Investment Management: Court Rules In Favor Of Registered Investment Advisors

Ulli Uncategorized 4 Comments

Last week, the U.S. Court of Appeals overturned a long-standing special exemption for brokers known as the “Merrill Rule,” which allowed broker-dealers from offering fee-based accounts without being registered as Investment Advisors.

The court found that the SEC had exceeded its authority by allowing such practice. At this point, the SEC announced that it will not fight the decision.

The lawsuit was brought by the Financial Planner’s Association (FPA), and it agued that “whereas commissioned brokers are only responsible for making sure that trading and related transactions are handled properly, advisers by law must make investment decisions based on what’s in the best long-term financial interests of their clients.”

This is a point I have repeatedly touched on over the years. Broker-dealers, or their sales people, do not necessarily have the client’s best interest in mind when they peddle preferred company products based on incentives.

I for one applaud the U.S. Court of Appeals for fighting the SEC on this one. The outcome has the potential to benefit all investors by making them aware of the differences in compensation and subsequently the bias of the advice.

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Comments 4

  1. Ulli,

    Out of curiousity, do you know if this “special exemption” was made law before, during, or after Arthur Levitt’s tenure as chairman of the SEC?

    I’ve read his book “Take On The Street”, and I don’t recall him being on the side of the big brokerage houses on this issue, but I could be wrong.

    As an aside, IMO I think AL was/is good for the individual investor.


  2. Ulli,
    I am delighted that brokers are no longer able to “advise” clients on investments.
    Over the years, I have had many calls trying to sell me stocks or worse yet gold, currency and commodities. They usually hung up after I asked them a few in-depth questions about what they were selling. I suppose they had been told by their company to push these items and many unsophisticated investors were sucked in by their sales pitch.
    My daughter even got a call after she turned 18, telling her that her UGMA trust account was legally hers, and advising her that she should sue me for the money so this guy could “manage” it! Needless to say, that money was moved from this brokerage house the next day!

  3. Sanjoy,
    It’s unfortunate that your story is not the only one out there. I have heard many similar ones from readers over the years, and I hope that closing this loophole will greatly benefit the investing public.


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