NOTE: This post has been moved to the top for the rest of the day to emphasize the importance of the topic.
Those I know in the securities industry won’t agree, but I believe that the DC Court of Appeals ruling on Friday covered in this AP report by Marcy Gordon was long, long overdue:
Appeals Court Overturns SEC Broker Rule
A federal appeals court on Friday overturned a rule that allowed securities brokers to avoid some requirements faced by financial planners in advising customers, saying both groups must be held to the same standards in order to protect investors.
The 2-1 ruling by the U.S. Court of Appeals for the District of Columbia Circuit held that the Securities and Exchange Commission had overstepped its authority in adopting the rule in 2005. The Financial Planning Association had sued the SEC over the rule, saying that financial advisers and investment brokers acting as such should not be subject to two different regimes.
Brokers who charge customers a flat fee, rather than commissions on securities transactions, and act as financial advisers should – like financial planners – be required to disclose potential conflicts of interest to customers, the financial planners’ group contended.
The Consumer Federation of America, a mutual-fund watchdog group and the organization representing state securities regulators joined with the planners to challenge the SEC rule.
The two-judge majority of the appeals court panel agreed. The ruling said the law governing investment advisers was intended “to protect consumers and honest investment advisers,” and to establish standards of responsibility to act in the investor’s best interest.
“The SEC has exceeded its authority in promulgating the final rule,” said the ruling written by Appeals Court Judges Brett Kavanaugh and Judith Rogers. The agency’s legal stance on the matter “flouts six decades of consistent SEC understanding of its authority,” it said.
The regulatory overreach element of the Appeals Court’s argument appears to indicate that an appeal to the Supreme Court by the SEC would be futile. I don’t see Chief Justice Roberts or Justice Alito being receptive to the idea of the SEC taking upon itself the rewriting of professional regulations without Congress’s specific permission.
That is good.
- A financial adviser/financial planner’s mission in life is to help his or her clients reach their financial goals, which, though there are sometimes others, are usually these: Establishing a reserve fund, ensuring adequate and appropriate housing, providing education those who need it (for children going to college and for adults who might need continuing or career-change education), planning for a financially adequate retirement, and (of course) having some fun. The planner helps select appropriate investment products for his or her clients that will hopefully enable them to achieve those goals.
- Stockbrokers and those who sell securities are generally good at ….. selling securities. Although they may know securities and other investment products inside out, they are often not in a position, nor do they often have the training, to help their clients achieve their goals (other than to “make money”).
- I’m oversimplifying here, but not by much — The SEC’s position, known inside the industry as the “Merrill Lynch Rule” (because that firm was most outspoken in its belief that its brokers can and should be considered financial advisers), was that those who are able to sell securities essentially need little or no further training to be able to call themselves financial advisers. That is all too often transparently NOT the case. A securities salesperson holding himself or herself out to be a financial adviser without the requisite training and background in financial planning is misleading the public.
- As to conflicts of interest (again I’m oversimplifying), there is potential for that on the part of both financial planners and securities salespersons. But, a financial planner specifically takes on a fiduciary responsibility for helping his or her clients achieve their goals, and any decisions or recommendations that compromise that fiduciary duty are crystal-clear violations of the adviser’s code(s) of ethics. Not only are the ethical strictures less present and less visible in the securities industry, it is frequently the case that the securities firms push their salespeople to emphasize products that not only may not be the best products around, but that also are sometimes sold to clients who shouldn’t be buying them, because they (the clients) shouldn’t be taking on the high level of risk involved in a given product. A client of a securities salesperson holding himself or herself out to be a financial adviser without the requisite training and credentials is more likely to let his or her guard down and to be misled by the salesperson.
The Court ruled that the SEC was wrong. The Court is absolutely correct.