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Mixed Messages
Steven B. Weinstein
05/02/2005
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To the investor’s
misfortune, this approach has not always worked in practice. For well over a
decade, many stockbrokers have donned the mantle of financial advisor or
financial consultant and mixed execution with advice, without registering under
the 1940 act. The SEC recently acknowledged that of some 3,850 broker-dealer
firms that may be engaging in financial planning, about 2,950 of them have never
registered as investment advisors. Many brokers employed by these firms are
honest and competent individuals simply trying to earn a living by wearing two
hats. However, the lure of juicy compensation offered by the myriad mutual
funds, annuities and other products favored (and sometimes created) by their
employers has, in many instances, compromised their professional judgment. Blurred Boundaries
The SEC must bear responsibility for much of this
confusion. In 1999, it proposed a new rule exempting brokers from the fiduciary
and disclosure standards of the 1940 Advisors Act, as long as the guidance
supplied was nondiscretionary and solely incidental to the brokerage services
delivered. Inexplicably, the SEC never clarified what “solely incidental” meant,
and never permanently adopted the 1999 rule, but rather allowed brokers
everywhere to operate without registering as investment advisors. The SEC
has now proposed a revised broker exemption rule that still falls woefully short
of fully protecting the investing public. I suggest two alternatives. One is
that the SEC simply reverse its earlier stance and abolish the proposed broker
exemption once and for all.
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