February 7, 2005
I would like to comment on file number S7-25-99 , which would continue to exempt broker dealers from registration under the Investment Advisors Act of 1940, on the premise that advice is incidental to the business of broker dealers, and that it would be too costly for the industry to be subject to a second set of regulations and that the public would be deprived of the benefits the industry provides to the capital markets by its own trading as market makers.
I am particularly concerned that the agency charged with protecting the investing public in its release has wholesale adopted the arguments of the industry in its release.
The brokerage industry packages itself in its advertising as being professionals who know how to manage and advise the unsavvy public on how to handle all their finances. At this time several firms are going so far as to have broad advertising about Mortgaging ones home, and using some of that equity to trade stock. It is highly curious that the Fed has expressed concern over that practice and financial advice and not the SEC.......Now the SEC is stating that it does not want to impose more Advisory regulation on the brokerage industry because their is a sufficient regulatory scheme already on broker dealers. I strongly disagree.
The giving of advice is not incidental to the brokerage business. The industry holds itself out as being expert and if it is paid a mere 1 percent to render advice that fee or a fixed fee - those fees are substantial and -often exceed the amount that could even be obtained in safe investments in Treasury instruments over the last several years......Those fees should support some regulation through the further protections of the Investment Advisors Act.
No one has demonstrated that such costs would jeapordize the financial well being of the brokerage industry. But the arbitration process has demonstrated that investors who pursue the industry on their faulty advice -only succeed 50 percent of the time and in most cases never even collect
In analyst cases investors are succeeding presently in approximately 20-30 percent of the cases....a sad commentary on possible redress and the existing regulatory and litigation structure. The SEC has not commented on how much was lost in individual portfolios, pensions, etc. after the 90s and the market collapse of 2000-2002. Was the speculation the fault of the public or the advice of the industry making huge profits throughout those years....i.e. both up and down years.....
The serious abuses of the industry in the 90s.....in the analyst cases, mutual fund scandals, trading scandals and other self dealing do not show that the industry has a strong interest in self regulation. The industry also pushed hard for the abolition of Glass Steagal.
Today an investor in arbitration. given the complexity of corporate structures..subsidiaries..affiliates...parents...trading entities...has a tough road to hoe to ascertain which entity he can sue....and often has his claim dismissed against those other than the entity which executed his trades.
It is important to note that the entity which executes an investors trade usually blames market forces and not their own advice...even if it is through materials provided incidentally through a related corporate entity...possibly engaged in self dealing through its principal trades....
The industry has not established that advise is incidental to its brokerage business...Nor has it demonstrated that regulation will be too costly. It has made only a broad assertions and ..Not demonstrated that it provides liquidity to the capital markets by its own trading....Witness the ongoing investigations of the specialists....and the many front running cases ...Robertson Stevens and many other trading arms of the largest firms...settled in recent years.
Subjecting the industry to the additional regulation would be a positive step in protecting the investing public. The exemption provided since 1999 should not be continued.
The original intent of all the securities laws was to protect the investing public. The industry position which you seem inclined to adopt that the rule would require too much regulation at too much cost has not been demonstrated. Your position release simply fuels recent allegations in the press that the agency charged with the protection of the investing public is not carrying out its mandate.