To Appeal or Not to Appeal? SEC Feels Heat Over Pro-FPA Court Ruling

Apr 26, 2007 4:27 PM, By John Churchill

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The SEC is feeling lobbyist pressure from both sides as it prepares to either appeal or let stand the March 30^th ruling by a Federal Court of Appeals that vacated the “Merrill Lynch” rule.

Today, the SEC got an earful (via media conference call) from the Consumer Federation of America, a consumer advocacy group, along with the Zero Alpha Group, an international network of independent investment advisory firms. The two groups are urging the SEC to let the D.C. Appeals Court decision stand, and they used findings from an April investor study showing confusion caused by the different regulatory regimes for brokers and advisors as support for their arguments. (To read RR’s coverage of the March 30^th ruling as well as the case history and court ruling, click here).

“The survey will show that an appeal by the SEC would be ill-conceived from an investor-protection standpoint,” said Steve Lugar, managing director of BHCO Capital Management in Dallas. He pointed out that of the 1,073 respondents to the survey, which was conducted by phone in April by Opinion Research Corporation (ORC), 29 percent said advice is the “primary” service offered by stockbrokers, a number virtually unchanged from when the survey was conducted in 2004. (To see the rest of the ORC study’s findings, click here).

“The SEC’s ‘enhanced disclosure’ rule that was issued in May 2005 is clearly not working,” said Graham Hueber, senior research associate at ORC. Barbara Roper, director of investor protection at CFA added that the “survey reveals investors still don’t understand the difference between brokers and advisors [and that] regulatory policy [in this area] has been an abysmal failure.”

Meanwhile, the brokerage industry’s lobbying organization, SIFMA (The Securities Industry and Financial Markets Association), issued a statement on April 10^th urging the SEC to appeal the Court’s decision (click here to read SIFMA’s position). The SEC has until May 14^th to file for a rehearing. And while attorneys say any appeal by the SEC is has very little chance of reversing the ruling, it does buy the regulator and the industry valuable time to make the necessary changes needed to adjust to their new reality.