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SEC Releases RAND Report; Industry Groups Share Concerns

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The Securities and Exchange Commission has shared the findings of a RAND Corporation study that compares how different regulatory systems for broker-dealers and investment advisors affect investors. The study’s release prompted a call from the Securities Industry and Financial Markets Association (SIFMA), representing some 650 broker-dealers and related organizations, to maintain consumer choice. The Financial Planning Association, for its part, is asking the SEC to stage an open forum to discuss the findings in the interest of investor protection.

It’s Here!For the complete text of both the summary and full conclusions of the RAND report on broker-dealers and investment advisors,

In April 2007, a federal court of appeals ruled in favor of the FPA in its case against the Securities and Exchange Commission over the so-called “Merrill rule” or “BD rule.” The court says the SEC exceeded its statutory authority under Section 202(a)(11)(F) of the Investment Advisers Act of 1940 when it adopted Rule 202(a) (11)-1, which exempts broker-dealers offering fee-based brokerage accounts from registering as advisors.

The SEC Act of 1934 (48 Stat. 881) regulates brokers and dealers, and the IAA Act of 1940 (54 Stat. 847) regulates investment advisors, explains the RAND report. “In light of these differences in definitions and regulations, the dividing line between broker-dealers and investment advisors has always been an important one. However, trends in the financial-service market since the early 1990s have blurred the boundaries between them,” the document says.

The SEC is poised to re-examine regulations covering brokers and investment advisors in light of this court decision and in consideration of the factual analysis in the 220-page RAND report, which the SEC commissioned. RAND is a government-funded research group based in Santa Monica, Calif.

“The RAND study confirmed that investing and saving for the future can be a complex and occasionally confusing endeavor,” says Ira Hammerman, senior managing director and general counsel of SIFMA. “But we must recognize that some of the confusion appears related to the broad range of customer choice. Any efforts to reduce confusion must ensure we don’t diminish customer choice.”

“The broker-dealer community is already more heavily regulated and scrutinized than any of its peers or competitors, including financial planners, Hammerman continues.

For its part, the FPA has asked the Securities and Exchange Commission to host a roundtable for consumer and industry groups to discuss the RAND report findings.

“Given the potential for major regulatory reform, we believe a broad dialogue with all interested parties is not only appropriate, but vital,” says FPA President Mark Johannessen, CFP. “The last advisory roundtable was held on May 23, 2000. We believe another one is overdue to examine the extensive findings by the RAND report before any new proposed rules are submitted to the commission by its staff.”

The 28,500-member FPA, based in Denver, is concerned that investors may lose the fiduciary protections of the Investment Advisers Act of 1940 if the SEC were to support a blended form of regulation for stockbrokers and advisors, according to Johannessen.

“RAND simply confirmed that there is an enormous amount of confusion facing investors,” says Johannessen, “since they can’t tell who is selling and who is advising. The SEC should use the RAND data to start with a clean slate to distinguish between sellers of product from advisors who are legally required to act in the client’s best interest.”

An overview of the RAND study included the following conclusions:o The industry is very heterogeneous, with firms taking many different forms and offering a multitude of services and products. o Partly because of this diversity of business models and services, investors typically fail to distinguish broker-dealers and investment advisors along the lines that federal regulations define. o Despite their confusion about titles and duties, investors express high levels of satisfaction with the services they receive from financial-service providers.o The number of investment advisory firms in the Investment Adviser Registration Depository (IARD) database grew substantially, from 7,614 in 2001 to 10,484 in 2006, though the number of brokerage firms declined from 5,526 to 5,068.o The number of brokerage firms in the Financial and Operational Combined Uniform Single (FOCUS) Report database fell from 5,526 to 5,068.o The number of dual registrants (firms in both databases) in these data remained relatively constant (between 500 and 550 each year).

Janet Levaux is the managing editor of Research; reach her at [email protected].


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