Tad Borek wrote:

- quote -

Now I guess I'm confused. I haven't been following this issue.
But, while the original post talked about opposing the dropping
of RIA licensing for brokers, it sounds like what a number of
people really want is NEW, ADDITIONAL regulation of brokers. Do I
understand this so far?

MTW

MTW wrote:
- quote -

I think you've inadvertently asked a loaded question! Depending on who
you ask, it's either imposing a new regulation, or stopping brokers from
getting away with avoiding the regulations that apply to them.

The regulation dates back to 1940 so it's hard to say it's a new one.
The Investment Advisors Act of 1940, which defines RIAs, says that if
you provide investment advice for a fee, you need to register as an RIA,
and make a bunch of disclosures to your clients. And you are by
definition a fiduciary to your clients. There are other things -
advertising restrictions, and restrictions on statements about
investment performance.

So it seems that if you're saying "buy X Y and Z" and collecting a fee
(not a commission - which is what broker regulations address) then you
should fall under that law. I do, and you would.

Brokers have tried to dodge this by relying on the concept that advice
"incidental to the sale of securities" doesn't fall under the 1940 act.
Fine but the "Merrill Rule" is a much broader loophole. Under it
Wirehouse A could charge a client a 1.5% annual advising fee, but avoid
registration under the Act as an investment advisor, and avoid being
labeled a fiduciary. The marketing and compensation go beyond "sales for
commissions" but not the liabilities. So fiduciary duty is replaced by
"caveat emptor."

I see no problem with them getting into the "planning & advice" business
but only if they stop trying to dodge the responsibility for the
planning and advice that they sell. This seems pretty basic.

The SEC has sat on its hands for something like 4 years since proposing
that the Merrill Rule be adopted formally via regulations (merrill & th
industry pushed for the rule, incidentally). It's been revived as an
issue because a planner/advisor trade association (that I am not a
member of) has sued the SEC to get off its duff and address the issue
once & for all. We'll see who has the stronger lobby on this one...I'm
guessing Merrill.

-Tad

MTW wrote:
- quote -

MTW,
I'll kick in some more about this one, it's a big issue in the industry
at the moment. As I think you know I'm a registered investment advisor
(RIA) & attorney and have looked at the question wearing both hats.

You're right that brokers are already regulated but the Merrill rule is
from a client's perspective, or a client's lawyer's perspective, a big
liability loophole. To me the crux of the issue is the responsibility
that brokerage firms take for their recommendations. It's much different
than for RIAs. The statutes that define RIAs and our system of
regulation state explicitly that RIAs are fiduciaries, meaning we need
to act in clients' best interests. And to a lawyer that means that we
can be sued if we don't fulfill the duty - there's no dodging the
responsibility. These rules apply to individuals providing specific
investment recommendations and charging for the service (including me,
even though I'm an attorney, and you, even though you're a CPA, if the
topic is investments - we have an extremely narrow exception to RIA
registration, but no "Merrill Rule").

Under the Merrill Rule (which came out of a court case against Merrill
Lynch) brokerage firms are allowed to make money by pitching themselves
as providing planning and investment advice, but dodge liability as
fiduciaries by saying it all falls under the sale of securities. So
they're taking on the planner/advisor role in a marketing sense, but if
push comes to shove they'll say "who us, fiduciaries? no, we're simply
selling product." The old have-cake/eat-it-too thing. Skim any major
magazine right now and it's clear that the wirehouses are positioning
themselves more as advisors than product specialists.

This is a very important rule because it allows the firms to earn
profits off of clients that wouldn't be appropriate for a true
fiduciary. Some examples - recent ones - include the excessive use of
in-house mutual funds, selling mutual funds with sales incentives,
selling mutual funds of the inappropriate share class, and of course
Merrill's own cheerleader-analyst Henry Blodgett and that whole class of
activities. Essentially, the activities that boost firm profits at the
expense of customers. With a fiduciary that type of activity is off limits.

The "contra view" on this is that brokers are already regulated, as you
said, so this avoids excess regulation. That fiduciary liability isn't
the be all & end all to broker responsibility - your broker owes you
other duties and you can sue your broker under other theories. I think
that view is held by people who haven't gone through the process of
attempting to do so, or aren't concerned with how difficult it really
is. If the Merrill Rule dies, a lot about brokerage firms' business
operations would, I believe, need to change - with the result being
investors getting more from their brokers.

-Tad

LKYPon wrote:

- quote -

But in the case of stockbrokers, they ARE licensed and heavily
regulated. I would imagine that the goal of the SEC is to
eliminate DUPLICATIVE regulation.

As a CPA in Washington State, I can't offer "financial planning"
services without ALSO obtaining a state investment advisors
license. What is the point of that, especially if the planning
advice falls short of recommending SPECIFIC securities? It is
DUPLICATIVE licensing. It simply increases costs that someone
(the public) must bear, but doesn't appreciably increase consumer
protections.

I guess I just don't have a big problem with the SEC proposal.

MTW

The Securities and Exchange Commission, which regulates both brokerage
firms (like Merrill Lynch) and financial planners, has proposed a rule that
EXEMPTS brokerage firms from regulatory oversight over their advisory
activities. The argument that the brokerage firms are putting forth is
that advice is INCIDENTAL to their primary objective of selling products.
We in the financial planning community are dismayed to see the same
brokerage firms advertising themselves as trusted ADVISORS and making no
mention that any advice they provide is merely to aid them in the sale of
products. I personally believe that this is an instance of false
advertising that the SEC should crack down on rather than give its blessing
to.

Both the Consumer Federation of America and AARP also strongly object to
the proposed rule, but we need people who are not engaged in the financial
services field to make their feelings on this issue known to the SEC. The
SEC is accepting comments until September 22nd, and I urge you to go to the
URL below and give them your thoughts.

Comments can be submitted electronically to the SEC at
http://www.sec.gov/cgi-bin/ruling-co...e_path=/rules/
proposed/s72599&file_num=S7-25-99&action=Show_Form
...


Here is the text of the comments I submitted:

I urge you to WITHDRAW your proposal to exempt broker/dealers (or any other
financial organizations) from the requirements set forth in the Securities
Act of 1940 when they offer fee-based brokerage programs.

It is contrary to the public's interests to be offered financial advice
without the advisor being subject to regulatory oversight. It is also a
specious argument that any financial advice could be "incidental" to the
sale of products. That would be the same as saying that the knowledge
required to fill a medical prescription properly is "incidental" to the
sale of that drug and therefore pharmacists need not be licensed because
they're merely selling products.

Companies should not be allowed to offer financial ADVICE (as distinct from
sales recommendations) AT ALL unless they are willing to conform to the
higher standards implied by that. It is clear from the marketing efforts of
such firms that they are positioning themselves as advice-givers rather
than sellers of products.

If a company is PRIMARILY in the business of selling products, it should
not be allowed by regulators to market itself as an advisor if it isn't
willing to be regulated as such - that is FALSE ADVERTISING, which
presumably is still frowned upon by the SEC.



Marcee Yager, CFP (R)
President
FINANCIAL VISION WEST