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News April 3, 2006 Issue

FPA Continues Fight Against SEC’s Fee-Based Brokerage Rule

The Financial Planning Association has reopened its legal challenge against the SECís fee-based brokerage rule. On March 23, the group filed an 81-page opening brief.

A few days later, SEC Commissioner Roel Campos spent a quite bit of time discussing the controversy over the SECís fee-based brokerage rule.

Campos acknowledged that the SECís final fee-based brokerage rule was a "line-drawing exercise" that has displeased both the broker-dealer community and the investment adviser community. However, he added, "we have to recognize that there is a serious competitive dispute going on here, and to some extent this rule is a sideshow."

Campos said that he and the other Commissioners are "very concerned" that investors may be confused about financial service providers "and the differences in the protections received depending upon what type of financial service provider is being used."

On one hand, if brokers were deemed to be fiduciaries with respect to each of their customers, that would "undoubtedly increase the costs of brokerage service" and "may not reflect the intent or the expectations of the parties."

On the other hand, "more and more brokers" are portraying themselves as "financial consultants" or "financial advisers," but then claiming in SEC enforcement proceedings that they did not owe the customer any duties beyond minimal suitability requirements. "These Ďfinancial consultants,í" said Campos, "often have serious conflicts of interests," which under the Advisers Act would be required to be fully disclosed to clients. "We need to explore seriously whether the statutory protections set up 65 years ago ó which depend upon the status of the financial service provider under these old statutes ó make sense today."

Campos said he was "extremely supportive of moving forward quickly" on the IA-BD study.

At last monthís SEC Speaks conference, Chairman Christopher Cox indicated that an announcement about the study was pending. To date, however, the SEC has not issued any additional information about the study.