The Financial Planning Association
has renewed its legal battle against the Securities and Exchange
Commission and its adoption of a broker-dealer exemption, arguing the
rule is "defective" and harmful to consumers and financial planners.
The FPA announced last week that it has filed a petition with U.S. Court of Appeals for the District of Columbia Circuit that asks that the SEC's rule exempting broker-dealers from the Investment Advisers Act of 1940 be vacated entirely.
"FPA believes that the rule is contrary to law and encourages
broker-dealers to engage in self-dealing with their clients without
disclosing their conflicts of interest," FPA President James A. Barnash
Saying the SEC has "erred by adopting a defective rule," and that the consumer protections provided under the Advisers Act are "starting to look like Swiss cheese," Barnash said the FPA saw a legal challenge as its only option.
Controversy over the exemption rule has been brewing for more than five years, and led the FPA to file a lawsuit last year to force the SEC to make a final decision after years of delays. The decision finally came on April 12, when the SEC officially approved the exemption with the addition of stricter disclosure requirements and a promise to further study its impact on investors.
The FPA's decision to continue a legal challenge came the day before all parties to the suit were required to inform the court of their intentions.
The new petition steps up the potential gravity of any final ruling. Whereas the first lawsuit challenged the SEC on procedural grounds, the new challenge strikes at the rule itself-arguing it should be vacated because it does not comply with the intent of the Advisers Act of 1940.
Barnash, while saying "I personally don't like having to resort to litigation," said the FPA decided to challenge the rule itself in court because it provides "inadequate protection to consumers and is harmful to the continued development of the financial planning profession."
Echoing arguments it has made previously, the FPA says the exemption-rule creates two different playing fields for brokers and investment advisors when it comes to investment advice. While investment advisors are subject to Advisers Act regulations that require them to act as fiduciaries, the FPA argues, exempt brokers are bound merely by a "suitability standard"-a requirement that their products and services are suitable for clients.
The lack of fiduciary standards for brokers, the FPA says, leaves consumers vulnerable to situations where their so-called advisors are motivated more by sales than by their clients' best interests.
""There are many, many ethical and qualified sales people who provide the same advice as their advisor counterparts, but we are concerned about the ones whose divided loyalties can lead them astray, yet act as trusted advisors under the rule," Barnash said.
The SEC's rule requires that exempt broker-dealers dole out advice that is "solely incidental" to the brokerage business, but Barnash argued the line between incidental advice and financial planning is "as clear as mud" in the rule.
"As a result, the investor loses," he said.
SEC spokesman John Nester said the commission had no comment.
The Securities Industry Association, which has lauded the rule as something that will stimulate the creation of broker fee-based services for consumers, said it's not worried about the impact of further litigation.
"We don't think it will succeed," SIA spokeswoman Margaret Draper said of the FPA's new legal challenge. "The SEC has spoken very clearly."
Whatever the outcome, it appears the controversy could extend into at least early next year, when the FPA expects the first hearings and oral arguments on its new petition.