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Regulation and Compliance > Federal Regulation > SEC

Feds May Erase Line Between Advisors And B-Ds

By Allison Bell

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Members of the U.S. Securities and Exchange Commission voted unanimously Wednesday at an open meeting to give broker-dealers more freedom to shift to fee-based and asset-based compensation arrangements.[@@]

But members of the U.S. Securities and Exchange Commissioners also have agreed to increase disclosure requirements for broker-dealers, and SEC Chairman William Donaldson has commissioned a study that will look into the possibility of the SEC eliminating the distinctions at the retail level between broker-dealers that work with retail customers and investment advisors who work with retail customers.

The SEC has been working for years on a rule that would endorse the practice of broker-dealers, including insurance companies’ many broker-dealer units, taking fee-based and asset-based compensation.

The SEC has argued that a shift in compensation arrangements might reduce broker-dealers’ incentives to use high-pressure sales tactics or churn customers’ accounts.

An early draft of the broker-dealer compensation rule, released in 1999, proved to be controversial and drew hundreds of comments, with most broker-dealers supporting the change and most financial planners, investment advisors and consumer groups opposing the change, according to the SEC staff presentation at the open meeting.

The SEC released a new draft of the rule in January and also established a temporary rule, set to expire April 15, permitting broker-dealers to accept fee-based and asset-based compensation without automatically triggering some consumer-protection provisions of the Investment Advisers Act.

The act provisions in question require financial professionals who give consumers financial advice to assume fiduciary obligations to look after the best interests of the consumers.

But broker-dealers already can give some, “incidental” financial advice, such as comments about whether bonds tend to be riskier than stocks, without assuming fiduciary responsibility for their clients’ well-being, according to the SEC.

Donaldson said Wednesday that he continues to believe that the SEC should base any distinctions it makes on the type of information a financial information a professional gives and how the professional provides the information rather than on compensation structures.

But Donaldson has requested that the SEC staff spend 90 days studying questions about how the SEC should regulate broker-dealers. The study should look at issues such as whether the SEC should strengthen the rules governing broker-dealers and whether the SEC should eliminate retail-level distinctions between broker-dealers and investment advisors, Donaldson said.

The rule that the SEC approved says financial firms may trigger the consumer-protection provisions of the Investment Advisers Act if they charge separate fees for advisory services, market themselves as financial planners or provide financial plans.

Broker-dealers also must comply with the Investment Advisers Act when they have discretionary authority over customer assets, according to the new rule.

When broker-dealers are serving consumers as broker-dealers, they now must give the consumers disclosures that state that, “Our interests may not always be the same as yours,” and “We’re both paid by you and sometimes by people who compensate us based on what you buy,” according to the staff presentation at Wednesday’s SEC meeting.

The SEC commissioners themselves noted at the open meeting that the broker-dealer compensation was getting surprisingly little attention because of the even more controversial nature of another item on the agenda, a proposed “trade through” rule that was supposed to guarantee that investors receive the best possible price. The SEC approved the trade-through rule.

Several holders of the Chartered Life Underwriter professional designation and several financial professionals who identified themselves as members of the National Association of Insurance and Financial Advisors, Falls Church, Va., wrote to the SEC to object to the draft of the broker-dealer compensation rule that was released in January.

At press time, NAIFA was still reviewing the SEC’s actions on the broker-dealer comp rule and Donaldson’s request for the study on broker-dealers’ relationships with customers.

Carl Wilkerson, a vice president at the American Council of Life Insurers, Washington, says the new broker-dealer comp rule codifies a series of interpretive letters and no-action letters issued over the past few years.

The new rule “provides more permanent regulatory certainty,” Wilkerson says.

The SEC has posted audio recordings of the meeting in 2 formats at http://www.sec.gov/news/openmeetings.shtml

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