SEC Won't Appeal Court Decision
The Securities and Exchange Commission (SEC) has abandoned its legal defense of the so-called Merrill Lynch rule, saying it will not appeal an appellate court decision that struck down the rule in March.
The decision represents a decisive victory for the Financial Planning Association (FPA), which launched a legal battle against the rule in 2004 after unsuccessfully lobbying against the rule for five years prior.
The (FPA), which was joined in its lawsuit by organizations that included the Consumer Federation of America and the National Association of Personal Financial Planners, argued the rule allowed wirehouse brokers to present themselves as fee-based investment advisors without being subject to the fiduciary requirements of the Investment Advisers Act of 1940. In the end, the U.S. Court of Appeals for the District of Columbia Circuit agreed, ruling the SEC overstepped its authority by granting the exemption.
The SEC announced on May 14 that it will not appeal the ruling, and will instead ask for a 120-day stay to allow investors and their brokers to decide how to respond. The SEC estimates the ruling impacts about 1 million fee-based brokerage accounts totalling $300 billion in assets.
"The commission is committed to taking the opportunity provided by this decision to improve investors' ability to make educated decisions about their investment accounts and their financial services providers," SEC Chairman Christopher Cox said in a statement.
Insiders say the SEC's final decision was a difficult one for the agency. "It's my understanding that there was a lot of heated debate at the SEC about whether or not to appeal this ruling," said one lobbyist familiar with the case who wished to remain anonymous. "I think they went around and around, but ultimately decided that the likelihood of winning an appeal or getting the Supreme Court to hear this case was very remote. They went down to the wire on this and took the full 45 days to decide."
Reaction to the SEC's decision was swift and, in some cases, furious-reflecting the intensity of a battle that has consumed much of the financial services industry for the past eight years. The Securities Industry and Financial Markets Association (SIFMA), which had urged the SEC to appeal the ruling, issued a scalding denunciation of the SEC decision and described it as an "outrage."
"The SEC helped popularize these accounts as an important step in aligning a broker's and client's interests," said Marc Lackritz, SIFMA president and CEO. "Their decision not to seek a rehearing leaves one million investors and their brokers to pick up the pieces."
The decision apparently puts an end to the "Merrill Lynch rule" saga, but observers note the heart of the issues is still unsettled. Namely, what does the future hold for fee-based brokers, their customers and the $300 billion they have under management?
FPA said it was pleased by the ruling, but added that it wanted to see timely action on the issue of regulating fee-based brokerage accounts. "FPA agrees that the agency should provide a reasonable deadline for transitioning fee-based accounts to Advisers Act jurisdiction," says Duane Thompson, managing director of FPA's Washington D.C. office. "However, the SEC should avoid an open-ended transition that violates the intent of the court order."
Longer-term, FPA is concerned about a potential blowback on several fronts from the brokerage industry as it contemplates this monumental legal loss. One concern, says Thompson, is that SIFMA will seek to have a bill introduced in Congress to resurrect the exemption the Merrill Lynch rule created-reinstating the ability of brokers not registered as advisors to sell fee-based advisory accounts without accepting fiduciary responsibility.
The other concern is SIFMA will renew its efforts to have a single regulator-namely the National Association of Securities Dealers-appointed to govern both advisors and brokers. This would require an act of Congress. "We would be very concerned if it were the NASD," Thompson says.
But even when the Merrill Lynch rule is fully vacated, there will still be unattended business the FPA intends to tackle. One unsolved issue? Who regulates financial planning, which can take place in either brokerage or advisory accounts, regulated by the NASD and SEC respectively?
Fidelity Offering For RIAs
Fidelity Investments is planning to offer a customized, integrated CRM and financial planning application for registered investment advisors. The CRM system, a customized version of Oracle's Siebel CRM on Demand, and the financial planning application, EISI's NaviPlan Central, are Web-based applications that will be integrated into Fidelity's Advisor CHANNEL brokerage platform for advisors.
According to Fidelity, it is the first custodian to integrate application service provider-hosted CRM and financial planning applications into a custodial platform. The goal is to create workflow efficiencies by reducing double data entry, reducing errors and eliminating the need to log on to multiple systems.
The CRM system will offer automatic data management, including prepopulated Fidelity forms and applications. It will offer views at the household level, tracking every interaction with a household to identify opportunities and measure results. Within one page, advisors will be able to view client relationships, including contact information, history and account valuations. The financial planning application will allow advisors to import information adirectly into NaviPlan.
12(b)-1 Fees, Advisors' Growing Role, Are Focus At ICI Fund Conference
The ever-evolving role that investment advisors play in America's investment landscape took center stage at the annual mutual fund conference in Washington, D.C., with officials and executives focusing on a promised overhaul of 12(b)-1 fees and advisors' growing presence in the retirement planning and 401(k) marketplaces.
