“Merrill Lynch” Rule Dead, But SEC to Ask for Time

The SEC isn’t going to fight the March 30 D.C. Court of Appeals ruling that vacated Rule 202, the broker/dealer exemption (a.k.a. the Merrill Lynch rule)—they’re just asking for a little mercy for firms that have to adjust. The securities industry still hopes that the SEC will somehow come up with a new plan to keep the fee-based brokerage account (or something like it) from coverage by the Investment Advisers Act of 1940, which mandates that to offer financial advice, you have to be a fiduciary.

The SEC isn’t going to fight the March 30 D.C. Court of Appeals ruling that vacated Rule 202, the broker/dealer exemption (a.k.a. the Merrill Lynch rule)—they’re just asking for a little mercy for firms that have to adjust. The securities industry still hopes that the SEC will somehow come up with a new plan to keep the fee-based brokerage account (or something like it) from coverage by the Investment Advisers Act of 1940, which mandates that to offer financial advice, you have to be a fiduciary.

The SEC announced today it will be requesting a 120-day stay of the ruling that effectively said fee-based brokerage accounts are advisory accounts, not brokerage accounts. And while securities industry lobbying organization SIFMA has urged the SEC to request a rehearing, this announcement says it will not; it will let the ruling stand. “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,” said SEC Chairman Christopher Cox in the official release.

Marc Lackritz, SIFMA president, was not happy with the SEC’s decision to let the rule stand without a fight. “As a result of the SEC’s decision not to ask for a rehearing today, 1 million investors will be disadvantaged—forced into accounts where choices are limited and costs to consumers can be nearly double,” said Lackritz. “SIFMA pledges vigorously to pursue a solution that will enable investors to have access to fee-based payment options and that will not force investors into a world of one-size-fits-all accounts.”

The SIFMA release added that it believes that “fee-based brokerage accounts are not the type of services that the Advisers Act was intended to address, and that the application of the Act is unnecessary given the extensive regulation and supervision to which b/ds are already subject to under the Securities Exchange Act of 1934 and SRO rules, among others. Our members and 1 million investors reasonably expect that the SEC will expeditiously develop alternative solutions that will preserve this critical element of investor choice,” it says.

The news means that the roughly $300 billion in fee-based brokerage accounts throughout the industry will have to be switched to advisory accounts or another payment arrangement, such as commissions, must be found. The statement said the SEC will work with individual brokerage firms to help them make any necessary transitions. (To understand the full impact and implications of the ruling, read Registered Rep.’s May cover story. Unfortunately, due to technical problems, it is not yet available on the Web site.)

Interestingly, the SEC release also said the agency will “consider whether further rulemaking or interpretations are necessary regarding the application of the Advisers Act to these accounts and the issues resulting form the court’s decision.” This leaves open the possibility of some other legislation in the future.

In addition, the SEC announced that Chairman Cox has approved “additional emergency funding” to speed up the in-depth study of the differences between brokers and advisors and how best to improve the regulatory rules that govern them. The study is being conducted by the RAND Corporation and was not scheduled to be released until sometime in 2008 but is now being promised “no later than December 2007,” according to the release.

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