Tomorrow the so-called "Merrill Lynch" rule exempting brokers marketing fee-based accounts from crucial aspects of Registered Investment Advisor regulation becomes effective. But already many are asking how wirehouse executives and their Washington lobbyists could have allowed their sales networks to be defined in such a negative light.
   Speaking at the Financial Services Institute meeting in San Diego on January 25, Maryanne Smythe, formerly director of the SEC's Division of Asset Management and now a partner at Wilmer Cutler Pickering Hale & Dorr, addressed several issues raised by the rule.
   During the five years that the rule was debated, the regulatory environmentchanged dramatically. One change was that early in this decade, the SEC was outmaneuvered politically by New York Attorney General Eliot Spitzer, who prompted the agency to "embrace the 'F' (fiduciary) word with a vengeance."
   Smythe noted that brokers have "all types of relationships with clients" and acknowledged that she lobbied hard to remind regulators of this fact. "You can take off your fiduciary hat as long as you say you are not on (the clients') side."
   But Smythe implicitly questioned the wisdom of the major wirehouse's decision to pursue relentlessly the adoption of the rule. "Brokers have allowed the idea of a broker to be fixed in the SEC's mind as someone who doesn't put the client's interest first," she remarked. "As brokers have moved closer to advisors in compensation they have let themselves be defined as something not very attractive. Brokers are not just sales people; they must determine if a transaction is suitable."
   But thanks to their own legal staffs, you would hardly to know this. "Most brokers are loathe to give the 'Don't Trust Me' speech," she said. "I can't imagine why."
   The idea for the Don't Trust Me came after the SEC conducted several focus groups, something the agency loves, according to Smythe. "They found 99% of the retail public had no clue whether their broker was a broker or an advisor; 90% of brokers had no clue either," she quipped. "But it's up to (the broker-dealers) to make sure the client knows who they are dealing with."