Financial Planners Say SEC Brokerage Proposal Unfair

Financial planners are urging the Securities and Exchange Commission to fix a problem it created when it developed a proposal allowing brokers to act as financial advisors in some cases.

That was in 1999. The proposal was never adopted, but because the SEC promised no enforcement until it was finalized, brokers have acted as if the rule is in effect, financial planners told the Wall Street Journal.

The SEC has created a situation in which brokers are enriched, investors are short-changed and financial planners are forced to follow far more stringent rules than their competition, the planners say.

The Financial Planning Association, which has opposed the proposal from the start, planned to send a letter to the SEC on Monday urging it to abandon the proposal or change it dramatically.

"It's difficult to challenge a rule that's never been adopted, so this will help force the issue," said Duane Thompson, who directs advocacy for the association and its 28,000 members.

The proposal would allow brokerage firms to offer investment advice and fee-based accounts as long as three tests are passed. First, advice must be "solely incidental" to brokerage services. Second, the customer must retain discretion over the account and last, the customer must be informed that it is a brokerage account. The proposal would also allow brokers to forgo commissions and be paid for advisory services even though they aren’t investment advisors, the Journal reported.

Critics of the proposal say that brokers, instead of trying to generate commissions, are charging pricey asset-based fees. Customers get little for their money, planners say. The former National Association of Securities Dealers acknowledges that fee-based programs can be more expensive for customers who do not trade actively.

If the proposal isn’t scrapped altogether, financial planners want investor protections to be added. The way it stands now, brokers must make recommendations that are "suitable" for customers; advisors must act in the "best interest" of their customers.

Advisors must provide complete information on past investment-performance, disciplinary problems and potential conflicts of interest. They must also get permission from customers before buying or selling stocks from their own inventory, for instance.

Advisors also complain that the SEC is required by federal administrative procedures to act in a timely manner. Failing to finalize a proposal discussed nearly five years ago does not meet that standard. They assert that the SEC has failed to provide clear regulatory guidance and is misinterpreting powers granted by Congress.

Former SEC attorney Mercer Bullard, now a University of Mississippi law professor and founder of Fund Democracy, a fund shareholder advocacy group, told the Journal that the SEC buckled under pressure from Wall Street firms and gave brokers "carte blanche" to act as advisors.

Bullard said by promising no enforcement, the SEC effectively adopted the rule by proposing it.

"I think it's illegal and I think the SEC knows it," he said.

Now, Bullard hopes the SEC will provide only a very limited exclusion for brokers offering advisory services — an approach he said would fare better with consumer groups and investment advisors.


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