The U.S. Court of Appeals in Washington, D.C., heard oral arguments today in the Financial Planning Association's longstanding legal battle to force the Securities and Exchange Commission to overturn its so-called Merrill Lynch rule.
The exception allows brokers to sidestep high-level consumer protection rules when providing investment advice to investors.
FPA officials said after the hearing that they are hopeful that the appeals panel will vacate the SEC's rule, so that brokers who offer wrap accounts and other advice-oriented programs will have to register as advisors. "We'd like to see the judges vacate the rule, so that brokers who provide advisory services have to live by advisor rules, " said Duane Thompson, the FPA's group director of advocacy. "We'd love for this to be decided on whether or not consumers are adequately protected when brokers get exceptions, but the real issue before the court is whether or not the SEC crafted a rule in violation of Congress's intent."
The FPA appeared to score some major points on this issue with the three members of the appeals panel, who each grilled SEC Senior Litigation Specialist Rada Lynn Potts about whether the SEC has ever before rewritten or expanded the exceptions Congress laid out in the Investment Advisers Act of 1940. "In 66 years has the SEC ever created new or broadened exceptions for one of the 13 people who received exceptions in the original 1940s act?" Judge Brett Kavanaugh asked the SEC attorney.
Potts was forced to answer: "No, it would be consistent with practice, but the SEC has never done it."
The appeals panel also appeared to have problems with the SEC's use of the term "special compensation," which Potts seemed to suggest in one breath was a reason not to give exceptions to brokers, later adding "only these new fee-based accounts would fall into this [lack of exception]."
"Legal history suggests that if you're defining special compensation as anything other than commissions, it hurts your case," Kavanaugh responded.
Merril Hirsh, attorney with the law firm of Ross Dixon & Bell, LLP, Washington, D.C., represented the FPA. While Thompson declined to put a dollar amount on the FPA's legal bill to date, he did say Hirsh agreed to take on the case for a flat fee. Earlier estimates put the FPA's legal tab at $100,000.