Change The Rules

There are some topics in this business that seem to pop up again and again. This month's cover story addresses one of them: The difference between registered reps (Series 7 holders) and investment advisor reps (Series 65 holders). The investing public regards them as the same even though there are important legal differences. The problem is the decades-old regulatory laws that govern them the Securities

There are some topics in this business that seem to pop up again and again. This month's cover story addresses one of them: The difference between registered reps (Series 7 holders) and investment advisor reps (Series 65 holders). The investing public regards them as the same even though there are important legal differences. The problem is the decades-old regulatory laws that govern them — the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 — no longer address the needs of a profession that has changed dramatically over the years.

The thing is, this time around, the industry may be at a turning point. A recent study commissioned by the SEC broadcast loud and clear that investors don't know the differences between the two kinds of advisors. And that means they don't know what they're getting, or what they're paying for, when they sign on for financial advice. What's more, now that the broker/dealer exemption (the one that allowed brokers to offer fee-based brokerage accounts) has been vacated, the SEC has an unparalleled opportunity to change the archaic laws to better reflect the modern financial landscape.

By June 1, SEC Commissioner Christopher Cox is to receive a report from his staff about what to do. Let's hope he is prepared to ask Congress to make real changes to the laws that will help the investing public understand what standards of care they should expect from their financial intermediaries.

We're inclined to think that Congress should wave its magic wand and demand that everyone who calls himself a financial advisor adhere to the fiduciary standard required under the Investment Advisers Act. But we can see that it's a vexing problem: How do you make commission-only reps, who are paid on the sale of a particular financial product, fiduciaries? That's a tough one. Still, we hope the big minds down in Washington will take the time to figure this one out. And move it to the top of the list. Alas, during this election year, it may be more fun for Congress to demonize CDO brokers (and their evil firms) for the ways in which they supposedly misrepresented those complex derivatives to pension plan managers — presumably the most sophisticated investors on the planet. Well, theoretically anyway.

We thank you for your support. Drop us a line with your comments at: 249 W. 17th St., New York, N.Y. 10011-5300. Or email us at [email protected]. Publisher Rich Santos can be reached at [email protected].

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