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SEC Considers New Broker-Dealer Comp Solution

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Federal securities regulators are asking for public comments about a proposal that would give broker-dealers more freedom to shift to fee-based and asset-based compensation systems.[@@]

The 5 commissioners who serve on the U.S. Securities and Exchange Commission voted today at an open SEC meeting to seek a fresh, 30-day round of public comments on the new broker-dealer compensation proposal.

The commissioners also voted to approve a temporary rule that will let broker-dealers collect asset-based and fee-based compensation until April 15, 2005, without having to comply with the Investment Advisers Act.

The debate over broker-dealer compensation arrangements could affect life insurers’ that own investment advisor units or broker-dealer units.

Traditionally, federal securities laws have given investment advisors the ability to choose between fee-based, asset-based and commission-based compensation. Broker-dealers have depended mainly on commissions.

The SEC issued a proposed rule in 1999 that would give broker-dealers official permission to update their compensation arrangements. The SEC staff also assured broker-dealers that the SEC would not take action against them if they set asset-based and fee-based prices.

The proposed rule has received 1,700 comments, with most of the supporters being broker-dealers and most of the critics being investment advisors, financial planners and consumer groups, Paul Roye, the director of the SEC investment management division, said today at the open meeting, according to a written version of his remarks posted on the SEC Web site.

The Financial Planning Association, Denver, has filed a suit arguing that making the original proposal final would let broker-dealers bill themselves as financial planners without having to comply with the rigorous provisions of the Investment Advisers Act.

The SEC staff is recommending that the commissioners approve flexible broker-dealer compensation rules. But broker-dealers should help strengthen the distinction between the broker-dealer business and the advisory business by improving disclosure about when they are acting as advisors and by treating all accounts over which they have discretion as investment advisory accounts, regardless of the compensation system used, Roye said.

“Such an interpretation would provide a bright-line test…based on the exercise of discretion at a time when the line between advisory and brokerage services is blurring,” Roye said.

SEC Chairman William Donaldson, the former chairman of Aetna Inc., Hartford, praised the idea of moving away from using a financial service provider’s form of compensation to classify the provider as an advisor or a broker-dealer. “It seems to me that nvestors would be better served by an analysis that focuses more squarely on the nature of the services provided and the relationship between the investor and his or her service provider,” Donaldson said.

A recorded version of the SEC meeting is on the Web at

Written versions of Roye’s statement and 2 other statements delivered at the meeting are on the Web at


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