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."

The crux of the problem, Thompson contends, is that consumers don't know what to ask for when it comes to compensation conflicts of interest or how such conflicts can affect their bottom line. That makes burying such information in a general prospectus disclosure even more problematic.

Others less than wowed by the NASD proposal also note that it's not even an original proposal, but reaction to clean-up legislation (the Mutual Funds Integrity and Fee Transparency Act) introduced by Rep. Richard Baker (R-La.) this past summer. Baker caught on early to the ongoing fund scandals being uncovered by state officials, most notably New York State Attorney General Eliot Spitzer.

To its credit, the NASD has brought some high-profile cases. It censured and fined Morgan Stanley $2 million for conducting prohibited sales contests to entice brokers and sales managers to sell more of the firm's own brand of mutual funds. Morgan Stanley paid more than $1 million in prize inducements, including NBA tickets and resort trips.

"The main problem has not been a lack of rules," NASD Chairman and CEO Robert Glauber told compliance officers at the NASD's most recent securities conference. "It has been lack of compliance with the rules."

But if that is the case, why is the NASD writing this new rule in the first place? And why has the self-regulatory organization taken such a different tack from its regulatory parent, the SEC? Under the SEC proposal, broker-dealers would make disclosures of "transaction-specific" costs in two new forms. One would be given or read to an investor before they plunk their money down; the second would be sent in the form of a confirmation statement, again explaining exact consumer costs.

In a request for investor comment, the SEC said the forms are designed to "tell you how much you must pay when you buy a particular fund and how much your broker and the firm will receive for selling that fund." The agency, which is also proposing that 12-b-1 fees be deducted directly from shareholder accounts, has asked if the fees should be outlawed altogether.

The SEC said it will consider the NASD's proposal "in the event that the NASD submits it," noting that it contains general explanations that complement the SEC's own proposals.

While SEC staffers, like enforcement chief Stephen Cutler, have expressed "outrage" over the fund problems that have been brought to light, one wonders why in the face of such widespread wrongdoing the SEC staff is still talking about going forward with its proposal to make permanent the exemption from fiduciary laws it currently gives to brokers? In February, former SEC Chairman Arthur Levitt, whose agency initially proposed the rule, told attendees at TD Waterhouse's institutional conference he was no longer in favor of it and intimated that several current SEC commissioners shared that view.

The upshot of the exemption is that reps won't have to put investors' needs first. "How can you not be irked by the difference in disclosure between reps and investment advisors?" asks Paula Hogan, president of Hogan Financial Management in Milwaukee, and a member of the National Association of Personal Financial Advisors compensation task force. "Why shouldn't the consumer know the price of our services? What else do you buy where the price is kept a secret?"

For her part, Hogan provides each client with a document that outlines her actual fees, the brokerage costs they've incurred, fund fees and expenses and the total client tab. But that's not the norm in the financial services industry. "If a bank manages your funds, you don't know what the expense ratios are. If you buy a bond, you don't know what the bid-ask spread is. You also don't know what kind of deals are going on behind the scenes to influence most brokerage deals," says Hogan.

While Congress pushed long and hard to level the so-called playing field for financial service institutions by dismantling the Glass-Steagall Act, consumer advocates argue that fair fee disclosures (also called a simple bill of sale) have yet to catch up.