Securities and Exchange Commission Chairman Christopher Cox warned the 1,000-plus attendees at the Investment Company Institute's general membership meeting May 9-11 that despite the fund industry's central role in America's investment plans, the SEC would be cracking down on 12(b)-1 fees, with "reform or repeal" likely.
The problem, Cox said, is that the fees are being misused. One abuse, he said, is the use of the fees as a substitute for front-end loads, with companies who collect the fees for this purpose sometimes even going so far as to advertise their funds as no-load. In fact, Cox said, the transformation of the 12(b)-1 fee from a distribution subsidy into a "sales load in drag" is now nearly so complete that it accounts for almost all the $11 billion in 12(b)-1 fees collected last year. The main use of the fee is "to compensate brokers," Cox has said.
The fee is also misused to pay for administrative expenses, a far cry from its original use as a distribution channel subsidy, and now is even charged to existing shareholders in some closed funds, the SEC Chairman said.
During a press conference after his speech, Chairman Cox held out the possibility that the SEC (with the help of the fund and brokerage industries, no doubt) may come up with another way for brokers and planners to get compensated for distribution and servicing customer accounts if 12(b)-1 fees are banned. "Those are administrative chores that fund shareholders need to have performed. The money needs to come from someplace," the chairman said.
How investment advisors will work with 401(k) plans, and how their fees and role will be disclosed in the wake of the Pension Protection Act of 2006, was also front and center at the conference. "This act addresses a vital need-investment advice for workers," ICI Chairman Martin L. Flanagan said in a keynote address. "For many families, a 401(k) is their first-and their largest-foray into investing. For that reason it's vital that workers get it right from the start. Investment advice is one tool to help them, and the pension act makes it easier for a worker to get investment advice from the provider who knows his or her 401(k) plan best," Flanagan said.
The ICI is asking that the Department of Labor increase disclosures, particularly in the area of plan fees, with particular emphasis on total fees and a breakout of the fees charged by the investment advisor that manages the product's investments, Flanagan added.
These added disclosures will be particularly important as companies move to institute default participation for workers who do not actively choose to participate in their 401(k) plans, Flanagan and other experts said.
New research from the ICI showing that 49% of fund shareholders have used financial advisors was also featured at the conference. The research, based on a survey of 1,000 fund investors, found that investors are often prompted to seek advice because of a life change, such as the receipt of a lump sum of money, the birth of a child or impending retirement. Most likely to use advisors, according to the survey, "Why Do Mutual Fund Investors Use Professional Financial Advisors," are older shareholders, those with greater household assets, female shareholders and those who do not use the Internet for investment advice, said Sarah Holden, the ICI's director of retirement and investor research.
NAPFA Renews Outreach On Fiduciary Issue
If there's any confusion among the public about what it means to be a financial advisor who acts a fiduciary, the National Association of Personal Financial Advisors (NAPFA) plans on doing its part to clear things up.
NAPFA, the organization of fee-only financial advisors, announced that for the second year in a row it will launch a campaign to educate the public about what it means to be an advisor who follows a fiduciary standard.
Moreover, NAPFA says it's going to utilize just about every form of mass media to get the message across. The organization says it will use the Web, radio and print advertising, fliers and posters, CD-ROMs and even podcasts to conduct the campaign.
The campaign starts June 1 and will last through the summer, according to NAPFA.
The extent to which fiduciary requirements should be enforced with the financial services industry has been a long-running debate in professional circles, but the issue seems to have come to head as of late.
In a recent decision, the U.S. Court of Appeals for the D.C. Circuit invalidated an SEC rule that allowed fee-based brokers who provide investment advice to be exempt from the Investment Advisers Act of 1940 if they meet certain conditions. The exemption meant brokers didn't have to meet a fiduciary standard.
In another development, the Certified Financial Planner Board of Standards has released a proposed revision of its ethics code that would require all CFP certificants who provide financial planning services to provide their clients with the "care of a fiduciary."
FPA's Second Pro Bono Conference To Spotlight Katrina Efforts
The Financial Planning Association will be putting the spotlight on pro bono programs in New Orleans, where FPA advisors have been providing free advice since the Katrina flooding of 2005.
The second annual Pro Bono Directors' Forum will be held at the Hilton New Orleans Airport Hotel June 15 and 16 and is designed for people involved in pro bono programs with FPA's chapter organizations, according to the organization.
"FPA was one of the first organizations to offer free and objective financial planning advice to assist hurricane victims after Katrina devastated New Orleans," says FPA President Nicholas A. Nicolette. "So that city seems like a natural choice for our second chapter pro bono directors' conference."
The sessions will include talks on how to raise public awareness about pro bono programs, how to help the poor with Earned Income Tax Credits, how to partner with community-based organizations such as domestic violence shelters, and tips on how to manage a chapter pro bono program.
The forum is funded through a grant from the Foundation for Financial Planning, according to FPA.