The Consumer Federation of America, Fund Democracy, Consumer Action, and Consumers Union strongly support the Financial Planning Association’s lawsuit challenging the Securities and Exchange Commission’s proposed rule expanding the broker-dealer exclusion from the Investment Advisers Act.
The Investment Advisers Act exempts brokers, but only to the extent that they limit themselves to giving advice that is “solely incidental” to effecting transactions in securities and do not charge “special compensation” for that advice. For years, the SEC has effectively removed the “solely incidental” standard, by allowing brokers to hold themselves out to the public as advisers and offer extensive advisory services without being subject to the fiduciary duty and disclosure requirements of the Advisers Act. The 1999 rule being challenged by FPA goes a step further by removing the “special compensation” test for non-discretionary, fee-based accounts.
“The SEC has given brokers a wholesale exemption from the Advisers Act that Congress never intended,” said Barbara Roper, CFA’s director of investor protection. “The recent mutual fund scandals provide ample evidence of the enormous gap between the advisory image brokers promote and the seamy reality of their conduct. This is the predictable result of allowing advisory services to be offered under a sales-oriented standard of conduct.
“It is long past time for the SEC to withdraw this ill-conceived rule and require brokers to either abide by the standards appropriate to an advisory relationship or stop misrepresenting their services to the public,” Roper added. “We are hopeful that the FPA lawsuit will spur the agency to respond appropriately. Only then will investors receive the assurance they deserve that all those offering investment advice to the public are subject to the same rules.”
When it issued its rule “proposal,” the Commission agreed that, pending final adoption, it would not recommend an enforcement action against a broker for conduct that complies with the proposed rule but that would otherwise be in violation of the Advisers Act. This situation persists to this day, despite the hundreds of letters opposing the rule received by the Commission. By leaving this highly controversial rule proposal in effect for nearly five years without taking formal action, the SEC has violated procedural rules by effectively adopting the rule without an opportunity for comment.
“The SEC’s non-enforcement position violates fundamental rulemaking procedures, and the broker exemption is an abuse of the SEC’s authority,” said Mercer Bullard, president and founder of Fund Democracy and a securities law professor at the University of Mississippi School of Law. “It is disheartening that the SEC still supports exempting brokers from their fiduciary duties in the wake of years of unrelenting scandals in the financial services industry.”
“Investors expect the SEC to protect their interests,” said Sally Greenberg, senior counsel with Consumers Union. “The SEC’s actions – exempting brokers from being held to fiduciary standards when they advise clients on investments – represent a retreat from the Commission’s mandate to protect the investing public.”