Financial Planning Ass'n v. Securities & Exchange Commission

Court of Appeals for the D.C. Circuit
375 U.S.App.D.C. 389, 2007 U.S. App. LEXIS 7356, 482 F.3d 481 (2007)

ELI5:

Rule of Law:

The Securities and Exchange Commission cannot use its general exemptive authority under the Investment Advisers Act to create new exemptions for broker-dealers that contradict the specific statutory conditions Congress expressly established for that class of persons.

Facts:

Congress enacted the Investment Advisers Act (IAA) of 1940 to regulate investment advisers and protect the public from fraud, requiring advisers to register and adhere to fiduciary standards.
The IAA explicitly exempted broker-dealers from these requirements, but only if their advice was solely incidental to their business and they received 'no special compensation' for it.
Historically, broker-dealers charged commissions on transactions, which was not considered 'special compensation.'
Over time, the securities industry evolved, and broker-dealers began offering 'fee-based programs' where customers paid a fixed fee or a percentage of assets instead of commissions.
This new fee structure constituted 'special compensation,' which technically triggered IAA regulation for these broker-dealers under the original statute.
To accommodate this industry change, the SEC promulgated a final rule exempting these fee-based broker-dealers from the IAA, even though they received special compensation.
The Financial Planning Association, representing investment advisers subject to the IAA, faced competition from these newly exempted broker-dealers.

Procedural Posture:

The Financial Planning Association filed a petition for review of the SEC's final rule in the United States Court of Appeals for the District of Columbia Circuit.

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Issue:

Does the Securities and Exchange Commission have the authority under Section 202(a)(11)(F) of the Investment Advisers Act to exempt broker-dealers from regulation as investment advisers when they receive "special compensation" for advice, despite the statute specifically subjecting broker-dealers who receive such compensation to the Act?

Opinions:

Majority - Circuit Judge Rogers

No, the SEC exceeded its authority because the statutory text clearly addresses the precise conditions under which broker-dealers are exempt. The court applied the first step of the Chevron framework, determining that Congress had spoken directly to the issue. The statute explicitly exempts 'any broker or dealer' who does not receive special compensation. By attempting to exempt broker-dealers who do receive special compensation, the SEC's rule contradicted the unambiguous text of the Act. Furthermore, the SEC's reliance on subsection (F), which allows exemptions for 'other persons,' was invalid because broker-dealers are not 'other persons'—they are a class already specifically addressed in subsection (C). The agency cannot use a general catch-all provision to rewrite specific statutory limitations imposed by Congress.

Dissenting - Circuit Judge Garland

Yes, the statute is ambiguous regarding the scope of the SEC's exemptive power, and the agency's interpretation warrants deference. The terms 'such other persons' and 'intent of this paragraph' in subsection (F) are not clear and could reasonably be interpreted to mean any individual not actually covered by the specific exemptions, rather than excluding the entire class of broker-dealers. Because the statute is ambiguous, the court should have proceeded to Chevron step two. Under this step, the SEC's view—that fee-based brokerage is functionally similar to traditional brokerage and should be treated similarly—was a reasonable policy choice to which the court should defer.

Analysis:

This decision is a significant application of the Chevron doctrine, specifically reinforcing the rigor of 'Step One' analysis. It establishes that regulatory agencies cannot use general exemptive powers or 'catch-all' clauses to override specific statutory boundaries set by Congress. The ruling prevented the SEC from unilaterally reshaping the regulatory landscape of financial advice to accommodate new business models when doing so conflicted with the plain text of the 1940 Act. Practically, this forced fee-based broker-dealers to either register as investment advisers (subjecting them to fiduciary duties) or restructure their pricing models, leveling the playing field between financial planners and stockbrokers offering advisory services.

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