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."