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SEC Orders Delays in Rule Compliance Dates

The SEC yesterday announced that it will extend the compliance date for the rule that identifies the circumstances under which a broker-dealer's advice is not solely incidental to its brokerage business and thus subjects the broker-dealer to registration under the Investment Advisers Act (Rel. No. 34-52407). However, the extension was granted until January 31, 2006, rather than April 2006 as requested in rulemaking petitions by the Securities Industry Association, the American Council of Life Insurers and and in a letter by the Financial Services Institute. The extension of the effective date was opposed in a joint letter by the Consumer Federation of America, Fund Democracy and Consumers Union, by Joseph Capital Management LLC and by the Investment Adviser Association. In announcing the extension, the SEC advised that it had considered all of the petitions and the letters in opposition. The rules were to take effect on October 24, 2005.

The petitioners had sought a delay in complying with the Investment Adviser Act rules affecting certain types of brokerage programs. The rule provides that, when a broker-dealer offers advice as part of a financial plan or in connection with financial planning services, it is providing investment advice that is not solely incidental to the business of a broker or dealer for purposes of the Investment Advisers Act. Further, the advice will not be deemed solely incidental if the broker-dealer holds itself out to the public as a financial planner, delivers a financial plan to a customer or represents to the customer that the advice is part of a financial planning service.

The SIA said that brokers needed additional time to consider the activities that are subject to the Investment Advisers Act and to develop and disseminate the disclosure about brokerage and advisory relationships. ACLI advised that broker-dealers that are affiliated with life insurers are significantly different from full-service brokers and that the new rules present a different set of challenges for its members. The consumer groups argued that the changes were long overdue and that no further delay was needed. The Investment Adviser Association noted that the SIA and its members have known for several years that the final rule would require brokers to treat discretionary accounts as advisory accounts.

The SEC said that it was persuaded that extending the compliance date for rule 202(a)(11)-1(b)(2) and (b)(3) for a short time is appropriate. The SEC acknowledged concerns about delaying the benefits of the rule, but concluded that a limited extension, on balance, is reasonable. The SEC was not persuaded that the additional six months delay requested by the petitioners was necessary. The SEC also disagreed with Joseph's view that the relief would exacerbate and extend investor confusion about fee-based accounts since broker-dealers are already required to comply with the disclosure provisions of the rule.