SEC may reignite debate over advice

Mulls same standards for brokers, advisers

Feb 2, 2004 @ 12:01 am

By Frederick P. Gabriel Jr.

The Securities and Exchange Commission, looking at an industry where the traditional line between stockbrokers and investment advisers has blurred, is considering a proposal that would apply similar standards to both.

In an interview, SEC commissioner Harvey Goldschmid said that it might no longer make sense to hold some stockbrokers and investment advisers to different regulatory standards. The interview took place following a recent meeting of regulators, shareholder advocates and mutual fund executives in Oxford, Miss.

"I think we've got to sit back - and perhaps sit back with Congress - and ask ourselves whether something that worked in the 1930s, 1940s and 1950s is still going to work in the new century," he said.

Specifically, the SEC may consider whether brokers who "do the same thing" as advisers ought to be made to comply with the rules that govern advisers, Mr. Goldschmid said.

Although he made it clear that the SEC is unlikely to take up the issue in the near future, his comments are significant. First, they indicate that the agency may be willing to reignite a long-standing debate over the regulation of investment advisers and stockbrokers.

Mr. Goldschmid's comments also signal that the SEC is beginning to take seriously a complaint that consumer advocates have been lobbing with increasing intensity.

"People treat the words `broker' and `adviser' as if they are interchangeable," said Barbara Roper, director of the Consumer Federation of America in Washington.

"Brokers, despite calling themselves `financial consultants' or `financial advisers,' are salespeople. They don't have a legal obligation to assure that you get the very best product at the very best price."

Elizabeth Jetton, president of the Atlanta- and Denver-based Financial Planning Association, applauded Mr. Goldschmid's remarks and noted that the application of similar standards to investment advisers and brokers who dole out advice would benefit investors.

Nevertheless, she

said, it is probably unnecessary to hold all stockbrokers to the same standards applied to investment advisers.

"I believe there are cases when people just need to do a transaction," Ms. Jetton said. "They don't necessarily need to be under that fiduciary responsibility, because that comes with an awful lot attached to it."

Michael Udoff, vice president and associate general counsel for the Washington- and New York-based Securities Industry Association, concurs.

"I don't think it's a real issue," he said. "In the totality of regulation, the oversight of brokerage activities has a better historical track record. I don't think it's an issue of something being broken that needs to be fixed."

Stephen A. "Tony" Batman, chairman of the Atlanta-based Financial Services Institute, a newly formed trade group for independent broker dealers, said regulators should reconsider the regulatory framework for dispensing advice altogether. The laws regulating investment advisers under the Investment Advisers Act of 1940 are directed mainly toward institutional advisers rather than advisers to individuals, he said.

So, what does Mr. Batman think of the idea of holding brokers and independent advisers to the same standards?

"It should be explored," he said. "There is fertile ground for exploring a new model for anybody who renders advice, regardless of the form of compensation."

Arthur Grant, president of Cadaret Grant & Co. Inc., an independent broker-dealer in Syracuse, N.Y., said regulators need to do something. Specifically, they should decide whether to make the distinction between brokers and investment advisers more clear or apply similar standards to both groups, he said.

"My only problem with that would be if it meant brokers have to become fiduciaries" said Mr. Grant.

"I don't think that's a great idea," he added. "If brokers were classified as fiduciaries, it would create more conflicts than it resolves. Do t

hey represent issuers or do they represent investors?"

The Investment Advisers Act requires that people who give in- vestment advice register as advisers unless the advice is "incidental" to their business, as is the case with those who sell stocks without offering comprehensive advice.

The law also requires that anyone who gets "special compensation" - interpreted thus far as anything other than commissions - must register as an adviser.

Currently, NASD oversees stockbrokers. The SEC regulates advisers managing more than $25 million in assets, while individual states regulate advisers with less than that.

Both groups must meet strict - but varying - standards.

Stockbrokers must adhere to an NASD "suitability" rule, which requires them generally to make reasonable efforts to obtain information concerning a customer's financial status, tax status, investment objectives and other relevant information before making a recommendation.

Investment advisers are deemed to be "fiduciaries," which essentially means they are expected always to act in their clients' best interests and to disclose any conflicts of interest they as advisers may have. The fiduciary standard applied to investment advisers is widely viewed as more stringent then NASD's standard of what constitutes a suitable sale.

In recent years, the line between stockbrokers and investment advisers has gotten hazy. That has become especially true as more stockbrokers have begun charging fees based on assets under management, as opposed to collecting commissions on product sales.

For years, the SEC has flirted with the idea of allowing NASD to assume responsibility for overseeing investment advisers - an idea that industry trade groups such as the FPA have strongly opposed.

The SEC has also raised the idea of putting advisers under the oversight of a self-regulatory organization. Creating an SRO would require an act of Congress.

The SEC in 1999 issued a proposal to exempt investment advisers at bro

ker-dealers who offer fee-based services from registering with the agency. Since then, the rule has hung in regulatory purgatory, and it is likely to remain there at least until the continuing mutual fund trading scandal blows over.

That proposal, known as "the Merrill Lynch rule," paved the way for such brokerage firms as New York's Merrill Lynch & Co. Inc. and San Francisco's Charles Schwab & Co. Inc. to begin touting aggressively their advice-oriented services.

"Their marketing departments are doing what they can to make it seem they do what we do," said Brent Brodeski, a managing partner at Sa- vant Capital Management Inc. a fee-only advisory firm in Rockford, Ill., that oversees $540 million in assets.

"Prospective clients come in all the time and say, `I'm talking to two financial advisers: you and this guy at Merrill Lynch.' It makes you cringe," he said.


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