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Regulatory Debates

As a registered rep, are you in the "advice" business? That's the question at the heart of a contested SEC rule proposal.The SEC's answer is, somewhat surprisingly, no. Agency staff is arguing that your advice giving is not a main part of your business. Therefore, the SEC Division of Investment Management is proposing to uphold your exemption from the fiduciary standards of the Investment Advisers

As a registered rep, are you in the "advice" business? That's the question at the heart of a contested SEC rule proposal.

The SEC's answer is, somewhat surprisingly, no. Agency staff is arguing that your advice giving is not a main part of your business. Therefore, the SEC Division of Investment Management is proposing to uphold your exemption from the fiduciary standards of the Investment Advisers Act of 1940. Wall Street firms support the exemption.

But some other lobbying groups in Washington, D.C., disagree. They're determined that you should be held to the same tough fiduciary standards and compensation disclosure requirements as registered investment advisers.

"Brokers are transforming their businesses, becoming investment advisers first and foremost, and secondly salespeople," says Barbara Roper, director of investor protection for the Consumer Federation of America (CFA). The CFA represents more than 260 national, state and local consumer advocacy groups, including the American Association of Retired Persons. "Certainly, if you believe [brokerage firms'] advertising, it is advice that they are selling, and that's how we believe they should be regulated."

The proposal in question is Release No. 34-42099, also known as the "Merrill Lynch rule." It was prompted largely by the introduction of Merrill's fee-based Unlimited Advantage account and other fee-based brokerage (not managed) accounts. The proposal states that registered reps don't need to meet the same standards as investment advisers just because they have started charging fees instead of commissions. The fundamental nature of the brokerage business--charging for trades with advice being an "incidental" component--has not changed, the SEC says.

But as stockbrokers stray into areas traditionally occupied by financial planners and advisers, they are finding some opposition. In fact, the CFA is so adamantly against the proposal that it teamed up with three groups representing financial advisers and planners to send a comment letter to the SEC.

"We're typically on the opposite sides of an issue rather than allies," Roper says. "But we've found some common ground with financial planners and investment advisers, who are generally not my biggest fans. They're concerned about unfair competition from broker/ dealers, and we're concerned primarily about investor protection."

Roper's May 31 letter to the SEC was submitted in conjunction with the Certified Financial Planner Board of Standards, the Investment Counsel Association of America and the National Association of Personal Financial Advisors.

The bottom line: Roper says all financial advisers should be regulated under one set of standards and by one regulatory organization. "We've always advocated uniform regulation for all those who hold themselves out as financial planners and consultants," she says.

Other planner associations such as the Financial Planning Association (FPA) have spoken out against the proposal. But the SIA, which represents securities firms, supports it wholeheartedly.

The official comment period ended back in January, but the SEC has continued to accept late submissions--most are from CFPs arguing against the exemption. Comments received electronically are available at

The next step is for the SEC's Division of Investment Management to make a recommendation to the SEC for adoption of a final rule. "There is no deadline for that recommendation, but this proposal is a high priority for the division," says David Fielder, adviser to the director. "I believe we will have a recommendation to the commission before the end of the year."

Who Should Regulate? At the same time the "advice" question is being debated, another issue about who should regulate is simmering.

Some subtle signs point to possible consolidation among regulators. In Florida, state legislators have proposed a "cabinet restructuring" bill that would consolidate regulatory supervision of banks, brokers, financial advisers and insurance agents under one state department.

"I suspect they're finding it not as smooth as they anticipated," says Dede Pahl, interim president of the Certified Financial Planner Board of Standards in Denver.

Still, her organization sees some duplication among state and federal regulators. And in discussions prior to the passage of Gramm-Leach-Bliley, the SIA suggested doing away with much state regulation of brokers and broker/dealers.

Meanwhile, the idea of a separate "SRO" for advisers has resurfaced. Even trade groups that have not felt the need for an SRO in the past are considering the possibility, Pahl says.

FPA President Roy Diliberto supports the idea of creating a single SRO for financial planners, provided that the process would not result in any additional regulations, says FPA spokesperson Scott McDuffee.

Under current federal law, no provision exists for an adviser SRO. Back in 1989, the SEC floated a proposal before Congress to establish an SRO for financial advisers, but that proposal "died quickly," according to a letter submitted in May by David Tittsworth, executive director of the Investment Counsel Association of America (ICAA), as part of an SEC roundtable on investment adviser regulatory issues. "However, we remain concerned about renewed attempts to authorize the formation of SROs for the advisory profession," he wrote.

In the past, the NASDR has pushed for extending its authority to cover advisers (see February 1999 RR, "The NASD's Power Grab," Page 109).

But adviser groups blasted that idea, and the SEC eventually nixed the thought as well. NASDR spokesperson Nancy Condon now says the SRO "has no intentions of regulating financial advisers."

The Big Question "The biggest question is whether, 20 years down the road, all financial planning professionals will be regulated under one big, happy regulatory umbrella," says Duane Thompson, director of government relations for the FPA in Washington, D.C.

