Broker-Dealer View On Regulation
Dale Brown, president and CEO of the Financial Services Institute, recently weighed in on the upcoming regulatory battles involving the financial advisory industry in an interview with Financial Advisor. FSI is a membership group for independent broker-dealers and independent financial advisors.

Q: In an evolving and uncertain regulatory environment, what are the most pressing issues facing broker-dealers?
A: Uncertainty in and of itself is a serious concern because, as business people, independent broker-dealer executives need a degree of stability in which to operate and achieve their business objectives. At FSI, we are working to make sure our members are not harmed by the unintended consequences inherent in any legislative or regulatory overreaction.

Q: What are those unintended consequences?
A: The biggest one we're concerned about is that continual increases in compliance costs are pushing access to advice out of reach for people who need it most. Independent advisors are in a helping profession, but they're also business people. And if the cost of doing business rises they must find ways to deal with it, and one way is charging more for services, and that could push it out of reach for small investors.

Typically, independent financial advisors affiliated with independent broker-dealers are subject to FINRA broker-dealer regulations while investment advisors are regulated by the SEC and/or the state. Here's a real world example-FINRA might examine a broker-dealer or an advisor's office as part of a branch office exam. Because the SEC has oversight responsibility of FINRA, the SEC not long after might follow up to do a FINRA oversight exam. That's an example of redundancy that's of no additional advantage for investors, and it adds to the advisor's or broker-dealer's costs.

Q: What are the prospects for reconciling the issue of the fiduciary standard?
A: I don't necessarily agree with the assumption that the standard on the investment and broker-dealer sides need to be reconciled. There are legitimate reasons why, on the broker-dealer side, the standard is suitability. I don't think the issue is reconciling these two legal standards as much as it is finding ways to harmonize regulation of these activities in such a way as to make better sense for investors.

Q: What's FSI's position on creating a self-regulatory organization (SRO) to regulate the industry, and do you expect to see FINRA play a bigger role on the investment advisor side of the business?
A: The "self" part is that those in the industry have a role to play in setting the standards in the rules, administration and ultimate enforcement of those rules. That's why FINRA is an SRO for the broker-dealer side of the business. Given FINRA's extensive oversight of broker-dealers and their access to considerable resources as a private industry regulator, I think it is reasonable to expect them to be called on to play a larger role than they are now. 

We're not in a position to say whether an SRO for independent advisors is the right solution. We're focused first on applying some principles on what's best for small advisors and for what will help increase transparency and effectiveness. If that leads to the conclusion that some type of organization-and not an agency of government-needs to be involved on the independent advisor side, then that's what we get to.

Q: "Financial advisor" is a nebulous concept . . . do you think it's important to narrow the number of designations used throughout the advisory industry?
A: Our focus is not on narrowing designations but in expanding access to advice, products and services to help Americans achieve a secure and dignified retirement, fund a good college education for their kids, and fulfill their other financial goals. We believe independent financial advisors who are affiliated with independent broker-dealers-regardless of the specific designations they may hold-are the best source for meeting that need. 

Tax (Saving) Season Is Here
Each year brings new taxes and new rules to minimize taxes, and financial advisors seeking the latter can find ways to cushion the blows for alternative minimum taxes and C corporations. And for advisors with clients affected by the Bernard Madoff fiasco and other Ponzi schemes that grabbed headlines last year, it's time to dust off obscure theft-loss rules for victims.

Some of the newest breaks benefit dot-com folks who cashed in their incentive stock options (ISO) after the tech bubble burst earlier this decade, only to have them trigger an AMT greater than the value of their plummeting shares. "If you had an outstanding balance with the IRS due to ISO-related AMT on October 3, 2008, it is forgiven," says Ronald Perry, a partner at Russell, Brier & Co. LLP, a certified public accounting firm in Boston. "If you previously paid penalties and interest because you were late in paying this tax, you can get those refunded, half now and half next year." 

Pre-2005 alternative minimum tax credits are also refundable on the same schedule if the tax was triggered by incentive stock options and if the client is still carrying them forward, and it doesn't matter what the client's 2008 income or tax liability is.  "We have clients who are sitting on hundreds of thousands of dollars of these old credits," Perry says. "This is an enormous windfall for them."

Also new this year is the 0% tax rate on both qualified dividends and long-term gains for couples with taxable incomes of less than $65,100 (and for single people with income less than $32,550). "We're seeing retired clients take advantage of it," says Michael Kitces, director of financial planning at Pinnacle Advisory Group in Columbia, Md. "Some of them don't have high taxable incomes this year because of large deductions and [because they can] liquidate assets for cash flow without generating a lot of current income."

Note that the null rate stops at the income threshold.  A couple with $6,000 in qualified dividends and $60,000 in other taxable income pays 0% on the first $5,100 of dividends ($5,100 plus $60,000 of other income equals the $65,100 threshold) and 15% tax on their last $900 in dividends.  Perry points out that the kiddie-tax rules generally prevent children under 18 from using the 0% rate on their investment income above $1,800, as well as full-time students under 24 who earn less than half of their own financial support.

As for C corporations, they may not have to write a check to the IRS this spring if they anticipate a loss for 2009, says Atlanta business attorney John Jeffrey Scroggin.  He adds that by filing Form 1138, a corporation can use an expected loss in 2009 to offset what it owes for 2008. But the form must be filed before the tax is due.

Finally, there's the matter of Ponzi schemes and the Madoff mess. Robert Keebler, a CPA and partner at Virchow, Krause & Co. LLP, in Green Bay, Wis., says losses from investing with Madoff should be deducted in 2008 because that's when they were discovered.  But figuring the client's theft-loss deduction is tricky. Whatever the client might eventually recover must be considered. Without IRS guidance, that involves guesswork, Keebler says.

Equally thorny is how to handle previously reported income from Madoff investments since there is no standard. 

Keebler presents some options in a document found at (choose "services," then "tax," then "estate planning," and click on the document "Potential Madoff Tax Issues-Summary and Personal Checklist.") And by all means, he says, file protective claims to keep clients' old federal and state tax returns amendable, particularly for 2005 because that closes soon.

-Eric Reiner