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News February 5, 2007 Issue

Pending Decision in FPA v. SEC Suit Might Have Unintended Consequences

If the U.S. Court of Appeals rules in favor of the Financial Planning Association and broadly tosses out the SEC’s fee-based brokerage rule, things could get interesting.

Although not contested in the litigation, part of the SEC’s fee-based brokerage rule states that a brokerage firm may charge execution-only commission rates alongside full-service brokerage rates, without the additional charges for full-service brokerage being deemed "special compensation" necessitating Advisers Act registration.

If the court broadly struck down the entire fee-based brokerage rule, including that provision, wouldn’t all full-service brokerage accounts offered by a brokerage firm that also offers execution-only brokerage automatically be deemed to be advisory accounts? Legally speaking, the additional amount paid for full-service brokerage might be deemed "special compensation," and Poof! the broker-dealer carveout to Advisers Act Section 202(a)(11) would not be available.

Of course, as we’ve learned over the past few years, a court ruling striking down an SEC rule isn’t final until the court issues its mandate. Presumably, if the court struck down the entire fee-based brokerage rule, the SEC would quickly act to address any unintended consequences of an overly-broad court ruling before the mandate issued, the way it did following the U.S. Court of Appeals’ sweeping decision in Goldstein v. SEC.

And, of course, this is all theoretical. The court may very well side with the SEC. Or, it may side with the FPA, but take a tailored approach to its opinion.

The decision in FPA v. SEC is expected any day now, as it has been for months. In reality, there’s really no telling when the court will issue its opinion, or which way it might lean. "Everything leaks in this town, except that," noted one Washington, D.C.-based observer.