Back

Assessing the Impact of the Merrill Lynch Rule Overturn

What’s the difference between a broker-dealer and a financial advisor?

As of May 21, not much when it comes to fiduciary responsibilities.

The U.S. Court of Appeals for the District of Columbia Circuit scrapped the Securities and Exchange Commission's broker-dealer exemption rule on March 30. The ruling went into effect May 21.

Now, registered reps positioned as financial advisors offering fee-based brokerage accounts are regulated the same as any other financial advisor. No longer is fiduciary responsibility and compliance just a banking and trust phenomenon.

The exemption, which had gone into effect in 2006, absolved fee-based broker-dealers of the fiduciary obligations required of advisors under the Investment Advisors Act of 1940. It allowed registered reps to dispense “incidental” advice, which exempted them from being regulated as financial advisors.

The Denver-based Financial Planning Association sued the SEC in 2004, and the Court of Appeals’ decision, which was not appealed, is final. The SEC could, however, seek a new law from Congress.

The end of the exemption means broker-dealers must adopt the best practices that create standardized processes for managing and reporting client information. NorthStar’s pre-integrated Compliance Solution 5.0 is ideally suited to provide that type of investment policy guidance.  Not surprisingly, the Solution has received tremendous interest from banks, trust firms, and broker dealers alike.

“The broker-dealer exemption was wrong,” said J. Thomas Bradley Jr., president of TD Ameritrade Institutional of Jersey City, N.J., one of the few brokerage executives opposed to the rule. “I hope no one tries to wiggle out of it. We all need to suck it up.”

Impacts of the new ruling include a lengthy and time-consuming process of transitioning some $300 billion worth of fee-based broker accounts (approximately one million clients) into straight-commission accounts or advisory alternatives, possible increased costs to broker-dealers who provide their reps with investment advisory services, and it is hoped, increased efforts to educate investors on the difference between advisors and brokers.

Investment advisors are obligated to act in their clients’ best interest, while brokers can sell products that may be suitable, but not the best choice, for their clients. Both offer financial services, but the client may not be clear on distinguishing one professional from the other.

“We’ve asked the SEC to help educate investors,” says Barbara Roper, director of investor protection for the Consumer Federation of America. “As long as brokers are free to call themselves advisors and offer advisory services, you’ll never be able to educate investors to understand the difference between brokers and other advisors.”

Indeed, many investor advocates have called upon the SEC for increased disclosure that would help define the role of different financial professionals. The SEC has not responded.

— Investment News

 Back