January 13, 2000
By U.S. Mail and Electronic Filing
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: Release Nos. 34-42009; IA-1845; File No. S7-25-99, Certain Broker-Dealers Deemed Not To Be Investment Advisers
Dear Mr. Katz:
I am writing to provide information on the Securities and Exchange Commission's (the Commission) proposed rule regarding the application of the Investment Advisers Act of 1940 (Advisers Act) to broker-dealers which are beginning to offer brokerage services for an asset-based fee instead of traditional commissions. The CFP Board1 appreciates this opportunity to provide information it hopes is helpful to the Commission in deliberating this proposal.
The CFP Board commends the Commission for its efforts to ensure that American investors continue to prosper and its simultaneous promotion of the financial services industry's health. As financial services, products and delivery methods change, the Commission has been diligent in adapting to current business practices. The CFP Board believes the Commission's proposed rule is in the spirit of creating a regulatory environment that continues to allow investors to reach their financial goals while resting on the assurance of continued consumer protection.
The Commission has correctly assessed market conditions concerning changes in the brokerage business. Broker-dealers and their traditional transaction-based compensation business face pressure from clients who are increasingly either interested in low cost transaction services or full-scale advice. This trend has led broker-dealers to promote, for some time, the investment counsel they offer, all the while remaining in the brokerage business. The CFP Board believes the pressure on broker-dealers has become strong enough to warrant a shift from transaction to asset-based pricing. In turn, changes in the broker-dealers' pricing policy have rightly caused the Commission to review this issue. However, the CFP Board is not certain that the proposed rule as it currently exists is the most effective way to address this change.
The advice-driven business broker-dealers are facing is not a new method of providing financial guidance. The trend towards obtaining objective financial advice has developed over the last several decades and has furthered the development of the financial planning profession and interest in the CFP marks. Expansion of client-focused business practices to brokerage firms will benefit consumers, as it has done in the financial planning field. Consumers in the long run will feel more comfortable with investment recommendations that are client-focused, ensuring the economic health of the country and of their own retirement.
The CFP Board wants to point out to the Commission that just as an investment adviser may offer advice without discretion (such as the proposed rule requires of a broker-dealer seeking an exemption), all that separates the two under the proposed rule is the concept that the advice is "solely incidental." However, the proposed rule provides no clarification on how the Commission will derive what is incidental advice. If a client is compensating a broker-dealer specifically for advice within the asset-based fee structure, the Commission has an imperative duty to ensure the advice is truly incidental. This can only be achieved if the Commission makes clear determinations for broker-dealers as to the services they may offer and the practices they must follow to be considered offering incidental advice. Additional clarification from the Commission on what is "solely incidental" will give much needed direction to broker-dealers and investment advisers and strengthen consumer protection.
Under this proposed rule, the separation of client accounts into either brokerage or advisory accounts based upon the "solely incidental" basis has far reaching implications. Investment advisers provide their customers with advice under a fiduciary responsibility and therefore have certain disclosure and principal trading obligations. The Advisers Act also prohibits testimonials, while the applicable NASD brokerage account rules do not. Regulation in this area will best serve consumers by ensuring those protections exist wherever consumers receive substantive advice. Regulation should not allow brokerage accounts to serve as advisory accounts with less protection.
If broker-dealers simply define their services as incidental advice to avoid these consumer protections, it could not only harm the investment public, but possibly give broker-dealers a competitive advantage over investment advisers. This in turn would harm Certified Financial Planner and CFP Practitioner businesses. Possibly, a reduction in the number of qualified financial planners would occur and thus reduce access to personal financial planning as a choice for consumers.
The Commission has proposed requiring that "advertisements for and contracts or agreements governing the account must contain a prominent statement that it is a brokerage account."2 The Commission's attention to adequate consumer disclosures is well founded and necessary. The CFP Board's Code of Ethics and Professional Responsibility requires each CFP practitioner to be objective, competent, and fair and to always work in the client's best interest. The Code also prohibits licensees from making any false or misleading communications or advertisements and requires proper disclosures including any potential conflicts of interest, sources of compensation, and relationships with third parties.3 The CFP Board realizes from its own experience in drafting disclosure requirements how important these protections are in any professional relationship. The disclosure requirements in the proposed rule are essential in assuring that consumers receive the same protection with broker-dealers as they find with CFP licensees.
The CFP Board believes it is crucial that the disclosure requirements in the proposed rule adequately inform the consumer of the nature of the accounts (i.e. that they are brokerage and not advisory accounts). However, a simple disclosure statement may not be enough to protect consumers. The Commission and other securities organizations have in recent years begun increasing the attention to investor education due to the their concern over Americans deficient understanding of complex financial issues. Commission Chairman Arthur Levitt himself stated, "The plain truth is that we are in the midst of a financial literacy crisis. Too many people don't know how to determine saving and investment objectives or their tolerance for risk. Too many people don't know how to choose an investment, or an investment professional, or where to turn for help."4 With this lack of consumer understanding, simple disclosure of the nature of the accounts does not suffice. The Commission may find it needs to implement consumer education in this area as well as provide more comprehensive and specific disclosure requirements.
An equally important task for the Commission will be ensuring that broker-dealers closely adhere to the disclosure requirements. Recent advertising by broker-dealers indicates the Commission will need to be extremely vigilant in assuring broker-dealers follow the disclosure requirements. Advertising that would invite a consumer to, "consider your stock broker more of an adviser than a broker" is clearly not within the spirit of the rule and a certain violation of the disclosure requirement.
The Commission may also find additional consumer education is necessary to inform investors of the changes in policy. If changes in the rules do occur, broker-dealers will begin charging for advice, a cost consumers would normally have only seen from an investment adviser. Simply changing the rules and then not informing the public of this change could cause unnecessary and damaging confusion.
The CFP Board hopes the information it provided is useful to you in your deliberations on this proposed rule. If you should have any questions regarding the CFP Board, CFP licensees or the CFP marks, please contact me at 303-839-0610 or visit the Board's web site at www.CFP-Board.org.
Robert P. Goss, CFP
1 Founded in 1985, the Certified Financial Planner Board of Standards, Inc. (CFP Board) is a Denver based nonprofit professional regulatory organization whose mission it is to benefit the public by fostering professional standards in personal financial planning. The CFP Board owns the CFP certification mark and the marks CFP® and Certified Financial Planner® and licenses individuals who meet its certification standards to use them. There are currently over 34,600 CFP licensees nationwide and 10 international affiliates that license additional thousands of qualified persons outside the U.S. The CFP Board also serves as an educational resource to federal and state lawmakers and regulators on personal financial planning issues.
2 Certain Broker-Dealers Deemed Not To Be Investment Advisers, Release Nos. 34-42099; IA-1845, November 4, 1999.
3 CFP Board's Code of Ethics and Professional Responsibility (1999)
4 Levitt, Arthur, Chairman, U.S. Securities & Exchange Commission, speech at the Media Studies Center, New York, NY, April 26, 1999