SEC’s “Merrill Lynch Rule” Struck Down by the US Court of Appeals
In a 2 to 1 decision this morning, the US Court of Appeals struck down the US Securities and Exchange Commission’s rule on fee based broker accounts, which as become commonly known as the “Merrill Lynch Rule.” This rule was first proposed in late 1999 and formally adopted in 2005. This rule allowed stockbrokers to act as “advisors” and to charge percent of assets fees. Prior to this rule, only investment advisors who registered with the SEC or with the states and who were regulated under the Investment Advisers Act of 1940 were permitted to do this. Under the Merrill Lynch Rule, brokers could call themselves advisers, yet remain exempt from regulation under the Investment Advisers Act, as amended.
US Appeals Court Judges Judith Rogers and Brett Kavanaugh decided that the SEC had exceeded its authority in granting this exemption to stockbrokers. The ruling found no congressional intent to “support the SEC’s interpretation of its authority.” Whether the SEC will appeal this decision to the US Supreme Court is not clear at this point. As the decision stands today, brokerage firms would need either to convert their client wrap accounts, which currently hold several hundred billions of dollars in client assets, or be regulated by the Investment Advisers Act. Judge Merrick Garland dissented.
The Skilled Investor has written previous articles about this exemption and about the regulation of brokers and investment advisers. (See this article on the securities industry’s financial incentives, which includes an earlier discussion of the Merrill Lynch Rule: The securities industry calls marketing and selling: “advising”). You may also wish to peruse our extensive collection of articles about financial advisors in these categories: Selecting an Advisor, Regulation of Advisors, Payment of Advisors, and Advisor Fraud.)
This US Appeals court decision is an important legal victory for individual investors. Numerous surveys of investors have shown that they do not understand the important legal distinctions between securities brokers and investment advisors. For almost six and one-half years, since November 4, 1999 when the SEC proposed Rule 202(a)(11)–1.7 to regulate ‘‘fee based” and “discount” brokerage products offered by full-service broker-dealers, the SEC has just added to this ambiguity.
The Merrill Lynch Rule allowed stockbrokers to call themselves “advisors,” “counselors,” and other similar terms that implied they were helping clients to make financial and investment decisions in their clients’ best interests. In fact, brokers have had no legal obligation to act in the best interests of their clients. Instead, securities laws only required them to sell “suitable” financial and investment products to the public. The definition of a “suitable” investment is vague at best. The full-service brokerage industry wanted the ability to market themselves as advisors without the legal obligations that the Investment Advisor’s Act entailed, and the SEC aided this effort for years.
These legal proceedings were prompted when the SEC formally adopted its “Merrill Lynch Rule” in 2005. The SEC then was sued by the Financial Planning Association and by the Consumer Federation of America. This link will take you to a press statement from the FPA about this court decision.
Tags:
broker accounts
Personal Financial Planning
- American Funds – Capital Income Builder Fund – Class A Shares (CAIBX) attain a +4 Fund Authority Score (Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise and objective summaries of mutual funds and ETFs for comparisons within investment [...])
- Commentary on How Many Mutual Funds are Needed for a Well-Diversified Portfolio (
For holding periods of many years, diversification improves dramatically, when you hold multiple actively-managed mutual funds in an investment portfolio.
In "How Many Mutual Funds Constitute a Diversified Mutual Fund Portfolio?," Professor Edward O'Neal of the University of New Hampshire at Durham tackled the important question of how much an investor could improve on diversification by [...])
- The most effective strategy to increase your mutual fund and ETF investment returns (
What is the most effective strategy you have to increase your long-term mutual fund and ETF investment returns?
Just reduce your investment fees to rock bottom and buy directly to eliminate all sales loads. This strategy is both simple and entirely within your control. You do not have to be smarter than all those other smart [...])
- The Heavy Burden of Recurring Investment Expenses and Fees (
The heavy burden of recurring investment fees (Part 1 of 2)
Recurring investment costs can significantly impact the long-term value of your retained investment portfolio assets.
Recurring fees, such as asset management fees, 12b-1 marketing fees, and advisory/asset custody fees are charged periodically, as a percent of your investment assets. The relative cost-efficiency of your investment portfolio [...])
- Conclusion of the Biggest Personal Finance Story of the Past 30 Years ( < <-- Go to Part 4
The Biggest Personal Finance Story of the Past 30 Years - Conclusion
This article concludes our series on the greatest personal finance story of the past thirty years. In this article, we discuss whether the dramatic growth in equity value of the financial services sector indicates that securities markets are [...])
- Avoid High Turnover Mutual Funds and Active ETF Trading (
Avoid investment funds with higher investment portfolio turnover
The problem with high turnover is that higher fund trading adds substantial hidden expenses that drag down returns.
Because short-term trading is a zero sum game (before costs) played against other well informed traders, greater turnover is far more likely on average to result in lower fund returns instead [...])
- 10 Lower Cost S and P 500 Index Mutual Funds (
10 Lower Cost S&P 500 Index Mutual Funds
Regular readers know that The Skilled Investor advocates a very boring, low cost, broad market, passive index investment strategy. Costs less. Gets the broad market return -- whatever that will be. Narrows the range of outcomes and therefore the risk to your long-term personal financial plan. Takes far [...])
- The Value and Opportunity Cost of Your Personal Investment Management Time (
Your time is valuable, and it should be included in calculations about your investment returns.
Whether you add or subtract value from your assets when you spend time on investment activities should also be evaluated. Some investors spend significant time on the wrong strategies. Instead of adding value, their efforts reduce their investment portfolio performance and [...])
- Stay Invested in Securities Markets to Earn Risk Premiums (
You must stay invested in the securities markets to earn market return risk premiums
Securities markets pay risk premiums to risk takers
You have to have your money invested and at risk to be paid a risk premium. Attempting to avoid risk or losses by jumping in and out to "time the markets" does not work. Scientific [...])
- How Investment Securities Are Valued – Snapshots in Time (
Snapshots in time - How investment securities are valued
Every securities market transaction requires a buyer and seller with differing viewpoints.
Markets can operate, because there are differences between investors in their assessments of the intrinsic value and risk of securities.
Current investment values vary in the eyes of the many beholders of investment market securities. Knowledgeable participants [...])
- Vanguard 500 Index Fund – VFINX – merits the Best +10 Fund Authority Score (The Standard & Poors 500 stock index is the most common equity index fund benchmark in the U.S. The S and P 500 tracks about 75% of publicly traded U.S. equity market asset value. The dominant issue in choosing among passively managed index mutual funds and ETF funds benchmarked against the S & P 500 [...])
- The Optimal Investment Strategy for Individual Investors (The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient
A previous article, "The Problem - Straight answers about personal financial and investment planning are difficult to find," summarized important reasons why individuals may experience difficulties, even if they are intent upon doing better with [...])
