Don't Party Like It's 1999
After suffering its third humiliating defeat on the "Merrill Lynch" rule in two years in front of a high federal court, the Securities and Exchange Commission (SEC) finds itself facing a serious dilemma.
The SEC can either let the ruling stand, challenge it in court or seek legislation to change the law. The betting is that the agency will continue to try to determine the best way to let wirehouse brokers deliver financial advice while permitting them to avoid or sidestep fiduciary responsibility.
If the SEC continues to pursue this goal, they will have the strong financial support of the wirehouses and their lobbyists as they seek to lubricate the wheels of government, most likely Congress. The Securities Industry and Financial Markets Association (SIFMA) has urged the SEC to petition for a rehearing, claiming the court's verdict impairs consumer choice.
Even though the nominal layout of the competitive playing field will revert to its 1999 boundaries, the changes that have redrawn the financial services business over the last eight years remain in force. What's at stake is about $300 billion in assets held in about one million accounts, or 20% of all retail accounts, according to SIFMA.
The SEC has until May 14 to petition the appeals court for a rehearing and another 45 days after that to decide whether to appeal the ruling to the U.S. Supreme Court. Most experts consider any petition or appeal unlikely, given the agency's embarrassing and abysmal recent record in court.
While the SEC's divisions of market regulation and investment management may be spoiling for a courtroom victory, it's likely that SEC Chairman Christopher Cox, a longtime congressman, will overrule them and seek other avenues. Many think the SEC and SIFMA will lobby Congress for legislative relief.
"That is a scenario that is likely," says Tom Bradley, CEO of TD Ameritrade Institutional, which supported the FPA's lawsuit. "In the end, the wirehouses want to provide advice without accepting fiduciary responsibilities. This period of limbo could drive more brokers to go independent."
Despite the vast financial resources wirehouses can marshal to bring their case to Congress' attention, observers say they can expect a "huge fight" in the legislative branch, which has many other priorities ranging from the war in Iraq to the subprime mortgage fiasco. The SEC has indicated it will rely on a study by the RAND Corp., scheduled to be completed in 12 months, to decide how advice will be delivered.
Whether or not they decide to seek legislative relief, the wirehouses probably will have no choice but to repaper many fee-based accounts. Depending on the nature of each broker-client relationship, some accounts will revert to traditional brokerage accounts while others can be converted to full-fledged advisory accounts and brokers can become Investment Advisor Representatives (IARs) under their employers' corporate RIA.
"If they make a lot of folks IARs, that's perfectly fine," says Duane Thompson, head of government relations at FPA. "If they receive a fee, they are or should be subject to a higher standard."
The last act has yet to be played out, but some think it could be anticlimactic. "It's not over yet," says Roy Diliberto, who was chair of FPA when it first challenged the rule seven years ago. "I don't see how, in this political environment, Congress would approve laws saying you don't put the customers' interests first and you don't have to disclose it."
Yet the SEC's tenacity in fighting for a dubious rule on behalf of the wirehouses has amazed him. "I never would have thought the SEC would have carried it this far, especially after [former SEC Chairman] Arthur Levitt, who originally proposed it, indicated it was a mistake," Diliberto continues. "The SEC has been acting like their constituents are the major brokerage firms, not the investing public."

CFP Board Moving Headquarters
To D.C. By Year's End
In a 1,700-mile cross-country move designed to gain a bigger voice for CFP licensees in policy and lawmaking decisions in the nation's capital, the CFP Board of Standards will move its headquarters from Denver to Washington, D.C., by the end of the year.
"We're recognizing that if we're going to accomplish our mission to make sure the public gets ethical, competent advice, we have to be where that policy is being shaped and sit in on those conversations," CFP Board of Directors Chair Karen P. Schaeffer says.
The move is especially key as the Securities and Exchange Commission (SEC) undertakes its overhaul of Investment Advisors Act regulation, she says. Schaeffer declines to specify the cost of the move, but says it will impact the CFP Board's 40 current employees, who will have the opportunity to reapply for their jobs. Those who decide not to make the move or who aren't hired will get "generous severance and job counseling," adds Schaeffer, who says that a group of consultants the CFP Board hired is still working out what staffing competencies are needed at the new headquarters. Office space has yet to be located.
Schaeffer indicates the motivation to move this year is more complex than FPA's growing Washington presence and the success of its five-person government relations office, especially its recent landmark legal victory forcing the SEC to rescind its "Merrill Lynch" exemption for brokers offering investment advice.
"That wasn't it so much, but there have been a lot of developments, and it's more and more clear that financial planning is being done and regulated in so many different venues in a piecemeal way," she says. "And we're out in Denver saying, 'Hey, talk to us. We'll facilitate that. We'll steer that. We know about that.' We didn't have the relevance we would have liked in many situations where decisions regarding planning have been key."
Schaeffer says that the decision was not made recently, but over a number of years. "I've been on the board five years now, and I think the feeling was there when I started that the board was missing opportunities in Washington and had a mission that it wasn't fulfilling as well as it could."
While the CFP Board attempted to create a Washington presence by opening an office in the northern Virginia suburbs back in 2000, the group's controversial and now-departed CEO, Sarah Teslik, shuttered that office and terminated its two employees a month before officially beginning her job in January 2005. Now, a little over two years later, the CFP Board is ready to move its entire headquarters there.
After a six-month search for Teslik's replacement, the CFP Board will name its new CEO "in short order," says the board's outside spokesman, Javier E. David. As for policy priorities once it moves to Washington, Schaeffer says the board will work those out in May. "We have to be enlightened regulators first and foremost, and I think by being in Washington, D.C., we'll inspire a vision of how to do that," she argues.
Is becoming a true self-regulatory organization like the National Association of Securities Dealers in the cards for the group, which oversees 55,000 CFPs in the United States and another 55,000 abroad? "It's not on my list of priorities right now," says Schaeffer. "Our first mission is to serve the public. It's hard to have conversations about an SRO when there are some pieces of the puzzle still coming into place, like the evolution of planners themselves." -Tracey Longo

Advisors Settle Multimillion Lawsuits
Former advisory firm partners Don Rembert and Marjorie Fox have settled their respective lawsuit and countersuit over who owned advisory clients after she was terminated from their firm in the Washington, D.C., suburb of Falls Church, Va. The settlement narrowly avoided a trial that could have cost either of them millions of dollars in damages that each was seeking and could have set far-reaching precedents in the advisory industry. Read Tracey Longo's full story of the case in the FA News section of Financial Advisor's Web site,