SEC Advice Exemption Rebuffed

March 30, 2007 ( - A federal appeals court has rebuffed a Securities and Exchange Commission exemption, ruling that the agency exceeded its authority in granting a disclosure exemption on investment advice.

The U.S. Court of Appeals for the District of Columbia Circuit said the SEC exceeded its authority in granting a 2005 disclosure exemption to brokers who provide investment advice that is incidental to their business, but who nonetheless are paid a special fee for the advice.

The SEC issued the exemption to clear up regulatory confusion so that brokers could offer fee-based accounts without having to register as financial advisers, according to the Securities Industry and Financial Markets Association.   But, according to Reuters, the Financial Planning Association (FPA), which brought the case, argued that the exemption allowed stock brokers to dispense advice without disclosing conflicts of interest.

The law carves out six exemptions from the definition of “investment adviser,” including any broker or dealer “whose performance of such services is solely incidental to the conduct of his business as a broker or dealer” and “who receives no special compensation therefor.”

It also gave the SEC the power to exempt other persons not within the intent of the law’s other exemptions.

The SEC in  April 2005  adopted a rule exempting broker-dealers from the act's requirements when they do receive special compensation for the advice if the advice is "solely incidental to brokerage services provided on a customer's account" and if specific disclosure is made to the customer.   However, the FPA contended the law intended to give the SEC the power only to exempt new groups, not to expand the groups Congress had specifically addressed.

The FPA suit successfully argued that the SEC should not have adopted regulations which exempted certain broker-dealers from registering as advisers.  

"In the wake of this decision, our highest priority must be to our investors, ensuring there is no disruption to our customers while we wait for the SEC to provide interim guidance which conforms to the court's ruling," said Ira Hammerman, general counsel at the Securities Industry and Financial Markets Association, in a statement.

"In the meantime, we encourage firms affected by today's verdict to comply with the decision while simultaneously working to provide customers as much disclosure as is reasonable, given the ruling."

The ruling is online  HERE