A View From the Nation's Capital

Much of the noise in the broker/dealer industry lately is coming from the halls of Washington rather than from the trading desks all over the country. Ask an average registered rep what the most time-consuming portion of his day is, and more often than not the answer will be With Congressional proposals seeking to limit or do away with directed brokerage and, potentially, 12b-1 fees, and new disclosure

Much of the noise in the broker/dealer industry lately is coming from the halls of Washington rather than from the trading desks all over the country. Ask an average registered rep what the most time-consuming portion of his day is, and more often than not the answer will be “paperwork.”

With Congressional proposals seeking to limit or do away with directed brokerage and, potentially, 12b-1 fees, and new disclosure requirements, Registered Rep. senior editor David A. Gaffen sat down with one of the industry's top advocates, Marc Lackritz, president of the Securities Industry Association, who discussed his thoughts on the state of the industry.

Registered Rep.: There's a host of reform efforts in the industry right now — how would you say they're going?

Lackritz: I think that our industry's highest priority is to restore and enhance trust in the market and in the capital markets. Investors are really coming back into the marketplace, and the industry is doing a lot better than the couple of years before this.

At the same time, we've had three onslaughts of regulation in the last three years alone — new ones with respect to global research and banking, all the regulatory initiatives out of Sarbanes-Oxley and the mutual fund proposals. All these efforts add up significantly — we have to be careful that they don't overwhelm firms.

RR: Looking back, what was missing?

Lackritz: I think the disclosure has to be clear, conspicuous and understandable. At some level, what people really want to know is, ‘What is my return, net of expenses?’ We've got to be clear what that is. I think about the adage of Justice [Louis] Brandeis, that sunshine is the best disinfectant. Transparency is a very good thing for markets, and for investors, and for our industry.

RR: But what do you do with all that information, then?

Lackritz: It depends where you put it. If you put it in a trade confirm, you're going to put it with a lot of information that's going to get lost and cluttered. In a prospectus, people may not read that. But if it's in a sales document or piece of sales literature, you could maybe design a disclosure page or something — I know we've got a group working on that.

RR: Do you expect directed brokerage and 12b-1 fees to be modified significantly or done away with?

Lackritz: I don't think at this point they're necessary — the SEC has plenty of authority under existing law and, in fact, the SEC is addressing all of these issues. There's been almost a record number of releases related to disclosure of soft dollars, [and] clarification of 12b-1 fees, all of which are subjects of regulatory rulemaking. Plus, the SEC has brought some enforcement cases, which is the most effective deterrent going forward of these possibilities.

RR: Changing gears, is there any positive news out there?

Lackritz: There's a lot of good news out there. We began to resume hiring at some firms after an 11 percent to 12 percent reduction in our workforce. The economy seems to be coming back, the markets are doing much better and flows are coming into equity and debt funds. The industry is optimistic and, at the same time, you have these public relations problems, and these enforcement and regulation problems, which distracts the public on some level.

RR: And the costs of doing business remain high.

Lackritz: That's one of the things we have to be careful of. If costs escalate too high, it ends up hurting the small investor. Instead of servicing the $100,000 to $150,000 investor, the large broker/dealers are only servicing the $1 million-and-up client. That doesn't help those other people who need services badly.

However, there are a lot of competitors and a much wider range of choices than investors have ever had. From the standpoint of the customer and the investor, having more choices is a good thing, and reduces cost.

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