The Financial Planning Association
has renewed its legal battle against the Securities and Exchange
Commission and its adoption of a broker-dealer exemption, arguing the
rule is "defective" and harmful to consumers and financial planners.
The FPA announced last week that it has filed a petition
with U.S. Court of Appeals for the District of Columbia Circuit that
asks that the SEC's rule exempting broker-dealers from the Investment
Advisers Act of 1940 be vacated entirely.
"FPA believes that the rule is contrary to law and encourages
broker-dealers to engage in self-dealing with their clients without
disclosing their conflicts of interest," FPA President James A. Barnash
said.
Saying the SEC has "erred by adopting a defective
rule," and that the consumer protections provided under the Advisers
Act are "starting to look like Swiss cheese," Barnash said the FPA saw
a legal challenge as its only option.
Controversy over the exemption rule has been brewing
for more than five years, and led the FPA to file a
lawsuit last year to force the SEC to make a final decision after years
of delays. The decision finally came on April 12, when the SEC
officially approved the exemption with the addition of stricter
disclosure requirements and a promise to further study its impact on
investors.
The FPA's decision to continue a legal challenge
came the day before all parties to the suit were required to inform the court of their intentions.
The new petition steps up the potential gravity of
any final ruling. Whereas the first lawsuit challenged the SEC on
procedural grounds, the new challenge strikes at the rule
itself-arguing it should be vacated because it does not comply with the
intent of the Advisers Act of 1940.
Barnash, while saying "I personally don't like
having to resort to litigation," said the FPA decided to challenge the
rule itself in court because it provides "inadequate protection to
consumers and is harmful to the continued development of the financial
planning profession."
Echoing arguments it has made previously, the FPA
says the exemption-rule creates two different playing fields for
brokers and investment advisors when it comes to investment advice.
While investment advisors are subject to Advisers Act regulations that
require them to act as fiduciaries, the FPA argues, exempt brokers are
bound merely by a "suitability standard"-a requirement that their
products and services are suitable for clients.
The lack of fiduciary standards for brokers, the FPA
says, leaves consumers vulnerable to situations where their so-called
advisors are motivated more by sales than by their clients' best
interests.
""There are many, many ethical and qualified sales
people who provide the same advice as their advisor counterparts, but
we are concerned about the ones whose divided loyalties can lead them
astray, yet act as trusted advisors under the rule," Barnash said.
The SEC's rule requires that exempt broker-dealers
dole out advice that is "solely incidental" to the brokerage business, but
Barnash argued the line between incidental advice and financial
planning is "as clear as mud" in the rule.
"As a result, the investor loses," he said.
SEC spokesman John Nester said the commission had no comment.
The Securities Industry Association, which has
lauded the rule as something that will stimulate the creation of broker
fee-based services for consumers, said it's not worried about the impact of
further litigation.
"We don't think it will succeed," SIA spokeswoman
Margaret Draper said of the FPA's new legal challenge. "The SEC has
spoken very clearly."
Whatever the outcome, it appears the controversy
could extend into at least early next year, when the FPA expects the
first hearings and oral arguments on its new petition.