SEC Won't Appeal Court Decision
The Securities and Exchange Commission (SEC) has
abandoned its legal defense of the so-called Merrill Lynch rule, saying
it will not appeal an appellate court decision that struck down the
rule in March.
The decision represents a decisive victory for the
Financial Planning Association (FPA), which launched a legal battle
against the rule in 2004 after unsuccessfully lobbying against the rule
for five years prior.
The (FPA), which was joined in its lawsuit by
organizations that included the Consumer Federation of America and the
National Association of Personal Financial Planners, argued the rule
allowed wirehouse brokers to present themselves as fee-based investment
advisors without being subject to the fiduciary requirements of the
Investment Advisers Act of 1940. In the end, the U.S. Court of Appeals
for the District of Columbia Circuit agreed, ruling the SEC overstepped
its authority by granting the exemption.
The SEC announced on May 14 that it will not appeal
the ruling, and will instead ask for a 120-day stay to allow investors
and their brokers to decide how to respond. The SEC estimates the
ruling impacts about 1 million fee-based brokerage accounts totalling
$300 billion in assets.
"The commission is committed to taking the
opportunity provided by this decision to improve investors' ability to
make educated decisions about their investment accounts and their
financial services providers," SEC Chairman Christopher Cox said in a
statement.
Insiders say the SEC's final decision was a
difficult one for the agency. "It's my understanding that there was a
lot of heated debate at the SEC about whether or not to appeal this
ruling," said one lobbyist familiar with the case who wished to remain
anonymous. "I think they went around and around, but ultimately decided
that the likelihood of winning an appeal or getting the Supreme Court
to hear this case was very remote. They went down to the wire on this
and took the full 45 days to decide."
Reaction to the SEC's decision was swift and, in
some cases, furious-reflecting the intensity of a battle that has
consumed much of the financial services industry for the past eight
years. The Securities Industry and Financial Markets Association
(SIFMA), which had urged the SEC to appeal the ruling, issued a
scalding denunciation of the SEC decision and described it as an
"outrage."
"The SEC helped popularize these accounts as an
important step in aligning a broker's and client's interests," said
Marc Lackritz, SIFMA president and CEO. "Their decision not to seek a
rehearing leaves one million investors and their brokers to pick up the
pieces."
The decision apparently puts an end to the "Merrill
Lynch rule" saga, but observers note the heart of the issues is still
unsettled. Namely, what does the future hold for fee-based brokers,
their customers and the $300 billion they have under management?
FPA said it was pleased by the ruling, but added
that it wanted to see timely action on the issue of regulating
fee-based brokerage accounts. "FPA agrees that the agency should
provide a reasonable deadline for transitioning fee-based accounts to
Advisers Act jurisdiction," says Duane Thompson, managing director of
FPA's Washington D.C. office. "However, the SEC should avoid an
open-ended transition that violates the intent of the court order."
Longer-term, FPA is concerned about a potential
blowback on several fronts from the brokerage industry as it
contemplates this monumental legal loss. One concern, says Thompson, is
that SIFMA will seek to have a bill introduced in Congress to resurrect
the exemption the Merrill Lynch rule created-reinstating the ability of
brokers not registered as advisors to sell fee-based advisory accounts
without accepting fiduciary responsibility.
The other concern is SIFMA will renew its efforts to
have a single regulator-namely the National Association of Securities
Dealers-appointed to govern both advisors and brokers. This would
require an act of Congress. "We would be very concerned if it were the
NASD," Thompson says.
But even when the Merrill Lynch rule is fully
vacated, there will still be unattended business the FPA intends to
tackle. One unsolved issue? Who regulates financial planning, which can
take place in either brokerage or advisory accounts, regulated by the
NASD and SEC respectively?
Fidelity Offering For RIAs
Fidelity Investments is planning to offer a
customized, integrated CRM and financial planning application for
registered investment advisors. The CRM system, a customized version of
Oracle's Siebel CRM on Demand, and the financial planning application,
EISI's NaviPlan Central, are Web-based applications that will be
integrated into Fidelity's Advisor CHANNEL brokerage platform for
advisors.
According to Fidelity, it is the first custodian to
integrate application service provider-hosted CRM and financial
planning applications into a custodial platform. The goal is to create
workflow efficiencies by reducing double data entry, reducing errors
and eliminating the need to log on to multiple systems.
The CRM system will offer automatic data management,
including prepopulated Fidelity forms and applications. It will offer
views at the household level, tracking every interaction with a
household to identify opportunities and measure results. Within one
page, advisors will be able to view client relationships, including
contact information, history and account valuations. The financial
planning application will allow advisors to import information
adirectly into NaviPlan.
12(b)-1 Fees, Advisors' Growing Role, Are Focus At ICI Fund Conference
The ever-evolving role that investment advisors play
in America's investment landscape took center stage at the annual
mutual fund conference in Washington, D.C., with officials and
executives focusing on a promised overhaul of 12(b)-1 fees and
advisors' growing presence in the retirement planning and 401(k)
marketplaces.
