‘Merrill Rule’ Smack-Down good for alpha-centric investing
May 23rd, 2007 | Filed under: Hedge Fund RegulationAs advisors and brokers amongst you are well aware, the D.C. Court of Appeals recently hosted the regulatory equivalent of pro wrestling’s “Smack-Down”. The result - a defeat for the SEC - was hailed by some as a “long-shot victory” and a “stunning reversal of events“. And the SEC’s decision not to appeal a court decision put a final nail in the coffin of the controversial “Merrill Rule” just last week. The result is a clearer delineation between brokers and financial planners, thus removing one common barrier to alpha-centric investing for many retail investors - confusion.
The rule was initially adopted by the SEC in 2005 to allow broker-dealers to offer fee-based brokerages accounts without the requisite fiduciary responsibilities faced by fee-based financial planners (although certain other requirements were mandated in the place of those fiduciary responsibilities). Naturally, trade groups like the Financial Planners Association (FPA) cried foul, arguing in their capacity as de facto “advisors”, these broker-dealers faced a conflict of interest between their role “advising” clients and their role selling securities on a commission basis.
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[…] A few days ago, we wrote a posting on the repeal of so called “Merrill Rule†that allowed brokers to offer fee-based accounts without the full fiduciary responsibilities of traditional fee-based financial advisers. We argued that repealing this rule was good for those who want their adviser to present them with pure alpha or pure beta products without regard to the compensation they would receive from each. In short, we argued it was good for alpha-centric investing. […]