The Financial Planning Association has filed a lawsuit against the Securities and Exchange Commission in an effort to strike down the proposed broker-dealer exemption to the Investment Advisers Act of 1940.
FPA officials said today they decided to resort to a lawsuit because nearly five years of lobbying have yet to result in any action by the SEC. They note that the proposal is in actuality a de facto rule because the SEC has allowed broker-dealers to operate under the exemption pending its official adoption.
"This lawsuit is about restoring the integrity of the Investment Advisers Act and its protections to investors by eliminating a loophole for broker-dealers and allowing them to operate as advisers with virtually no disclosure of conflicts," said FPA President Elizabeth Jetton. "For nearly five years the SEC has permitted brokerage firms to comply with a rule that was never adopted. We believe that at a minimum, the SEC should comply with the rules under which federal regulations are adopted and to act promptly by withdrawing a poorly conceived regulation."
SEC spokesman John Nester said the commission has no comment on the FPA action.
The lawsuit was filed in U.S. Circuit Court of Appeals, District of Columbia, and argues that the SEC violated the federal Administrative Procedures Act by not completing its rulemaking process in a timely fashion. It also accuses the SEC of misinterpreting its authority under the Adviser Act in crafting a new exemption.
The rule in question was 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.
Among the FPA's complaints, as well as those of the consumer groups lobbying against the rules, is a clearer definition of what "solely incidental" means under the rule.
Given the blurry lines between incidental and actual investment advice, the FPA is advocating that RIAs and brokers operate under the same rules and regulations.
"Clearly, consumers, financial planners and compliance professionals still do not know what the SEC meant under the rule proposal," Jetton said in a statement. "However, instead of attempting to define a difficult legal concept, we believe the public would be better served by requiring brokers to operate under the higher standards of investor protection afforded by the Adviser Act."