punted on rules that would require reps at brokerage houses to register as investment advisors. The issue has been forced by fee-based advisors who complain that brokers who offer fee-based wrap accounts are misleading investors when they call themselves advisors. The final vote was 5 to 0 in favor of keeping a temporary rule that expires on April 15.
SEC Chairman William Donaldson
told the Commissioners in an open meeting Wednesday that the Division of Investment Management had recommending a temporary rule to permit broker-dealers to offer asset-based and fee-based pricing to their customers without compliance with the Investment Advisers Act. Donaldson said the SEC will revisit the rule again next year when the temporary rules expire.
"I agree that the particular form of a broker-dealer's or investment adviser's compensation ought not to serve as a bright-line boundary between the regulatory obligations of these financial service providers," Donaldson explained. "Although such an inflexible test may once have been adequate as a 'proximate solution to an insoluble problem,' it seems to me that investors 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."
, director of the SEC's Investment Management division, told the Commissioners that the division received more than 1700 comments on the rule proposal.
"Virtually all of the letters supporting the rule came from broker-dealers and those opposing the rule came mostly from investment advisers, financial planners and consumer groups," said Roye. "While broker-dealers viewed the new programs as providing the same services that broker-dealers have traditionally provided to their customers, investment advisers, including financial planners, saw the switch to a fee-based compensation scheme as a transformational event -- no longer were customers paying for brokerage transactions, but for a client relationship in which advisory services predominate. They argued that the rule, if adopted, would deny the account holders important protections provided by the Advisers Act. Many commenters also urged that the Commission provide greater guidance on when advice is incidental to brokerage."
Roye did recommend that all advertisements for an exempted account contain a "prominent statement that it is a brokerage account and not an advisory account" and that the firm's obligation with respect to such accounts may differ from those of an investment advisory.
"We believe this additional disclosure will assist investors in understanding the obligations attendant to a brokerage account and confirms the responsibility of the broker-dealer to explain to its customers the differing nature of brokerage and advisory accounts," said Roye.
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