Friday, May 11, 2007
The brokerage industry has been urging the SEC to seek a rehearing in FPA v. SEC, where the D.C. Circuit (2-1 vote) invalidated the SEC's rule that exempted brokers offering fee-based accounts from regulation under Investment Advisers Act. Commissioner Paul Atkins expressed his views on this in a speech on May 10 before the Financial Services Lawyers Roundtable Council:
We owe it to the financial services industry and the investors that you serve to take a consistently careful approach to regulation. Regulatory unpredictability undermines innovation and growth. One ongoing issue brings the importance of predictability to mind. On March 30, the D.C. Federal Circuit Court of Appeals rejected an SEC rule that excepted from the Advisers Act broker-dealers providing advice that is solely incidental to brokerage, but charging an asset-based or fixed fee for its services. Unlike the other recent decisions affecting mutual funds and hedge funds, this was a split decision. The Court found that the SEC had exceeded its authority, but the dissenting judge found the SEC's interpretation of the Advisers Act to be "a reasonable interpretation of an ambiguous statute."
I certainly think that the SEC would be well justified to ask for this ruling to be heard by the full DC Circuit - unlike the other vacated rules, this rule was adopted by a unanimous Commission. At the very least, as an interim measure, we need to ask the Court for a stay to allow for an orderly transition and appropriate rulemaking consistent with the Court's decision. Otherwise, I am afraid of confusion in the marketplace. Now that many firms have shifted customers into fee-based accounts in reliance on our actions -- and, one could argue, at our strong urging -- we should be striving to provide as much certainty as is in our power to provide to affected investors.
In the longer term, bigger questions are at issue and will have to be resolved. There are strong feelings about where and how to draw appropriate lines between broker-dealer and investment advisory activities and regulatory regimes. The SEC recognized the difficult questions in this area and their far-reaching importance at the time it adopted the rule. Indeed, the adopting release announced that the staff would undertake a further examination of the broker-dealer and investment advisor regulatory regimes. Last September, the SEC commissioned the RAND Corporation to do the fact-gathering and empirical research that will form the basis for the SEC's next steps in this area. RAND is looking at how financial products and services are marketed, sold, and delivered to retail investors. The study will investigate, among other things, how financial professionals are compensated and what investor perceptions are. This study will provide the raw material for the SEC's further action in the area. Ultimately, it is probably Congress that should resolve this issue of uncertainty between two sixty-year-old statutes governing an area that has changed so much over that time.