An interpretation by the SEC of how brokers are expected to toe the line between fee-based brokerage and advisory services has renewed the debate over the commission's broker-dealer exemption rule.
   After reading the interpretation, the Financial Planning Association says it plans on pressing on with its lawsuit against the rule, which was adopted by the SEC last year after more than five years of debate.
   'The only thing that is enlightening (about the interpretation) is that it confirms our need to have filed a lawsuit challenging a flawed rule and now a flawed interpretation," says Duane Thompson, the FPA's group director of advocacy.
   The FPA is arguing that the interpretation-contained in a December 16 letter from the SEC's Division of Investment Management to the Securities Industry Association-essentially allows brokers to perform the core functions of a financial planner without being regulated as advisors.
   "As long as they don't put the big stamp at the top of the document that says 'Financial Planning,'" they can get away with it," Thompson says.
   To read the full text of the SEC letter click on this link: docs/letter.pdf
   The letter was written as a follow-up to the SEC's approval of a rule that exempts brokers from the the Investment Advisers Act of 1940 as long as they, among other things, provide financial advice that is "solely incidental" to brokerage services.
   The SIA, which has been a proponent of the exemption, asked for and won an extension to January 31 of some provisions in the rule last year so it could weigh how some of its provisions would impact broker-dealers-including where the SEC drew the line between brokerage services and financial planning.
   The SEC letter addressed several questions posed by the SIA, including instances where broker-dealers are dually registered as investment advisors.
   In response, the SEC wrote, "Holding itself out as providing advisory services does not by itself require a broker-dealer to register under the Advisers Act."
   The letter goes on to state that, in such a case, a broker-dealer would be subject to the Advisers Act if it holds itself out as a financial planner "and also provides investment advice as part of a financial plan or in connection with providing financial planning services."
   When asked by the SIA what exactly constitutes a financial plan, the SEC indicated that it sees a financial plan as a broad spectrum of services that include insurance, savings, tax and estate planning.
   "This is distinct from a financial tool that is used to provide guidance to a customer with respect to a particular transaction or an allocation of customer funds and securities based upon the long-term needs of a client, but that is not applied in the context of the more comprehensive plan described above," the SEC wrote. "When used in this more limited way, a financial tool would be viewed as part of a broker-dealer's brokerage relationship with its customer."
   A SIA spokesman was non-committal when asked if the SEC's letter adequately answered the organization's questions regarding the exemption rule.
   "SIA found the guidance useful," spokesman Travis Larson said. "Members firms have taken it under advisement and are now working at both meeting the regulatory requirements and maximizing the guidance's usefulness for investors."

-Raymond Fazzi