BROKERS LEAN ON NASD AND SEC TO SUBJECT ADVISERS TO SAME RULES: WHO REGISTERS AS WHAT IS JUST TIP OF ICEBERG

Broker-dealers are pushing the National Association of Securities Dealers and the Securities and Exchange Commission to come up with rules that would impose the same regulations on investment advisers as on broker-dealers.

At least two issues are being considered by an NASD Regulation Inc. committee on independent dealers and insurance affiliates, says R. Clark Hooper, senior vice president in the office of disclosure and investor protection at the trade group’s regulatory arm:

l Whether the traditional definitions of broker-dealer and investment adviser are appropriate.

l Which sales methods and client services fall under regulations for investment advisers and which for broker-dealer registered reps.

NASD and SEC officials met in February on the issues. “It is time to create a dialogue — to make sure we’re on the path that leads to investor protection,” says Ms. Hooper, who discussed the problem at a recent conference in Washington.

The NASDR’s independent dealer-insurance affiliate committee is scheduled to discuss the issues in Washington on June 10.

“New technologies and the fees that are available for distribution of mutual funds are really changing the landscape rapidly,” says Joseph Price, counsel to the NASDR’s advertising-investment companies regulation department and staff liaison to the committee.

dual registration woes

The most important issue for the committee is “how to regulate dually registered investment advisers and broker-dealers,” Mr. Price says.

He notes that while broker-dealers are exempt from having to register as investment advisers if the advice given is incidental to their businesses, investment advisers must register as broker-dealers if they accept transaction-based compensation, such as commissions.

Broker-dealers who take asset-based compensation must register as investment advisers, but “when you have to register as a broker-dealer has been more ambiguous. The receipt of transaction-based compensation isn’t the only basis on which the SEC has required broker-dealers to be registered,” Mr. Price says. For instance, one SEC rule requires registration for soliciting on behalf of, and splitting commissions with, a broker-dealer.

“We are concerned that the lack of clear and current regulatory standards will encourage firms to adopt subtle modifications to their activities in order to avoid the important requirements” of securities law, states a Dec. 8 memo from Ms. Hooper to Barry Barbash, director of the SEC’s Division of Investment Management.

The particular areas of concern:

l Whether trail commissions, 12b-1 fees, service fees by fund underwriters to financial planners, or referral fees should be subject to broker-dealer regulations.

l If disclosure standards, training and bonding requirements should depend on how the broker-dealer or adviser is registered.

l What level of supervision broker-dealers should adhere to on the advisory activities of dually registered representative-advisers.

l Whether the same regulations apply to broker-dealers and to registered investment advisers if there is significant overlap in sales activities.

“Some RIA business practices –such as the recommendation of securities to retail clients, the receipt of distribution fees from a fund or its adviser, and the solicitation of clients on behalf of a broker-dealer, may be identical to traditional brokerage activities,” the memo states.

“The only significant business practice that distinguishes RIAs is that they cannot receive sales loads on the sale of mutual fund securities or commissions from the sale of other securities to customers.”

Robert Plaze, associate director in the SEC’s Division of Investment Management, says federal law limits the agency’s discretion as to who can be required to register as what.

“Financial planner groups are moving away from commissions toward fee-only” compensation, he says. “They feel very strongly they should be freed from broker-dealer regulation.”

At the same time, broker-dealers are questioning why they should be subject to an extra layer of regulation and capital requirements that advisers do not face, he says.