Opening Statement by SEC Chairman:
December 22, 2004 Open Meeting
Chairman William H. Donaldson
U.S. Securities and Exchange Commission
December 22, 2004
Good morning. This is an open meeting of the Securities and Exchange Commission. We have one item on our agenda that encompasses two separate but related actions recommended by the Division of Investment Management.
First, the Division of Investment Management is recommending that we adopt a temporary rule, and simultaneously direct the withdrawal of a staff no-action position, in order to permit broker-dealers to offer asset-based and fee-based pricing to their customers without compliance with the Investment Advisers Act. This recommendation will serve as an interim accommodation for broker-dealers who currently offer asset-based pricing to their customers in reliance on a staff no-action position that was promulgated in 1999 when we first proposed a rule that would allow such accounts. We will revisit the policy implications of this measure in the context of the broader interpretive issues raised in today's proposal.
Second, the Division of Investment Management is recommending that we propose a rule that would exclude from the coverage of the Investment Advisers Act those broker-dealers who offer asset-based pricing to their customers. The Division also recommends that we propose to clarify the obligation of a broker-dealer to comply with the Advisers Act when the broker-dealer exercises investment discretion with respect to an account, and when the broker-dealer performs certain financial planning and other services.
Today's discussion has its roots in the 1995 Tully Report on compensation practices in the retail brokerage industry. Building upon the report's recommendations, in 1999 the Commission proposed a rule designed to promote compensation practices that align the interests of customers with those of brokers and their registered representatives. The 1999 proposal generated an intense debate, and the Commission's staff has worked hard to formulate a practical rule that would serve investors' interests. As part of this process, we re-opened the comment period last August.
I agree that the particular form of a broker-dealer's or investment adviser's compensation ought not to serve as a bright-line boundary between the regulatory obligations of these financial service providers. Although such an inflexible test may once have been adequate as a `proximate solution to an insoluble problem,' it seems to me that investors would be better served by an analysis that focuses more squarely on the nature of the services provided, and the relationship between the investor and his or her service provider.
Although the Advisers Act contemplates that broker-dealers may provide their clients with a certain amount of investment advice without triggering the registration obligation, the Act's broker-dealer exception is not unlimited. Commentators therefore suggested that we give more guidance on what it means for an advisory service to be "solely incidental to" brokerage activity. Although we received significant comment on this issue in response to our 1999 proposal, in view of the thorny interpretive problems inherent in this matter, I agree with the recommendation to seek additional comment.
With that, I would like to thank Paul Roye, Director of the Division of Investment Management, and his staff, for their work in developing this recommendation. In particular, I would like to recognize Bob Plaze, Nancy Morris, Jamey Basham and Robert Tuleya. I would also like to thank the Division of Market Regulation and the Office of General Counsel - both of which contributed a great deal to the recommendation before us.
Now Paul, could you please give us the details.