6 Firms Lobby Mr. Cox


New York – At the SIFMA annual independent contractor broker-dealer conference being held in Baltimore this week, more pressure was brought to bear on the SEC to uphold the decision that fee-based brokerage companies should be deemed investment advisers and forced to live within the Investment Advisors Act of 1940 as fiduciaries. Yet while the judgment was focused on fee-based brokerage, there are potential consequences for alternative research providers.

Recent Developments

In a letter from six affiliated organizations to Mr. Cox, the organizations supported the view that brokers should be made aware of their obligations under the new restrictions and should adhere to them. The group indicates that the court decision, while disruptive, represents an opportunity for the SEC to educate the brokers on their new regulatory obligations.  The group is also pushing Mr. Cox to consider more “investor-friendly” rules as they relate to investors.

It might seem that the caucus was formed by ideological bent towards protecting the investor. However, a cursory look at the signatories suggests their may be factors other than the altruistic goal of protecting the investor at play.

For example, three signatories were the Investment Adviser Association, the National Association of Personal Financial Planners and the Financial Planning Association of Denver.

Brokers have traditionally been treated relatively lightly compared to financial planners or money managers.  Regulation has squarely placed the fiduciary responsibilities with the buy-side. By raising the bar to include fee-based brokerage companies, the courts have forced brokers (and alternative research providers) to reexamine the risk of the SEC determining their services are “investment advice”.

For the research providers, the publisher’s exemption has provided adequate cover for many years, but when push comes to shove, some alternative research providers seeking this protection may find they are camped out in the darker half of the grey area.

How we got here

In 1999, Merrill Lynch announced a new program called “Unlimited Advantage”. Under the program it would be charging fees based on assets under management for investment advice and unlimited trading. The move was, of course, in reaction to the thinning of commissions, but then SEC Chairman Arthur Levitt believed that Merrill was supporting his own view that a fee-based system removed the temptation for brokers to churn their accounts. As a result, Levitt supported Merrill’s move to asset-based fees by proposing that it be exempt from the Investment Advisors Act of 1940.

Looking Down the Road

At least so far in his tenure, SEC Chairman, Christopher Cox, is ruling by consensus more than anyone in recent history. Most votes by the Board have been passed by 5 to 0 votes. This indicates that the time it takes to engineer this kind of consensus on the issues has tended to slow down regulatory action.  It is also clear that the SEC has a more free market mentality than its predecessor.

Had the U.S. Court of Appeals for the District of Columbia Circuit not overturned the Merrill rule, the SEC may have continued to drift on the issue. But, given that the judicial system has acted, there is a greater need for the SEC to resolve this rather glaring exemption from the Investment Advisers Act.

Potential Impact on Alternative Research Shops

We expect that the rule will be changed to reflect a more even treatment of financial advice providers than currently exists. This is where the buck could stop for research providers as well.  While we view that the odds are very low that this expected reinterpretation will affect alternative research providers, it does construct a scenario where the risk to certain research business models will have risen.

At this point, it might be fortuitous for research providers to examine their business models, assess how much “individualized advice” they may be providing, and beef up their policies and procedures in this regard.


About Author

Leave A Reply