Advisers may gain from SEC disclosure rule

A new federal regulation may be a boon to investment advisers who want to shop for better execution of stock trades.

That is the conclusion of several industry members after examining a new Securities and Exchange Commission rule that requires a range of disclosures by stock market trading centers and broker-dealers.

The disclosures involve the site where trades are executed, whether investors get the best price available and whether brokers receive payments to route their orders to particular traders.

They also cover any other possible conflicts of interest. The new rule takes effect in April 2001.

“There are a lot of investment advisers who are going off on their own right now and using [electronic communications networks] to do their execution,” says Tom O’Keefe, president and founder of the National Association of Investment Professionals in St. Paul, Minn.

While investors are unlikely to understand or even be aware of the information, advisers could benefit, says Mr. O’Keefe, whose organization represents registered representatives and other investment advisers.

“This is information the public needs to make an informed decision on which broker-dealer to work with.

“I think it’s great. I think it’s about time,” adds Mr. O’Keefe, who is also a manager of two branch offices of Raymond James Financial Services.

spurring competition

Annette Nazarette, director of the SEC division of market regulation, says it is “intended to spur more competition to provide best prices for orders.”

As many as half the orders, particularly small orders, are executed at prices differing from the publicly quoted price, Ms. Nazarette says.

In addition to rules pertaining to market centers, brokerage firms will be required to make quarterly reports on which market centers they use, as well as provide information about the business relationships they have with those centers.

Other potential conflicts of interest, such as payments that brokerage firms receive to route orders to particular traders, must be disclosed.

Douglas Schulz, an investment adviser who works primarily as a securities arbitration expert, believes the additional information will make it possible to more precisely compare online trading services that advertise their execution ability with other trading systems.

“I have seen a significant increase in the last year and a half in order failure problems,” says Mr. Schulz, president of Invest Securities Consulting PC in Westcliffe, Colo. “It’s almost always an issue of time.”

No exact standards exist for governing how long it should take a market center to execute a trade, he says.

With more information, however, “we will start having documents measuring and comparing order execution by various firms.”

Mr. Schulz testifies as an expert witness in arbitration cases for investors and brokerage firms. Fast growth at online brokerage firms has led to service outages as well as other execution problems, he contends.

“The net benefit of this is going to be that these firms are going to have to clean up some of these deficiencies that they’ve had,” he says.

higher confidence

Marta Von Loewenfeldt, a New York spokeswoman for San Francisco-based Charles Schwab & Co., says investors are getting better executions than ever.

“We believe that providing customers with more information and greater transparency will increase their confidence in the quality of the executions they receive,” she said in a statement.

It will take some time before the information, which is compiled in various formats, can be analyzed by professionals, Mr. Schulz says.

Failing to provide the best execution is not, however, basis for a lawsuit. A provision to that effect is intended to satisfy concerns by brokerage firms that publicizing trading information will become fodder for the plaintiff’s bar.

Indeed, the Securities Industry Association charged that plaintiffs will have a huge new arsenal that they can use to claim that they were denied best execution.

“It’s like creating a regulation and then not having any teeth in it. The whole point of this is to force these players to truly get the best offer,” says Mr. Schulz.