ANOTHER PUSH TO OVERSEE BROKERS-TURNED-ADVISERS: WHAT, EXACTLY, ARE NASD FOLKS UP TO?

Like swallows returning to Capistrano, the National Association of Securities Dealers is returning to its well-worn theme that stockbrokers are dropping their registration in favor of becoming less-regulated financial advisers.

And, as usual, independent financial advisers aren’t swallowing the broker group’s contentions that it’s not setting its sights on regulating them.

Last Friday the NASD and members of the Investment Counsel Association of America Inc., which lobbies for large investment advisers, met to discuss the issue.

Mary Schapiro, president of brokerage self-regulator NASD Regulation Inc., sounded the switching-broker alarm at a recent NASD conference.

NASDR executive vice president Clark Hooper has voiced similar warnings, even though she acknowledges the NASD doesn’t have data showing how many brokers have actually dropped their licenses or whether any brokers who have done so have had disciplinary problems.

keeping regulators aware

“What we have been looking at is trying to update, see if this is a continuing trend, see if there are other issues that are growing,” Ms. Hooper says.”(The NASDR wants) to make sure that the appropriate regulators are aware of these black holes, and can make their own decision that there’s no threat to investor protection.”

Ms. Hooper says she bases her concern on articles she’s read in trade papers “that have encouraged registered reps to tear up their securities license and opt to do an investment adviser business with the specific point of avoiding the types of supervision.”

Investment adviser groups dispute the NASD’s contention that they are subject to lower levels of regulation.

“It makes it sound like all these big broker-dealers are suddenly giving up their licenses and becoming registered investment advisers because there’s less regulation,” says David Tittsworth, executive director of the Investment Counsel Association. “That’s fundamentally flawed.”

The long-term trend of brokers shifting from commissions to fee-based asset management is the primary reason behind their becoming investment advisers, Mr. Tittsworth says. “It is a business decision.”

The squeeze on commissions from online trading services also is driving people into the advisory business, he adds. “It’s not to find some safe haven in adviser regulation.”

Other adviser groups agree.

“Even though there’s been a pattern of denials (by NASD) of any desire to regulate investment advisers, they keep making noises that there are problems on that side,” says Duane Thompson, director of government relations for the Institute of Certified Financial Planners in Denver. “Denials notwithstanding, they are salivating to regulate investment advisers.”

Robert Goss, president of the Certified Financial Planner Board of Standards in Denver, notes there has been “some history of statements from the organization over a long period of time” expressing a desire to regulate advisers.

In late 1997, Ms. Hooper sent Securities and Exchange Commission officials a memo outlining areas where broker-dealer and investment adviser work overlaps and raising the issue of which regulator should oversee both groups. The SEC now oversees investment advisers managing at least $25 million, and the NASD regulates broker-dealers, subject to SEC approval.

Last fall, shortly after the SEC decided to let NASD handle the centralized reporting system for distributing information about advisers, NASD chairman Frank Zarb told a brokers meeting in California that his group was trying to persuade the SEC that it should regulate investment advisers (InvestmentNews, Nov. 30, 1998 ).

The CFP Board, which sets standards for certified financial planners, has repeatedly argued that if Congress decides that investment advisers should have a self-regulatory organization, it should be the one. “If we’re going to have self-regulation in the field of investment adviser work, it ought to be by investment advisers, not broker-dealers,” Mr. Goss says.

Adviser regulation not as tough? “The investment adviser (regulation) is a higher standard than the broker-dealer standard,” he says. “It’s a fiduciary standard where the investment adviser is required to act in the best interest of the client.”

issue is fairness

Tony Greene, chairman of Raymond James Financial Inc.’s independent broker-dealer unit, which manages $25 billion as a brokerage and an investment adviser, says the issue is one of fairness. “There are big differences (in regulation of the investment advisers and brokers) that need to be addressed.”

Brokers face day-to-day regulation by the compliance departments brokerages are required to operate, as well as by state regulators and the SEC. Many brokers, Mr. Greene says, are dropping their brokerage registration to become investment advisers, which allows them to do almost everything brokers do, except place trades, and without spending time and money reviewing every NASD memo.

“I think they (regulators) should build a relative level playing field” either by lessening broker-dealer requirements, enhancing adviser requirements or establishing a self-regulatory body to oversee advisers.

For its part, the SEC says that since it has shed responsibility for overseeing smaller planners, it has been able to increase examinations of advisers from an average of once every 14 years in 1997 to once every six years in 1998.

Different regulations for the two groups “reflect the different things they do,” says Robert Plaze, associate director of the SEC’s Division of Investment Management.

Broker regulations are aimed at ensuring that clients get the best price in trades, and that transactions are suitable for the clients’ needs. Mr. Plaze notes that brokers can sell directly to clients, while advisers cannot, as a protection against conflicts of interest.

Roy Diliberto, president of RTD Financial Advisors Inc., a Philadelphia advisory firm supervising $160 million, is both a registered investment adviser and a registered broker with Royal Alliance Associates Inc. of New York. He says NASD rules have been part of the reason brokers are dropping their registration.

Brokerages increased their cut of adviser revenues in 1994, when NASD ordered them to keep a closer eye on financial plans, Mr. Diliberto explains. This was just as more advisers were providing no-load mutual funds, so they could keep fees down.

“If the broker-dealer is taking a percentage of your fees and your fees become 90% of your business,” he says, “then the question becomes why do I need to give up a percentage of my compensation to the broker-dealer?”