A federal court ruled that October 1, 2007 is the date that the "Merrill Rule" will be repealed. On March 30, 2007, the U.S. Court of Appeals for the D.C. Circuit vacated the SEC rule exempting broker-dealers from the registration and fiduciary requirements of the Investment Advisers Act of 1940, the so called "Merrill Rule." On April 12, 2005, the SEC adopted a final rule to broaden the exemption of broker-dealers from the registration requirements of the Advisers Act. Under the Merrill Rule, broker-dealers could provide investment advice for a fee, subject to certain disclosures, without being subject to the fiduciary requirements of the Advisers Act.
The D.C. Circuit stated the SEC exceeded its rule-making authority. The Advisers Act specifically exempts a broker-dealer from registration as an investment adviser provided the advice is "solely incidental" to the brokerage transaction, and the broker-dealer does not receive "special compensation" for the advice.
The brokerage industry, led by its trade group the Securities Industry and Financial Markets Association had sought a longer extension to transition the estimated 1 million fee-based customer accounts at broker-dealers. Because of the court ruling, these accounts now will have to either be converted to commission-based accounts or advisory accounts by October 1, 2007. Brokerage firms will have to adjust their systems immediately and communicate the new arrangements to customers promptly. For example, brokerage firms will no longer be able to engage in principal trades with customers who have fee-based advisory accounts. In addition, registered representatives assigned to such accounts will have to become registered as investment adviser representatives.
It has been reported that the SEC may grant dual registrants some relief on principal trading by the October 1, 2007 deadline. Under the proposal, dual registrants would be allowed to obtain a single written consent from clients to conduct principal trades in non-discretionary accounts.
Please click http://www.sifma.org/ to access the principal trading rule proposed by SIFMA.