From: Tad Borek 
Newsgroups: misc.invest.financial-plan
Subject: Re: Please take a look at this regarding rule changes
Date: 25 Aug 2004 01:00:01 GMT
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MTW wrote:
> Now I guess I'm confused. I haven't been following this issue.
> But, while the original post talked about opposing the dropping
> of RIA licensing for brokers, it sounds like what a number of
> people really want is NEW, ADDITIONAL regulation of brokers. Do I
> understand this so far?

I think you've inadvertently asked a loaded question! Depending on who 
you ask, it's either imposing a new regulation, or stopping brokers from 
getting away with avoiding the regulations that apply to them.

The regulation dates back to 1940 so it's hard to say it's a new one. 
The Investment Advisors Act of 1940, which defines RIAs, says that if 
you provide investment advice for a fee, you need to register as an RIA, 
and make a bunch of disclosures to your clients. And you are by 
definition a fiduciary to your clients. There are other things - 
advertising restrictions, and restrictions on statements about 
investment performance.

So it seems that if you're saying "buy X Y and Z" and collecting a fee 
(not a commission - which is what broker regulations address) then you 
should fall under that law. I do, and you would.

Brokers have tried to dodge this by relying on the concept that advice 
"incidental to the sale of securities" doesn't fall under the 1940 act. 
Fine but the "Merrill Rule" is a much broader loophole. Under it 
Wirehouse A could charge a client a 1.5% annual advising fee, but avoid 
registration under the Act as an investment advisor, and avoid being 
labeled a fiduciary. The marketing and compensation go beyond "sales for 
commissions" but not the liabilities. So fiduciary duty is replaced by 
"caveat emptor."

I see no problem with them getting into the "planning & advice" business 
but only if they stop trying to dodge the responsibility for the 
planning and advice that they sell. This seems pretty basic.

The SEC has sat on its hands for something like 4 years since proposing 
that the Merrill Rule be adopted formally via regulations (merrill & th 
industry pushed for the rule, incidentally). It's been revived as an 
issue because a planner/advisor trade association (that I am not a 
member of) has sued the SEC to get off its duff and address the issue 
once & for all. We'll see who has the stronger lobby on this one...I'm 
guessing Merrill.

-Tad