The four-year freeze in the Securities and Exchange Commission's stance on broker-dealer exemptions is beginning to thaw.
The SEC has recently announced the reopening of public comments on the proposed broker-dealer exemption to the Investment Advisers Act of 1940, which the SEC hasn't acted on since it was first brought up in 1999.
The SEC's action comes two months after the Financial Planning Association-a staunch opponent of the rule proposal-filed suit against the agency, claiming its lack of action on the matter violated federal administrative law. In filing the lawsuit, FPA officials said they were attempting to force the SEC to move on the matter and put the issue under the national spotlight-a strategy that has thus far worked out as planned.
The SEC has since filed a motion asking for a delay in that proceeding. The FPA has consented to the delay in light of the public comment period and a commitment by the SEC to make a final decision by the end of the year.
"We're very pleased they made the decision to reopen the comment period and look forward to seeing what they decide to do," says FPA President Elizabeth Jetton.
But while one court confrontation seems to have been defused, another could loom on the horizon. If the SEC doesn't reject the rule or substantially amend it, the FPA warns that it will consider filing a lawsuit against the substance of the rule, rather than just the procedures used by the SEC. "That's always our last resort, but obviously we're prepared to do whatever we have to do," Jetton says.
The rule was first proposed by the SEC in 1999, and would expand the broker-dealer exemption to the Investment Advisers Act of 1940 under certain conditions:
The advice is provided on a nondiscretionary basis.
The advice is solely incidental to the brokerage services.
The broker-dealer prominently discloses to its customers that their fee-based accounts are brokerage accounts.
The FPA has been opposed to the rule, basically arguing it provides broker-dealers with a loophole for avoiding regulatory scrutiny. Also, former SEC Chairman Arthur Levitt, who initially proposed the rule, indicated he had changed his mind and now opposed it during a speech he gave in February.
The FPA has also marshaled the help of consumer groups in fighting the rule, which recently came under fire in editorials run by the New York Times and Business Week.
But proponents of the rule are gearing up for a fight as well. The Securities Industry Association plans to file comments with the SEC that state brokers are already heavily regulated, and that putting them under the Advisers Act would be overkill, says SIA spokesman Dan Michaelis. "The FPA lawsuit seems to make claims that there is an inadequate regulatory structure for brokers and we would strongly disagree," he says.
The SIA also maintains the exemption has been good for consumers.
"The SEC no-action position on the exemption has allowed the flourishing of fee-based accounts, which are very popular among investors," Michaelis says.
However, hundreds of comments have been filed by advisors at the SEC's web site this week and several have challenged the notion that investors already have sufficient protection. One advisor who testifies in arbitrations notes that many brokers end up trying to deny any fiduciary responsibility when they are taken to arbitration over fee-based accounts.