Broker or Adviser? The SEC Mulls

The two roles have merged in the public eye, as even the agency now acknowledges. Its next step: Coming up with a single set of rules

By Amey Stone

[an error occurred while processing this directive]On Apr. 6, the Securities & Exchange Commission pretty much admitted it: There's little difference between the roles and responsibilities of a stockbroker, an investment adviser, and a financial planner. Yet under current rules, their clients may be entitled to different legal protections depending on whether the financial pro in question is officially registered as an investment adviser with the SEC or as a broker with the National Association of Securities Dealers.

Regulators finally may be moving to fix that. SEC-registered investment advisers have a stronger fiduciary requirement to represent the best interests of their clients than do broker-advisers. But why should two different sets of rules and requirements apply to essentially the same job?

The SEC didn't solve this central issue on Apr. 6. But it did admit the problem exists (always the first step) and promised to study the question. Commission Chairman William Donaldson asked SEC staff members to make recommendations within 90 days on how to best reconcile the two regulatory regimes.


  The SEC also ruled on Apr. 6 on a narrower question -- when are brokers who charge an annual fee for their services required to register as investment advisers? This question had brought the larger, much thornier one to its attention. It decided to exempt fee-based brokers from registering as investment advisers with the SEC as long as they meet certain conditions -- which the agency spelled out in greater detail than in the past.

Now stockbrokers don't need to register with the SEC as investment advisers as long as they meet three main conditions: First, their client accounts need to be nondiscretionary (which means they can't make trades without client approval). Second, they can't sell financial plans or represent themselves as financial planners (who provide comprehensive advice on reaching a broader set of lifelong goals than just investing). And finally, they must issue new disclosures stating that clients are getting a brokerage account, not an advisory account, and give clients someone else at the firm to contact to ask questions about the distinction between the two.

Commissioners agreed that the additional disclosure can sometimes raise more questions than it answers and ultimately could increase investor anxiety. Commissioner Cynthia Glassman says the SEC's research found that consumers "thought that someone with a title other than broker was somehow more than a broker." Truth is, few in the securities industry call themselves a stockbroker anymore (see BW Online, 4/6/05, "Death of a Stock Salesman").


  Seems the SEC is finally realizing it has a lot more work to do in this area as the role of financial adviser continues to evolve. Anthony Sabino, a professor of business law at St. John's University, says consumer protection is diminished by having two sets of laws in place. "You lose the efficacy of both sets of regulations," he says. "The fear is that the vagueness will be exploited by less scrupulous people."

And though the Financial Planning Assn., a major financial-planning trade group, commends the SEC for improving disclosure, it called on the commission to eliminate the legal distinctions the group considers unnecessary. "The approach taken by this rule will be a disservice to the public over the long term if it only formalizes two different kinds of regulation for the same advisory service," the FPA said in a statement.

"We urge the SEC to go even further," says Tim Pinnington, chief executive of TD Waterhouse USA, which provides services to independent financial advisers. He feels the decision leaves too much of the onus on individual investors to figure out what type of investment professional they're working with and why it matters. (For some help, see BW, 4/11/05, "Broker or Adviser?")


  Full-service brokerages likely see the SEC's moves as a mixed bag. While they're happy they still get the exemption that allows their brokers to build a fee-based service -- $268 billion of customer assets are already in such accounts, the SEC reports -- brokers must provide additional disclosure to clients. Plus, they face the risk of new and perhaps increased regulation in the future.

In a statement, Merrill Lynch (MER ) said it "looked forward" to working more with regulators on the topic. Yet its stock price, as well as that of Morgan Stanley (MWD ) and A.G. Edwards (AGE ) fell on the news of the SEC decision (before recovering throughout the day) -- a sign that the ruling benefits consumers.

The SEC is beginning to delve into what the marketplace already recognizes: the job descriptions and customer expectations of brokers and investment-advisers have become one and the same. But the kind of regulatory overhaul needed to reflect that reality will take months -- if not years -- of additional study, consultation, and deliberation to make sure it's done right. At least investors can cheer that the SEC has gotten the ball rolling toward change.

Stone is a senior writer for BusinessWeek Online in New York

Edited by Beth Belton

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