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.
SEC spokesman John Nester said the agency “will analyze the opinion and proceed appropriately in investors’ best interests.”
The decision marked the third time in less than a year that the appeals court has overturned SEC rules. Unlike in this case, though, the rules tossed out in the other two instances had gone in the direction of stricter regulation. Last April, the court voided SEC regulations mandating that chairmen of mutual funds be independent from the companies managing the funds. And in June, it overturned a rule bring hedge funds under new supervision by the agency.
The latest ruling “represents an important step forward for investors,” said Barbara Roper, Consumer Federation’s director of investor protection.
The SEC rule “left an enormous loophole permitting brokers to call themselves advisers, market their services based on the advice offered, and still escape regulation as advisers,” Roper said.