Today, financial professionals such as planners, registered reps, insurance agents and registered investment advisers are regulated "functionally," Thompson says. That means the SEC or states regulate an adviser's advisory services (depending on amount of assets under management), and state insurance regulators control his insurance activities. Registered reps and broker/dealers fall under federal securities laws, administered by the SEC and SROs, with some parallel regulation and oversight by the states.

Functional regulation made sense when there were clear lines of demarcation among the types of services provided by advisers, planners, registered reps and insurance agents. But the landscape has changed dramatically since the Gramm-Leach-Bliley Act broke down the walls separating financial institutions.

Tittsworth says the distinction between investment advisers and registered reps is a fundamental reason the ICAA was formed in 1937. "We also recognize that a lot has changed since then," he says. "There's been a blurring of the lines among our [250 member] firms between brokerage services, advisory services, insurance, banking and financial planning."

Here's a rundown of five industry associations and their lobbying priorities.


The NAIP, which represents individual registered reps, continues to pursue online firms and challenge their deceptive ad campaigns, says NAIP President T. Sheridan O'Keefe.

In July, the NAIP was also in the process of preparing an amicus curiae brief for a Supreme Court appeal involving Circuit City and mandatory arbitration. "The court's decision will obviously affect arbitration in the securities industry," O'Keefe says.

Boca Raton, Fla., attorney Alan Foxman, chairman of the NAIP's government relations committee, is working with the securities committee of the National Conference of Commissioners on Uniform State Laws ( in an attempt to strike any reference to qualified immunity from new uniform codes, O'Keefe says.

NAIP is also monitoring the SEC's activity in the area of temporary restraining orders on brokers and the SEC's proposed rule regarding fee business and the broker's fiduciary role.


One of the SIA's most pressing lobbying efforts is encouraging Congress to raise the maximum IRA contribution from 2,000 dollars to 5,000 dollars a year. The SIA even published a form letter on its Web site that brokers could use to express their support for higher contribution limits.

Other hot-button issues include privacy provisions included in the Gramm-Leach-Bliley Act, decimalization, extended trading hours and "reinventing self-regulation."

As SROs like the NYSE and NASD begin to compete against the same firms they regulate (broker/dealers with ownership stakes in alternative trading systems, for example), the SIA has suggested that it might make sense for a single, consolidated SRO with centralized offices to handle many of the responsibilities of existing SROs.

Lastly, the SIA is backing the SEC proposed rule that upholds broker/dealers' exemption from fiduciary requirements.

The SIA was established in 1972 when the Association of Stock Exchange Firms merged with the Investment Banker's Association. It now represents 740 securities firms, including investment banks, broker/dealers and mutual fund companies.


FPA's initiatives in Washington, D.C., include an analysis of the new electronic signature law, called the Electronic Signatures in Global and National Commerce Act, and a petition to the SEC urging more frequent disclosure of securities holdings by mutual funds.

Other actions include sending comments to the North American Securities Administrators Association on electronic filing of the new form ADV for advisers and voicing opposition to the SEC's so-called Merrill Lynch rule.

"Many brokers do not contest the fact that they want to avoid certain requirements that arise from registration under the Advisers Act," wrote Duane Thompson, FPA director of government relations, in January to the SEC.

The FPA represents 27,000 individual financial planners and Certified Financial Planner licensees. The association was created when the Institute of Certified Financial Planners merged with the International Association for Financial Planning in January 2000.


Thanks to the NAIFA's lobbying efforts to add language in the Electronic Signatures in Global and National Commerce Act, insurance agents and brokers are protected from potential liability when insurance companies and policyholders use electronic signatures, the association says.

The NAIFA has voiced support for raising IRA contribution limits and advocates tax relief for small businesses, such as simplifying the generation-skipping transfer tax. "These reforms would significantly help small-business owners and family farmers," says spokesperson Jim Edwards.

The insurance group is currently working with lawmakers on a bill called the Homeowners' Insurance Availability Act, which would make affordable property insurance more available in disaster-prone areas, Edwards says.

NAIFA is a nonprofit federation of some 900 state and local associations, representing about 90,000 licensed insurance agents and registered reps. The group was formerly called the National Association of Life Underwriters.


The ICI's top priority in Washington is tightening up mutual fund governance practices. On July 7, the ICI issued a resolution strongly endorsing the 15 recommendations contained in an ICI advisory group report on best practices for fund directors. Among the recommendations: At least two-thirds of the directors of all investment companies should be independent directors.

The ICI has also voiced support for H.R. 1089, the Mutual Fund Tax Awareness Act of 1999, which requires the SEC to set up rules requiring mutual fund companies to report performance numbers on an after-tax basis (for nonretirement accounts subject to taxation).

The ICI has also voiced support for H.R. 4747, a bill that would loosen ERISA restrictions and allow mutual fund companies to offer investment advice to 401(k) plan participants.

The ICI represents mutual fund companies. Its membership includes 7,923 mutual funds, 447 closed-end funds and 10 sponsors of unit investment trusts.

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