Recently, an investor advocacy group petitioned the SEC to prohibit brokerage firms, who offer wraparound accounts, to also provide investment advice through both a duly registered BD and investment adviser.
This group claims that terminating this practice would resolve a very troubling regulatory issue. The group also petitioned the SEC to ban mandatory arbitration accounts for individual retirement accounts and allow for a private right of action by investors in a court. In any event, this group claims that its petition and potential subsequent SEC action were necessary because FINRA has refused to take any action to resolve this problem.
The groupl claims that FINRA refuse to enforce any fiduciary standard for investment advice relating to wrap accounts. This group believes that such a “non-practice” violates the U.S. Court of Appeals for the District of Columbia Circuit’s decision in 2007 in a case entitled Financial Planning Association v. SEC. The group believes that the D.C. Circuit stated that the SEC exceeded its authority in promulgating a rule exempting from regulation broker-dealers who also provided investment advice to client fee based accounts.
As a result of FINRA’s inaction, these dully registered wrap accounts are creating conflicts that are not being disclosed. Further, this group claims that confusion exists in the industry, leaving retail retirement investors without any appropriate legal process for claims of breach of fiduciary duty under the Investment Advisers Act of 1940.
Although it is unlikely this petition will ever be acted upon, it is important to keep in mind that, in an election year, anything is possible, and, who knows, the SEC may consider appropriate action at some time in the future.