Securities and Exchange Commission (SEC) is getting ready to see how
investors have been impacted by having two sets of regulations for
fee-based brokers and investment advisors. The SEC has published a
contract proposal for hiring a firm to conduct the study, a preliminary
step for soliciting comments from the public and potential contract
The study was promised by the SEC in April 2005, when it adopted a rule exempting brokers offering fee-based services from the Advisers Act of 1940 as long as the services are "solely incidental" to their brokerage services and they meet certain other conditions.
Critics of the rule contend that it confuses consumers and allows brokers to act as financial advisors without being regulated by the strict fiduciary standards of the Advisers Act, which place the interests of the client first. Brokers are instead regulated under the Securities Exchange Act of 1934.
Opponents also argue that the rule confuses consumers by creating two sets of regulations, even though both brokers and RIAs will often call themselves "financial advisors" in their relations with the public. If past surveys on this subject are any indication, investor perceptions of the differences between advisors and brokers are foggy at best.
The brokerage community, however, counters that the rule will encourage brokers to move from commission-based to fee-based work, benefiting consumers in the process. Brokers also say the Securities Exchange Act already contains rules that adequately protect consumers.
The broker exemption continues to stir controversy, with the Financial Planning Association (FPA) pressing ahead with a lawsuit against the SEC that seeks to void the rule.
The SEC, meanwhile, says it will rely on the study to address the issues raised by opponents. "Our goal is to improve investor protection by updating our regulation to deal with the realities of today's marketplace," SEC Chairman Christopher Cox said in a written statement. "We will develop the best available information, from inside and outside of the commission, to inform this important process. We welcome public input on the proposal."
At least one company has already probed investor attitude's regarding investment advisors versus brokers.
A survey conducted by TD Ameritrade earlier this year found that 43% of investors were not aware that stockbrokers and RIAs provide different levels of investor protection. This compares to a prior survey in 2004, where that figure was 41%.
The survey, which involved interviews with 1,000 investors, also found that 51% of investors were unaware that brokers are not required to disclose all potential conflicts of interest before providing financial advice, according to TD Ameritrade.
Only 26% of investors were aware that only investment advisors have a fiduciary responsibility to act in a client's best interests, while 51% incorrectly believed both brokers and advisors were subject to the requirement, according to the survey.
Public comments on the SEC's draft proposal are due by July 19.