BROKERS RAISE IRE WITH PLAN TO BECOME ADVISERS, TESTFREE: MUTUAL FUND LOBBY FEARS TRADING CONFLICT OF INTEREST, TOO

The broker lobby has managed to unite much of the rest of the financial community against its proposals to ease regulation of its members. Financial planner groups fear that the ensuing brouhaha could make it harder to get the changes they seek in securities laws.

The wish list sent by the Securities Industry Association to Senate Banking Committee Chairman Phil Gramm, R-Texas, includes provisions that would exempt brokers registered as investment advisers from adviser standards, including the exam securities regulators have been working on for three years. It also would loosen conflict-of-interest prohibitions against transactions between investment advisers and their affiliated mutual funds.

Mr. Gramm’s staff refused to comment on the proposal. But others have plenty to say.

“They’re (the SIA) suggesting that once you are trained and tested as a stockbroker, there is nothing more you need to know to be an investment adviser,” says Philip Feigin, executive director of the Washington-based North American Securities Administrators Association, which represents state and provincial securities regulators. “It really flies in the face of what every person who goes to an investment adviser wanted, which was impartial non-sales advice.”

Under the proposal, employees of broker-dealers registered as investment advisory companies would have to pass only the Series 7 exam for stockbrokers, not a test for investment advisers, such as the one the securities administrators expect the states to put into effect next year.

“Yes, there are differences,” between the requirements of the two jobs, concedes Stuart Kaswell, the brokerage lobby’s general counsel, “but we just think it’s a matter of how much is enough . . . It’s like saying how many driver’s licenses do I need?”

“If the system is not designed to leverage regulatory assets effectively … (investors) overpay for regulation that’s not effective,” Mr. Kaswell says. “They’ll have three cops on one corner and no cops on another. That’s silly, and we can do better than that.”

Counters Robert Goss, president of the Certified Financial Planner Board of Standards, the Denver group that sets standards for certified financial planners: “There is no reason at all to exempt stockbrokers from having to meet those professional competency requirements when everybody else applying as an investment adviser representative has to meet them. The SIA proposal is simply bad public policy.”

The proposal, which was one of many made by securities industry groups to Mr. Gramm, will be used to start drawing up legislation revamping securities laws this summer. Mr. Gramm was the principal mover behind the National Securities Markets Improvement Act of 1996, which split oversight of investment advisers between the Securities and Exchange Commission and the states.

fund group opposed

Matthew Fink, president of the mutual fund lobby, the Investment Company Institute, wrote SIA president Marc Lackritz April 28 opposing a surprise provision that would allow mutual fund affiliates to trade securities with the funds.

The prohibition is intended to guard against conflicts of interest. An example: Advisers with dealer affiliates could pressure funds to buy securities that would not be a good investment for fund shareholders. The brokerages’ proposal would allow such transactions only if prices could be clearly determined and other safeguards were in place.

In his letter, Mr. Fink notes that the restrictions were enacted as a result of “a wide array of abuses that occurred in the 1920s and 1930s,” and says preventing affiliates from selling funds unmarketable securities or securities at artificially high prices is only one of the problems the law addresses. An affiliate also might pressure funds to buy their securities simply to reduce inventory, he says.

Mr. Fink also was clearly piqued that the SIA did not consult his group on the proposal, a complaint voiced by state regulators as well.

“We think this provision of the Investment Company Act is one of the core investor protection provisions,” says Investment Company Institute general counsel Craig Tyle. “The proposed amendment sweeps too broadly. It undermines important investor protections.”

In a May 10 reply, Mr. Lackritz questions whether the institute “fully reflects the views of all funds that may be affected by our proposal.” Many of his members are concerned about the bad effects of the prohibitions on mutual funds managed by an affiliate of a major securities dealer, he writes.

“A fund that invests in securities that are traded in a dealer market has a strong interest in being able to effect transactions with the widest possible array of market makers,” the letter reads. “Yet (the law) currently eliminates the fund’s ability to execute a transaction with an affiliated dealer that may be offering the best price, even when the securities are readily marketable and there is little opportunity for abuse.”

The proposal may spur the SEC to hasten work on loosening regulations for mutual funds with major dealer affiliates, particularly in light of the numerous mergers.

The agency has allowed some funds to trade with affiliates, says Robert Plaze, associate director of the Division of Investment Management, noting that money market funds can trade commercial paper with affiliated dealers.

He adds, however, that “we’ve never received a request for such relief. The SIA proposal was surprising to us in the division.”

barrier to advisers’ issues?

Neither the Institute of Certified Financial Planners nor the International Association for Financial Planning would comment on the SIA’s proposals.

All of this makes investment adviser groups nervous that it will be difficult to enact the limited changes they want, most notably a prohibition against states’ charging fees for advisers that have only a limited number of clients in that state. Adviser groups have been battling with Texas and five other states over that issue.

“We haven’t decided whether our dog is in this fight yet,” says Karen Barr, general counsel of the Investment Counsel Association of America Inc., which represents large advisers. “But there’s some controversy going on out there that’s not helpful to getting our proposals passed in a nice, bipartisan, smooth way.”