Concerns grew among the brokerage industry and the SEC about the status of fee-based brokerage accounts under the Advisers Act. Why would clients ever pay a broker an ongoing fee if they weren’t expecting to receive ongoing, rather than incidental, advice? Didn’t the broker’s ongoing fee constitute “special compensation” Shouldn’t brokers, who were providing essentially the same services as advisors, be held to the same standards?
In 1999, the SEC proposed a rule to allow brokerage firms to offer fee-based brokerage accounts without registering under the Advisers Act. The so-called “Merrill Lynch Rule” was strongly supported by the brokerage industry, which did not want fee-based brokerage accounts subject to the fiduciary standard. Though the Merrill Lynch Rule was not formally adopted, the SEC let the brokerage industry know that it could act as though it was in effect.
In 2004, the Financial Planning Association took the SEC to court arguing it had violated federal procedures by failing to adopt the Merrill Lynch Rule after four years. In response, in 2005 the SEC adopted the Rule. The FPA then filed a lawsuit saying the SEC had exceeded its authority by turning the limited “solely incidental” loophole into an unlimited license for brokers to provide advice without being subject to the safeguards of the Advisers Act and the fiduciary standard.
In 2007, the D. C. Court of Appeals agreed and overturned the Merrill Lynch Rule. This left the status of fee-based brokerage accounts under the Advisers Act in serious question. Should brokers who provided personalized advisory services through these accounts be subject to the Advisers Act’s fiduciary standard? That question hung in the air unanswered.
In 2008, The RAND Corporation issued a report, commissioned by the SEC, showing that the investing public was confused about the nature of the services offered by, and the different standards applicable to, brokers and advisors. The report made clear that much of the confusion was caused because both brokers and advisors used the same titles to describe themselves. Examples included terms such as “advisor” and “consultant.”
In 2009, the Treasury Department proposed the SEC establish a fiduciary standard for brokers offering investment advice and “harmonize” the regulation of brokers and advisors.
Later in 2009, the brokerage industry joined Treasury in calling for harmonization of the standards applicable to brokers and advisors. “When broker-dealers and advisors engage in identical service, they should be held to the same standard of care,” said Randolph C. Snook, executive vice president, Securities Industry and Financial Markets Association (SIFMA) in his testimony before the House Committee on Financial Services in 2009.
In 2010, the harmonization concept was incorporated into the Dodd-Frank financial reform law. Dodd-Frank directed the SEC to consider applying a fiduciary standard to brokers no less stringent than that applicable to advisors. It also gave the SEC a seemingly impossible task—maintaining the stringency of the Advisers Act standard, while harmonizing it with brokerage practices like accepting commissions, principal trading and selling proprietary products.
In 2010, the Department of Labor recognized that the world had changed since ERISA was enacted in 1974 and proposed a new expanded fiduciary rule to reflect those changes. The rule was met by withering opposition from the brokerage and insurance industries. In 2011, the proposed rule was withdrawn for further study and consideration.