BARNEY FRANK, MA, CHAIRMAN W.j). ~ou~e of i\epre~entatibe~ SPENCER BACHUS. AI., RANKING MEMBER PAUL E. KANJORSKI, PA OAVID SCOTT, GA RICHARD H. BAKER, LA JED HENSARUNG, 'IX MAXINE WAlERS, CA AL GREEN, TX DEBORAH PRYCE, OH SCOTT GARRETT, NJ CAROLYN B. MALONEY, NY EMANUEL CLEAVER. MO UCommtttee on jftnandal ~etbites MICHAEL N. CASTLE, DE GINNY BROWN·WAITE, FL LUIS V. GUTIERREZ, IL MELISSA L. BEAN, IL PETER T. KING, NY J. GRESHAM BARRETT. SC NYDIA M. vEL.AzaUEZ, NY GWEN MOORE. WI ~a!,llurn ~uilbinlJ EDWARD R. RDYCE, CA RICK RENZI, foZ MELVIN I.WATT. NC UNCOLN DAVIS, TN 2129 1$ouse l!&fffce FRANK D. LUCAE, OK JIM GERLACH, PA GARY L. ACKERMAN, NY ALBIO SIRES, NJ RON PAUl. TX STEVAN PEARCE, NM JUUA CARSON, IN PAUL W. HODES, NH 'Basbington, 11~ 20515 PAUL E. GILLMOR. OH RANDY NEUGEBAUER, TX BRAD SHERMAN, CA KEITH EllISON, MN SlEVEN C.I.ATOURETTE, OH TOM PRICE. GA GREGORY W. MEEKS, NY RON KLEIN, FL OONALO A. MANZUllO, IL GEOFF DAVIS, KY DENNIS MODRE, KS 11M MAHONEY. FL WALlER B. JONES. Jft.• NC PATRICK T. McHENRY. NC MICHAEL E. CAPUANO, MA CHARLES WILSON, OH JUDY BIGGERT.IL JOHN CAMPBELL. CA RUB~N HINOJDSA, TX EO PERLMUTTER, CO CHRISTOPHER SHAYS, CT ADAM PUTNAM, FL WM LACY CLAY. MO CHRISTOPHER S. MURPHY, CT GARY G. MILLER, CA MICHELE BACHMANN, MN CAROLYN McCARTHY, NY JOE OONNEllY.IN SHELLEY MOORE CAPITO, WV PETER J. ROSKAM, IL JOE BACA, CA ROBERT WEXLER, FL TOM FEENEY. FL KENNY MARCHANT. TX STEPHEN F. LYNCH, MA JIM MARSHALL. GA BRAD MILLER, NC DAN BOREN, OK JEANNE M. ROSLANOWICK July 10, 2007 STAFF DIRECTOR AND c:' ,...., CHIEl'COUNSEL c..-:> => :A') => :;;0 -.... rqo· c:.... ;0 The Honorable Christopher Cox U>::;: c= -0,,;> c- fI1 ~ Chairman o=- (') :;:::0 ..... Securities and Exchange CommissiOli o=x Pl~ i'i1J> ~< 100 F Street, NE Zz -0 Washington, DC 20549 ('") . ::li: - m(J) en c: o. 8°J) Z N Dear Chairman Cox: C> -1 f' I am writing to urge the Securities and Exchange Commission's ("SEC" or "Commission") prompt attention to an issue arising out ofthe decision by the United States Court ofAppeals for the District ofColumbia in Financial Planning Association v. SEC (rtFPA ''). As you know, the court in FPA vacated a 2005 SEC rule exempting from the requirements ofthe Investment Advisers Act of1940 broker-dealers that receive fee-based compensation and provide investment advice that is "solely incidental" to the broker-dealer's brokerage services. The court's ruling has placed into legal jeopardy more than one million brokerage accounts, and could fundamentally alter the relationship between investors and brokers. Financial markets require regulatory clarity and certainty. However, the Court in FPA has overturned years ofestablished business practices between brokers and consumers, making it incumbent upon the SEC to ease the transition to a new regime. Regulatory inaction in this instance is, in my view, inconsistent with the goal ofassuring that the U.S. capital markets remain the most efficient and competitive in the world based on their responsiveness to investor needs and protection ofinvestor choice. As you know, fee-based brokerage grew out ofthe 1995 SEC-sponsored Tully Commission Report, which found that this form ofcompensation better aligned the interests ofbrokers and consumers than commission-based brokerage. There are at least one million consumers who have chosen to put $300 billion in fee-based brokerage accounts, and nearly halfofthese are being held by customers as retirement accounts. Since 2005, the broker-dealer industry has reasonably relied on SEC Rule 202, and prior to that a 1999 no-action letter issued by the COn'llnission, to permit the use ofasset-based compensation. The industry had nine months to implement the rule when it was passed, and it largely reflected existing practice. Responding to a reversal ofthis long-standing policy is a much greater task, and it appears that the industry will have far less time to come into compliance than it did when fee-based commission arrangements were fIrst authoriied. Unless the SEC intervenes, there will not be time for an orderly transition in which customers ofbroker-dealers are adequately informed about the changes caused by the FPA opinion and their alternatives. Firms cannot simply "convert" their clients' brokerage accoUnts into investment advisory relationships. Investment advisory and brokerage services are separate and distinct and each is governed by different laws, regulations and duties. Investment advisory relationships can only be created after all the necessary and appropriate discussions with clients have occurred, and of course, the clients' affirmative agreement must be obtained. Further, oDly upon that agreement can all the required profiling, selection process and docwnentation start to occur. While I fully support your decision to approve additional emergency funding to accelerate the RAND Corporation study ofthe marketing, sale, and delivery offmancial products and services to investors in this area, the Commission should not wait until the study's expected December release. Instead it should provide brokerage customers and providers the certainty they require to continue their chosen fmancial relationships. Thank you for your consideration. I look forward to your response. );ff~ Spencer Bachus Ranking Member.