based brokerage Passport account into a non-discretionary advisory version of the account after NASD of Washington fined it $750,000 for alleged failure to supervise use of the brokerage accounts.
As a result, the firm won’t be affected by the ruling, said spokeswoman Anthea Penrose.
Additional effect
The broker-dealer exemption rule also restricted financial planning services that brokerage firms could provide.
Firms have scrutinized the financial planning software and materials used by their representatives, Mr. Bellaire said.
Brokerage firms “have got to figure out if they want to unwind all of that ... and let reps use more of this [financial planning] material,” he said.
Another result from the court decision is that commission-based discretionary accounts no longer fall under the Investment Advisers Act.
Other than some paperwork, clients won’t see any effect, brokers said.
“My advice to clients won’t change” with a change of account type, the Wachovia rep said.
