NASD to crack down on ETF, separates sales

Oct 3, 2005 @ 12:01 am

By Bruce Kelly

NEW YORK - NASD soon might be taking a hard look at how broker-dealers and their registered representatives sell exchange traded funds and separate accounts, as well as other investment products.

Robert Glauber, NASD chairman, in New York last month for a Securities Industry Association meeting, said that regulators need to look at the spectrum of investments "to ensure that investors are as well protected from abuses when they buy those as they are when they buy mutual funds."

"Product recommendations that brokers make ought to be based, first and foremost, on the customers' needs and desires, not on how easy the products are to sell," said Mr. Glauber, who was speaking at the New York- and Washington-based SIA's soft-dollar and institutional-brokerage conference.

Beyond insurance

"So to level the playing field, I think we need to start looking at fixed annuities, variable annuities and equity-indexed annuities, exchange traded funds and perhaps some other products, such as separately managed accounts," he said.

Washington-based NASD re-cently has examined insurance-oriented products. In August, it sent to its broker-dealer members a notice "suggesting that registered reps would do well to treat [equity-index annuities] as securities, even though it's not clear that they are in every case," Mr. Glauber said.

His mention of exchange traded funds and separately managed accounts caught some in the industry off guard. NASD officials recently have told the organization's broker-dealer members that it has been slowing down on sweeps, observers noted.

"Those are surprising comments to me," said David Spinar, chief compliance officer with Securities America Inc. in Omaha, Neb. "I haven't heard anything, I haven't seen anything, I haven't read anything about ETF sales practices."

ETFs have been frequently praised as a low-cost investment that provides diversification. They also have been hot sellers, and NASD sometimes uses that simple criterion in determining the investments about which to gather information.

Net inflows into the exchange traded fund industry totaled $18 billion year-to-date as of Aug. 31, according to Barclays Global Investors in San Francisco, and assets in U.S. ETFs stood at $251.7 billion.

Mr. Glauber's inclusion of separately managed accounts in his laundry list of investments also came as somewhat of a shock, industry lawyers said.

At Securities America, as with many independent-contractor broker-dealers, separately managed accounts are on a firm's investment advisory platform, not the broker-dealer platform, Mr. Spinar said.

Industry lawyers also said that NASD had last given formal guidance about separately managed accounts in two notices to members from 1994 and 1996.

"I've wondered when they were going to exert authority over investment advisory activities" said one lawyer, who asked not to be named.

NASD is looking to help broker-dealers, Mr. Glauber said in his speech.

"I know that there is a perception within the industry that we, as regulators, live to regulate - that we get out of bed in the morning and say: 'What can we do today to make our members' lives more difficult?'" he said.

That simply is not true, Mr. Glauber said

NASD's "passion is for protecting investors," he said.

Lightening the load

"To relieve some of the cost and burden on firms, NASD is prepared to play a role in creating and maintaining an online-database utility to host the point-of-sale documents for all mutual funds," Mr. Glauber said.

"NASD understands that regulation imposes costs, and we believe we have a responsibility to bear some of those costs."

NASD also is "putting the finishing touches" on a website that provides information to reps and investors about mutual fund breakpoint discounts, Mr. Glauber said.

The site will be launched in the next few weeks, and NASD is "bearing the cost of this website," he said. "This is the proper role for us," Mr. Glauber said.


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