Big firms to D.C. Circuit: Give us a break, please

IRVINE, Calif. — The major sponsors of fee-based brokerage accounts claim they will need six months to a year to transition clients out of the accounts.
Eight firms detailed their concerns in sworn affidavits filed with the U.S. Court of Appeals for the District of Columbia Circuit. The filings supported a Securities and Exchange Commission motion for a stay of the court’s ruling throwing out the broker-dealer exemption rule.
The court in March killed the rule, which exempted the accounts from the Investment Advisers Act of 1940. As a result, firms must move fee-based brokerage accounts into straight commission accounts or advisory alternatives.
The SEC on May 17 asked the court to delay implementation of the ruling until Oct. 1. The court had been scheduled to implement the decision last Monday.
The Denver-based Financial Planning Association, which successfully challenged the rule, has until June 4 to oppose the SEC’s motion.
The SEC said in its motion that the extra time is needed to give customers a “meaningful opportunity to make informed decisions” about their options, and to ease administrative and billing chores for firms.
Firms’ estimates of the time they need vary.
Charles Schwab & Co. Inc. of San Francisco estimates that it will need 120 days to convert more than 100,000 accounts. Morgan Stanley of New York said that it will need up to a year to handle its 140,000 fee-based brokerage accounts.
UBS Financial Services Inc. of New York said that it will need six to nine months to deal with the “severe disruptions” caused by the court’s ruling.
If the stay is granted, the SEC said, it will provide the court with a status report prior to the expiration of the stay. The SEC said that it also might request a “further extension.”
Is the extra time warranted?
“The key thing would be: Do [firms] already have a [non-discretionary] advisory-type vehicle?” said a broker affiliated with Raymond James Financial Services Inc. of St. Petersburg, Fla., who asked not to be identified. “If they don’t, [requesting more time] might be valid.”
In 2005, in response to regulatory scrutiny, Raymond James transitioned all its fee-based brokerage accounts into an advisory version. The transition was “not big a deal,” said the Raymond James rep, who had to convert some accounts.
New York-based Morgan Stanley, the second-largest sponsor of fee-based brokerage accounts, is developing an advisory version of its Choice brokerage account.
Merrill Lynch & Co. Inc. of New York, the largest sponsor, launched an advisory version of its Unlimited Advantage fee-based brokerage platform last fall, but the program still is relatively small, and brokers say that it doesn’t have all the features of Unlimited Advantage.
Other major firms have alternatives in place.
The eight firms described a list of steps they say they must take to transition customers out of fee-based brokerage accounts, including:
• Identification of alternatives.
• Updating of marketing, communications and disclosure documents, such as the ADV form.
• Modifying compliance and operational systems.
• Training brokers how to explain alternatives, transition accounts and use advisory accounts.
• Meeting with clients, educating them about options, profiling them for advisory accounts and completing new paperwork.
• Completing supervisory reviews of new accounts.
• Licensing brokers to handle advisory accounts.
Several firms said they are worried about a possible widespread rush and delays in getting brokers licensed as investment adviser representatives. The firms also said that fee-based brokerage clients must be informed that they could pay more in commissions, loads, markups and markdowns, and that products traded on a principal basis won’t be available to them.
A.G. Edwards & Sons Inc. of St. Louis said that it “anticipates significant resistance” from clients who have saved nearly 60% off its standard commission schedule and use its fee-based brokerage account to keep to a “disciplined re-balancing schedule.”
Other firms that filed affidavits were RBC Dain Rauscher Inc. of Minneapolis and Northwestern Mutual Investment Services LLC, the broker-dealer subsidiary of Northwestern Mutual Life Insurance Co. of Milwaukee.