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SEC Proposal Draws Mixed Reactions


The Investment Company Institute is supporting a controversial rule proposal that would make it easier for broker/dealers to change how they sell their services.

An SEC proposal that exempts broker/dealers from registering as investment advisors for some of the services they perform may benefit investors, said Tamara K. Reed, ICI associate counsel, in a letter to the SEC Jan. 14. The rule proposal may help investors by permitting broker/dealers to charge fees based on an investor's assets under management rather than on transactions, without facing additional regulation, Reed said.

Arthur Levitt, chairman of the SEC, has supported securities industry moves to charge investors based on assets rather than transactions, saying that asset-based fees help reduce the conflict of interest that arises between a registered representative and his customer. A special SEC panel in 1995 warned that sales charges created an incentive for registered representatives to recommend inappropriate transactions to their clients.

On Nov. 4, the SEC proposed a new rule under the Investment Advisers Act of 1940. The proposal provides that broker/dealers would not be required to register as investment advisors so long as they satisfy three conditions. Broker/dealers must provide advice to customers only as part of their brokerage relationship; they cannot have discretion over customers' assets; and they must identify the customer accounts as brokerage rather than advisory accounts.

As they are now written, the rules appear to require broker/dealers to register as investment advisors when they provide advice and receive asset-based fees. The SEC rule proposal also received support from the Securities Industry Association of New York, a trade group representing broker/dealers. Jean Margo Reid, chairperson of the SIA investment advisor committee, said in a Jan.13 letter to the SEC that the proposal recognized that that there was little substantive difference, other than the way investors pay fees, between a brokerage account based on transaction fees and the same account charging asset management fees.

Organizations representing financial planners were not enthusiastic about the SEC proposal, however. The rule, if adopted, would eliminate for many investors the legal protections the Investment Advisers Act was designed to provide, said Duane Thompson, director of government relations for The Financial Planning Association of Washington, D.C., in a letter to the SEC Jan. 14.