The Financial Planning Association has bragging rights few groups in the world possess. The membership organization of some 24,000 planners sued the government and, in 2007, won.
The victory forced the Securities and Exchange Commission to vacate its so-called “Merrill Lynch rule,” which since 1999 had given the broker-dealer industry the green light to charge asset-based fees without having to register as investment advisors.
In its lawsuit, the FPA successfully argued that the SEC had exceeded its authority by giving Wall Street a prized exemption from securities law and investor protection. In short, the FPA wanted to overturn the regulation that exempted brokers who charge asset-based fees from SEC oversight and a fiduciary rule that required them to put investors’ best interests first.
In defense of its rule, “Certain Broker Dealers Deemed Not To Be Investment Advisers,” SEC attorneys asserted that broker-dealers should not be subject to the Investment Advisers Act just because they offer fee-based accounts, if their investment advice is “solely incidental to the conduct of their business as a broker-dealer.” In addition, asset-based fees should not be considered “special compensation” for purposes of requiring broker-dealers to register as investment advisors.
The U.S. Court of Appeals for the District of Columbia agreed with the FPA, ruling that the SEC did not have the authority to create such an exemption from advisor law. The judge vacated the Merrill Lynch rule on March 30, 2007.
“It was refreshing to see a court look at the facts and back our position. The little guy could still win in America,” says Dan Moisand of Florida-based Moisand Fitzgerald Tamayo. Moisand is a former FPA president and a vocal champion of the lawsuit.
“It was absolutely a victory,” he says. “We ran by the mantra, ‘They’re rich, but we’re right.’ Frankly, it was sad to see the regulators who are first and foremost supposed to protect the consumer side first with the industry. It was an instance of the shepherd giving the wolf a sheep’s costume.”
Ten years later, he and other advisory industry advocates contend that the victory has had a lasting impact, creating the path forward for comprehensive fiduciary standards that apply to both advisors and brokers alike offering asset-based accounts—even if the path has been slow and arduous.
Since the Financial Planning Association’s victory, the SEC has failed to create a single, inclusive best-interest rule to protect investors. Brokers are still not subject to an SEC-mandated fiduciary standard when they sell asset-based accounts, despite the industry’s move toward asset-based fees.
“Ten years later we still don’t have a uniform fiduciary standard across the industry,” says Shannon Pike, president of Tanglewood Legacy Advisors in Houston and the 2017 FPA president, “but I think the FPA win set the fiduciary train in motion for us to have this discourse.”