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The Honolulu Advertiser
Posted on: Thursday, July 22, 2004

Proposed SEC rule change won't serve interests of individual investors

By Michelle Singletary

There are some fights you just want to stay out of. But there is one going on between the Financial Planning Association and the Securities and Exchange Commission that directly affects consumers who pay for financial advice.

On Tuesday, the Financial Planning Association filed a lawsuit challenging a proposed SEC rule that Elizabeth Jetton, president of FPA, said "essentially allows broker-dealers to avoid the fiduciary and disclosure standards of the Investment Advisers Act of 1940 while acting as investment advisers and offering financial planning services."

Essentially, the FPA is objecting to a proposal that would clarify the exception that broker-dealers have from the definition of investment adviser.

The Advisers Act regulates the activities of investment advisers who get paid to give their views about investing in stocks and bonds. Firms that manage $25 million or more in investments must register with the SEC. Smaller firms and individual advisers must register with state securities agencies.

Investment advisers have a fiduciary responsibility to act in their clients' best interests. They are required to disclose any conflicts of interest and give advice suitable for their client. Brokers are also supposed to recommend suitable investments, but they aren't required to adhere to the higher standard of acting in a client's best interest, the FPA argues.

As it stands now, brokers — who only incidentally give financial advice to their customers — don't have to comply with the Advisers Act.

"What we fail to understand is why the SEC would propose a rule that allows brokerage firms to misrepresent and actively market themselves to investors as trusted advisers — instead of disclosing their true role as sales agents," said Jetton, a certified financial planner who also holds a broker's license. "The critical problem with the rule proposal is that it allows stockbrokers to call themselves financial planners and financial consultants, and to provide fee-based financial planning services under more lenient broker-dealer sales regulations."

The SEC declined to comment. The SEC proposed the broker-dealer rule in 1999, but hasn't taken action to adopt it.

In announcing the proposed rule change, the SEC acknowledged that in addition to traditional commission-based brokerage services, customers can now conduct securities transactions and receive related advice and other services by paying either a fixed fee or a fee based on a percentage of money they have on account with a broker-dealer.

The SEC said brokers weren't changing what they have been doing, so the agency sought to clarify whether they are covered by the Advisers Act. So under the proposed rule, broker-dealers providing investment advice to customers, regardless of how they are paid, would be excluded from the definition of investment adviser as long as they:

• Provide advice on a non-discretionary basis (in other words, don't buy and sell securities without contacting the client in advance).

• Ensure advice is "solely incidental" to brokerage services.

• Disclose to customers that their accounts are brokerage accounts.

What I don't like is that "solely incidental" is so open to interpretation that it's useless.

Increasingly, individual investors are seeking investment advice. Some turn to brokers. Who's to say that a broker won't step over that "incidental" advice line?

On this issue, I agree with the FPA. The line between who is and isn't an "investment adviser" has blurred.