Dave Interviewed by Maria Bartiromo on CNBC’s Closing Bell
It was May 11, 2007 and the SEC was one day away from the deadline to appeal the March 30 decision to strike down its controversial Rule 202, known officially as the “broker/dealer exemption” and unofficially as “The Merrill Lynch Rule.” The Merrill Lynch Rule’s purpose was to allow broker/dealers like Merrill Lynch to skirt the stringent fiduciary and disclosure rules of the 1940 Investment Advisor act while offering fee-based accounts that otherwise resembled the offerings of fiduciary advisors. While a registered investment advisor under the 1940 Act is required to disclose all conflicts of interest and to act as a fiduciary in putting clients’ interests first, broker/dealers are held to a much lower “suitability” standard. Under the proposed Merrill Lynch Rule, broker/dealers could, among other things, offer fee-based accounts in which they bought and sold securities from their own inventory without disclosing to customers that they were essentially double-dipping, putting the broker’s interests ahead of the client’s. The rule had been challenged in court by the Financial Planning Association, which Dave had chaired in 2004, when the FPA was first contemplating legal action against the SEC over the anti-consumer proposal. In this interview, Bartiromo notes that the brokerage industry claims it would lose billions of the exemption were rolled back. Dave points out that this is a ridiculous argument, noting that the brokers would lose money only because it’s more profitable when you can take advantage of clients, acting without transparency or disclosure and not subject to a fiduciary standard of care.
In the end, the SEC decided not to appeal the DC Court’s ruling and the Merrill Lynch Rule ceased to exist. As did Merrill Lynch itself in January of 2009 when it was taken over by Bank of America after suffering $52 billion of losses as a consequence of the sub-prime meltdown that Merrill had done so much to create. Truly, transparency and disclosure were the only thing that might have prevented the Great Recession and all the regulatory and legislative forces during the preceding decade had been moving in the opposite direction.