Rules on brokers compensation disclosure are changing-but slowly.

Regulators seem to be taking small if steady steps toward closing gaping holes in requirements that mandate if and how brokers disclose their compensation. But observers say some of the initiatives are too general to be meaningful to the investors they're supposed to protect. Other critics complain that regulators aren't coordinating their efforts to mandate additional disclosure.

Case in point? Two separate proposals (one from the National Association of Securities Dealers and the other from the Securities and Exchange Commission) which are designed, to varying degrees, to increase disclosure of the differential compensation that fund companies and others pay registered representatives to favor their products.

This so-called differential or additional compensation is designed to encourage brokers to sell one fund or family of funds (often the brokerage's proprietary products) over others, regardless of which products are the best buy for customers. Revenue sharing arrangements, which allow fund companies to pay for shelf space, are also targeted by the proposal.

In light of the fact that differential compensation, hidden from consumers, induces brokers to recommend funds regardless of their suitability for clients, what's wrong with the NASD's proposal to ramp up disclosure? For one, critics say, it's uncertain that investors will know where to look for the new compensation information.

The NASD wants to use a statement of additional information to direct investors to general information in a fund's prospectus and fee table. If any of this grabs an investor's attention, it still remains to be seen whether they'll be able to decipher what any of it might mean to their bottom line. "The proposal is too tentative a first step and, absent full and direct dollar disclosure, doesn't create transparency," says Neil A. Simon, the Financial Planning Association's director of government relations. "In order for investors to appreciate the impact these arrangements have on them, there has to be a disclosure of actual dollar amounts."

The NASD proposal does not mandate that broker-dealers give a customer an actual bill that explains what he or she is paying to purchase a fund. Nor would the self-regulator require that customers be given a detailed description of the actual incentives a rep is being paid and what conflicts the preferential compensation creates. In fact, a fund company or broker-dealer would still be able to pay reps more to sell its proprietary brand of mutual funds, or whichever funds might be most profitable, with very little meaningful disclosure. Ironically, regulators have acknowledged for more than a decade that paying reps more to sell certain products guarantees that investors will wind up with these funds-for better or worse.

Funds that pay reps more will have to be listed in the prospectus. But the disclosures will not apply to other investments, such as variable or fixed annuities, insurance policies or other stock or bond products. "Currently, the disclosure that investors receive depends upon which compensation arrangement a rep decides to partake in," the NASD wrote in the new proposal.

Which, of course, begs the question: Why not create meaningful and uniform disclosure that might actually enlighten investors? NASD spokesman Michael Shokouhi says, "The procedure is we'll review all the comments we've gotten on this proposal, make any necessary modifications and then file it with the SEC."

Many people dissecting the rule are concerned that adding a few more general paragraphs to a fund prospectus is simply not enough. And it certainly isn't in keeping with the climate created in the wake of the infamy that has rocked the corporate world, the New York Stock Exchange and, now, the mutual fund industry itself.

"The perpetual theme on Capitol Hill is the need for greater transparency for investors, from the NYSE down to the retail brokerage level," says Duane Thompson, the FPA's group director of advocacy. "We just don't think the NASD proposal goes far enough."

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