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Financial Planning Association v. Securities and Exchange Commission

Citation. Fin. Planning Ass’n v. SEC, 482 F.3d 481, 375 U.S. App. D.C. 389, Fed. Sec. L. Rep. (CCH) P94,185 (D.C. Cir. Mar. 30, 2007)
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Brief Fact Summary.

The Financial Planning Association (Plaintiff,) a group of financial advisers accountable to the Investment Advisers Act (IAA), argued that the Securities and Exchange Commission (SEC) (Defendant) surpassed its right in circulating a final rule that excused broker-dealers from the IAA when they accept “special compensation†for specific investment advice.

Synopsis of Rule of Law.

Broker-dealers who receive “special compensation†for rendering certain investment advice are not to be excused from the Investment Advisers Act by the Securities and Exchange Commission.


The SEC propagated a final rule that excused broker-dealers from the IAA when they get “special compensation†for specific investment guidance. As stated explicitly in the final rule, usually, on “fee based programsâ€, that a broker-dealer who (1) gets special compensation will not be considered an investment adviser if (2) any advice given is only supplementary to brokerage services offered on a customer’s account and (3) explicitdisclosure is given to the customer. On discount brokerage programs, a broker-dealer will not be thought to have gotten special compensation simply due to chargingcustomers varying prices for brokerage services.The rule mentions three none-exclusive conditions where advisory services, for which special compensation is accepted under a fee-based program, would not be implemented “solely incidental to†brokerage: when (1) a single fee or agreement is present for advice; (2) a customer accepts particular financial planning services; and, (3) a broker-dealer usually has investment discretion over a client’s account. Brokers and dealers are not accountable to the obligations stated under IAA § 202(a)(11)(C) where their investment advice is (1) “solely incidental to the conduct of [their] business as a broker or dealerâ€, and (2) the broker or dealer “receives no special compensation thereforâ€. Those investment advisers who are accountable to the IAA are obligated to register and keep records; to regulate the category of agreements they enter; and not participate in specific types of dishonest and fraudulent dealings. The Financial Planning Association (FPA), a group of financial advisers accountable to the IAA, appealed the final rule, arguing that the SEC had surpassed its right in endorsing it. The FPA argued that when Congress passed the IAA, Congress distinguished in subsection (C) the group of broker-dealers it proposed to excuse, and in that exception in subsection (F) for “such other persons not within intent of this paragraph†was only proposed to permit the SEC to excuse new groups from the IAA, not to enlarge the groups that Congress explicitly mentioned. The court of appeals granted review.


Does the Securities and Exchange Commission excuse from the IAA broker-dealers who get “special compensation†for providing particular investment guidance?


(Rogers, J.) No.The SEC does not excuse from the IAA broker-dealers who get “special compensation†for providing certain investment advice. The IAA broadly defines an “investment adviser†as “anyone who, for compensation, engages in the business of advising others, either directly or through publication or writings, as to the value securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities…†Under subsection (C), broker-dealers are omitted from this designation, if their investment advice is only supplementary to brokerage transactions for which they give only broker commissions. The final rule does not take this approach; still subsection (F) allows the SEC to excuse “other persons not within the intent of this paragraphâ€. So, the outcome of the FPA’s dispute brings up whether the SEC is given the right under subsection (F) to excuse from IAA coverage another group of broker-dealers outside of the broker-dealers excused by Congress in subsection (C). A decision like that necessitates a two-step examination that employsconventionalof legislative construction.  First, the court must decide whether Congress has directly addressed the precise query at issue. “If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.†Under step two, “if the statute is silent or ambiguous with respect to specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute.†In revising an agency’s interpretation as long asit is arealistic interpretation of its rights under a statute it controls, the court will uphold it. Subsection (C)’s exception is for “any†broker or dealer. Subsection (F) approves the SEC to excuse from the IAA “other†persons. The SEC claims to use its right under subsection (F) to increasethe final rule exception for broker-dealers listed under subsection (C). The final rule is conflicting with the IAA due to it failing to have either of the two conditions for an exception under subsection (F). First, the statutory “intent†does not support an exception for broker-dealers vaster than the exception set forth in the text of subsection (C); therefore, the final rule does not have the legislative condition that exceptions under subsection (F) be coherent with such statutory “intentâ€. Second, as a result of broker-dealers already being expressly addressed in subsection (C), they are not “other persons†under subsection (F). So, the SEC cannot utilize its right under subsection (F) to create new vaster exceptions for broker-dealers. Congress’s objective, which is articulated in the statute, excuses any broker-dealer who does not get “special compensationâ€, so the final rule’s exception is vaster than the one mentioned in subsection (C). Wanting to excuse broker-dealers past those who get brokerage commission for investment advice, the SEC has propagated a final rule that is in direct conflict with both the legislative text and the statutory objective.  Where the legislative text is well-defined, an agency may not utilize vague clauses to redefine the jurisdictional restrictions established by the statute. Congress was trying to eradicate the misuses and blatant violations of fiduciary obligation to investors by safeguarding investors as well as true investment advisers when they passing the IAA. Congress wanted to eradicate conflicts of interest between investment advisers and the customers and at the same time defining investment adviser generally and the exceptions to the definition exactly. As a result, it is inconsistent with statutory history to interpret the SEC’s right under subsection (F) as to enable individuals Congress decided must comply with the IAA to elude its restrictions. The SEC’s contention is that Congress was also apprehensive about the regulation of broker-dealers under the IAA and the Exchange Act is not supported. In the IAA, Congress explicitly stated that the broker-dealers it included could also be subject to other regulations.  The SEC’s final rule ignores 65 years of constant SEC understanding of its right under subsection (F) and over that time, the SEC has evoked subsection (F) to excuse individuals not otherwise mentioned in the five exceptions created by Congress, which supports the interpretation of subsection (F) as allowing the SEC to control individuals or classes concerning situations that Congress failed to foresee in the legislative text – not to widen the exceptions of classes of individuals Congress has explicitly mentioned. Because of the IAA’s legislative text and statutory history, the wording of subsections (F) and (C) is unmistakable and thus, the SEC has overstepped its right in promoting the final rule. Opposing the dissents contention, vagueness is not formed by definitional opportunities but by legislative perspective. The words Congress utilized have commonplace meanings, in the perspective of how those words are articulated, taking into account the legislative structure and the statutory history, those meanings are unmistakable. Whatever broad rulemaking right the SEC has under this statute is void due to there being no proposal by Congress that the SEC could disregard either of the two conditions in subsection (C) for broker-dealers to be excused from the IAA. The final rule is vacated.


(Garland, J.) Conflicting with the discoveries of the majority, the phrases “such other persons†and “within the intent of this paragraph†that relate to the IAA’s exceptions are not clear-cut. As a result, respect must be given to the SEC’s logical understanding and its rule upheld.


Since broker-dealers are generally not considered a client’s fiduciary, as investment advisers are, this case was seen as a reproach to the SEC and the efforts to lessen fiduciary protections afforded by the IAA. The final rule signified the SEC’s attempt to permit broker-dealers to suggest fixed fee and asset-based accounts without being labeled “investment advisersâ€, as long as any investment advice given to clients was “solely incidental†to brokerage services and necessary descriptions and disclosures regarding services were delivered. Such interpretation may have survived defiance if the SEC had wanted to interpret the legislativeprohibition for particular broker-dealer endeavors instead of proclaiming an extra exemption. The consequence of the decision was to compel broker-dealers to close their fee-based brokerage accounts or transport the accounts under the IAA where they would be subject to curator responsibility troubles, additional investment adviser regulation and compliance requests. 

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