It’s no longer business as usual on Wall Street. Starting yesterday, broker/dealers must follow a new SEC rule that requires them to disclose at certain times that they may not be acting in their clients’ best interest. The change however, has been long in the making and brokers appear to be taking it well – no matter how tough it is.
Wall Street firms are adjusting by issuing new forms and procedures for their brokers to follow. While some firms have waited till the last week to get them out, brokers appear to be taking it all in stride.
“It’s not going to change the fact that our clients see us as consultants,” says one Merrill Lynch broker. “None of my clients perceive me to be a stockbroker, if they did, I wouldn’t have them. I don’t think it’s going to change anybody’s mind that I can help them in a lot of different ways, more so than just recommending investments," he says. "As much as the FPA [Financial Planning Association] would like us see us never do anything but an equity trade, the reality is that that’s not the way it works anymore.”
Brokers, according to the new Rule 202 (think the SEC’s area code), must tell clients that they are not financial planners when they are offering anything that even smacks of financial planning, unless they take on fiduciary liability. What’s more – and here’s the hard part – they have to tell them that they may have a conflict of interest because product manufacturers also pay them.
Brokers were prepped late for the new world. Merrill Lynch, according to some of its brokers, sent around a new disclosure document to its financial advisors late last week. It instructs the broker to get a client’s signature on the document whenever he does a financial plan.
Merrill said in a prepared statement that it has given its financial advisors “guidance on how to offer brokerage and advisory services in light of SEC Rule 202.” And before clients receive a financial plan, the firm is asking them to “read and acknowledge in writing a description of those planning services,” a Merrill spokesman said. “We think that this is a good way to make sure that they understand those financial planning services, as well as the options available to them in determining if and how to take further action.” Merrill declined to comment further on the matter.
Morgan Stanley, meanwhile, has revised its disclosures and communicated with its financial advisors about the new rule's requirements, a spokeswoman said. “We have taken steps to ensure that all financial advisors offering advisory services are appropriately registered,” she said. “We have worked with our discretionary brokerage clients to transition their accounts either to advisory or to a non-discretionary brokerage account, depending on what the client wants.”
Under the new SEC rule, any broker who offers “financial planning” services, exercises investment discretion over an account or charges a separate fee for his advisory services must adhere to the Investment Advisers Act of 1940. That is to say, he must hold a series 65 license and assume fiduciary responsibility for that account.
Brokers offering other kinds of fee-based brokerage or investment advice are exempt from the Investment Advisers Act of 1940 as long as all client communications for those accounts include a detailed disclosure explaining that the account is a brokerage, and not an advisory, account, and that the broker may not have the client’s best interests at heart.
Some broker/dealers are considering licensing all those reps who don’t already have the series 65, industry sources say. “One broker/dealer executive at the Financial Services Institute conference told me he was going to have to license 7,500 reps with a series 65 in 90 days,” says Eric Schwarz, CEO of Fairfield, Iowa independent broker/dealer Cambridge Investment Research.
The rule, entitled "Certain Broker-Dealers Deemed Not to Be Investment Advisors," was finalized last April and was initially scheduled to take effect in October. But the Securities Exchange Commission granted an extension on that deadline as requested by brokerage industry trade group the Securities Industry Association. A second request for an extension of the deadline to March was denied.
The rule is the result of a long squabble between the brokerage industry and the financial planning industry. Financial planners say brokers are encroaching on their turf by offering planning and advice without adhering to the strict fiduciary standard that governs investment adviser reps. Instead, brokers have, until now, been governed by the looser suitability standard. In 2005, the Financial Planning Association filed a lawsuit against the SEC to get them to change that. Rule 202 is the result of the lawsuit.
For further insight on the rule, check out these past stories in Registered Rep.