WASHINGTON -- A federal appeals court dealt the Securities and Exchange Commission another blow by tossing out a 2005 rule that protected fee-based brokerage accounts from certain regulations.

The 2-1 decision by the U.S. Court of Appeals for the District of Columbia Circuit was the fourth recent ruling finding fault with the SEC's interpretation of its own rules or rulemaking process. The SEC now faces increased pressure to draft rules that will withstand court challenges.

"This is a case that the SEC should have won, and I believe that its problem is that it has really injured itself in the eyes of the D.C. Circuit by virtue of the way it handled the mutual-fund rulemaking case twice and the hedge-fund rulemaking," said former SEC Chairman Harvey Pitt. "The SEC is going to have to regain the trust of the D.C. Circuit."

In Friday's ruling, the court said the SEC "exceeded its authority" when it exempted fee-based brokerage accounts from the Investment Advisers Act, which requires detailed disclosures of conflicts of interest, disciplinary history, and requires advisers to act in the best interest of their clients. Commission-based brokerage accounts were already exempt from the rule, and the SEC said it was exempting the fee-based accounts to adjust to the evolving marketplace and noted those accounts were already subject to other regulations.

In a dissent, Judge Merrick Garland said the SEC's interpretation of its rule was "reasonable." That could open the door for the SEC to appeal, although it hasn't done it that often.

"We will analyze the opinion and proceed appropriately in investors' best interests, SEC spokesman John Nester said.

The Financial Planning Association, which represents investment advisers who must adhere to the Investment Advisors Act and faced increased competition from the new fee-based brokerage accounts, sued the SEC over the rule and declared Friday's decision a "major victory for consumers."

There were more than 996,000 fee-based brokerage accounts with $277.4 billion in assets at the end of 2006, according to Cerulli Associates, a Boston financial-services research firm. Those fee-based brokerage accounts make up 16% of all fee-based account programs, the research firm said. Yet, the number of these accounts has declined from more than one million at the end of 2005.

The SEC hasn't offered guidance to brokerage firms that offer the fee-based accounts. The securities industry trade group said until guidance is offered it is encouraging its members "to comply with the decision while simultaneously working to provide customers as much disclosure as is reasonable."

In the 1990s, brokers began offering fee-based accounts, rather than commission-paid accounts. Representatives in those funds only have to place clients in investments that are "suitable" but could be in the interest of the broker. The SEC, worried about brokers "churning" client accounts to generate commissions rather than putting clients in reasonable investments, encouraged the new fee-based accounts.

In 1999, the SEC said the new fee-based accounts were also exempt from the additional disclosure and duty requirements that are required under the Investment Advisors Act, since they provided investment advice bundled with brokerage services, such as execution.

The SEC didn't finalize the rule until 2005, under then-Chairman William Donaldson, prompting the lawsuit from the planners association.