Securities and Exchange Commission Chairman
Christopher Cox warned the 1,000-plus attendees at the Investment
Company Institute's general membership meeting May 9-11 that despite
the fund industry's central role in America's investment plans, the SEC
would be cracking down on 12(b)-1 fees, with "reform or repeal" likely.
The problem, Cox said, is that the fees are being
misused. One abuse, he said, is the use of the fees as a substitute for
front-end loads, with companies who collect the fees for this purpose
sometimes even going so far as to advertise their funds as no-load. In
fact, Cox said, the transformation of the 12(b)-1 fee from a
distribution subsidy into a "sales load in drag" is now nearly so
complete that it accounts for almost all the $11 billion in 12(b)-1
fees collected last year. The main use of the fee is "to compensate
brokers," Cox has said.
The fee is also misused to pay for administrative
expenses, a far cry from its original use as a distribution channel
subsidy, and now is even charged to existing shareholders in some
closed funds, the SEC Chairman said.
During a press conference after his speech, Chairman
Cox held out the possibility that the SEC (with the help of the fund
and brokerage industries, no doubt) may come up with another way for
brokers and planners to get compensated for distribution and servicing
customer accounts if 12(b)-1 fees are banned. "Those are administrative
chores that fund shareholders need to have performed. The money needs
to come from someplace," the chairman said.
How investment advisors will work with 401(k) plans,
and how their fees and role will be disclosed in the wake of the
Pension Protection Act of 2006, was also front and center at the
conference. "This act addresses a vital need-investment advice for
workers," ICI Chairman Martin L. Flanagan said in a keynote address.
"For many families, a 401(k) is their first-and their largest-foray
into investing. For that reason it's vital that workers get it right
from the start. Investment advice is one tool to help them, and the
pension act makes it easier for a worker to get investment advice from
the provider who knows his or her 401(k) plan best," Flanagan said.
The ICI is asking that the Department of Labor
increase disclosures, particularly in the area of plan fees, with
particular emphasis on total fees and a breakout of the fees charged by
the investment advisor that manages the product's investments, Flanagan
added.
These added disclosures will be particularly
important as companies move to institute default participation for
workers who do not actively choose to participate in their 401(k)
plans, Flanagan and other experts said.
New research from the ICI showing that 49% of fund
shareholders have used financial advisors was also featured at the
conference. The research, based on a survey of 1,000 fund investors,
found that investors are often prompted to seek advice because of a
life change, such as the receipt of a lump sum of money, the birth of a
child or impending retirement. Most likely to use advisors, according
to the survey, "Why Do Mutual Fund Investors Use Professional Financial
Advisors," are older shareholders, those with greater household assets,
female shareholders and those who do not use the Internet for
investment advice, said Sarah Holden, the ICI's director of retirement
and investor research.
NAPFA Renews Outreach On Fiduciary Issue
If there's any confusion among the public about what it means to be a financial advisor who acts a fiduciary, the National Association of Personal Financial Advisors (NAPFA) plans on doing its part to clear things up.
NAPFA, the organization of fee-only financial advisors, announced that for the second year in a row it will launch a campaign to educate the public about what it means to be an advisor who follows a fiduciary standard.
Moreover, NAPFA says it's going to utilize just about every form of mass media to get the message across. The organization says it will use the Web, radio and print advertising, fliers and posters, CD-ROMs and even podcasts to conduct the campaign.
The campaign starts June 1 and will last through the summer, according to NAPFA.
The extent to which fiduciary requirements should be enforced with the financial services industry has been a long-running debate in professional circles, but the issue seems to have come to head as of late.
In a recent decision, the U.S. Court of Appeals for the D.C. Circuit invalidated an SEC rule that allowed fee-based brokers who provide investment advice to be exempt from the Investment Advisers Act of 1940 if they meet certain conditions. The exemption meant brokers didn't have to meet a fiduciary standard.
In another development, the Certified Financial Planner Board of Standards has released a proposed revision of its ethics code that would require all CFP certificants who provide financial planning services to provide their clients with the "care of a fiduciary."
FPA's Second Pro Bono Conference To Spotlight Katrina Efforts
The Financial Planning Association will be putting
the spotlight on pro bono programs in New Orleans, where FPA advisors
have been providing free advice since the Katrina flooding of 2005.
The second annual Pro Bono Directors' Forum will be
held at the Hilton New Orleans Airport Hotel June 15 and 16 and is
designed for people involved in pro bono programs with FPA's chapter
organizations, according to the organization.
"FPA was one of the first organizations to offer
free and objective financial planning advice to assist hurricane
victims after Katrina devastated New Orleans," says FPA President
Nicholas A. Nicolette. "So that city seems like a natural choice for
our second chapter pro bono directors' conference."
The sessions will include talks on how to raise
public awareness about pro bono programs, how to help the poor with
Earned Income Tax Credits, how to partner with community-based
organizations such as domestic violence shelters, and tips on how to
manage a chapter pro bono program.
The forum is funded through a grant from the Foundation for Financial Planning, according to FPA.