Subject: File No. S7-25-99
From: Thaddeus Borek
Affiliation: Attorney and Registered Investment Advisor

September 22, 2004

As an attorney and investment advisor, I see proposed rule 202a11-1, also called the Merrill Rule, as a major loophole by which broker-dealers can avoid the fiduciary standards that should be applied to anyone marketing themselves as a provider of investment advice. I urge the SEC to withdraw this proposed rule.

Fiduciary duty is the crux of the responsibility an advisor has to his clients. Simply stated, an advisor must put client interests first and provide disinterested investment recommendations. It is more than just a business approach, it represents a legal standard and basis for liability. It assures that the advice rendered and paid for is not motivated by the profit motives of the advisor or his employer.

My experience as both an attorney and advisor has convinced me that the Merrill Rule would be abused and would harm investors. The reason is that the rule allows firms to position and market themselves as advice-providers while avoiding the duties that the law otherwise imposes on such advisors. The new fee-based accounts go far beyond a mere billing arrangement and represent a change in the way of doing business, a new positioning as advisors rather than brokers. As such the Merrill Rule represents nothing less than an end game around the fiduciary duties of the Investment Advisers Act of 1940.

There may be no better example than the eponymous firm of the Merrill Rule. From the recent marketing of their services it would be easy to forget what business they are in. As I type these comments, the front page of their investor-targeted web site reads as follows:


How do you see your financial life? Your investments are here. Your retirement there. Your mortgage over here. Your banking way over there. Seen separately and managed separately, your financial life can only take you so far. Now theres a way to go beyond those limits

At Merrill Lynch, we see your financial life in total. Total MerrillSM. Total Merrill is the power of all that is possible from a relationship with Merrill Lynch a relationship that provides you with a lifetime of solutions based on your total financial picture.

Working side-by-side with you, your Merrill Lynch Financial Advisor sees your life in total. Helps all the pieces work together.

END QUOTE - from on 9/22/04

This is the first thing a potential client sees when visiting the individual investors portion of the site.

Does this sound like a description of advice incidental to the sale of securities, rendered occasionally by product sales representatives? Of course not. Everything about it positions the service offerings as being in the realm of comprehensive financial advice. The positioning extends even to the title of their registered representatives, who call themselves Financial Advisors.

Which is fine - in fact I believe this is the kind of advice many investors need. But you cant have your cake and eat it, too. If you provide financial advice, you register as an advisor, and subject yourself to fiduciary standards. Anything less is just a marketing trick, and a gaping hole in the system of regulation. If you call yourself a Financial Advisor and tell your potential customers that you will be analyzing their financial life in total, you have crossed the line. No consumer should be expected to know that the firm refuses to back up the advice that its registered representatives will provide.

And lets not forget who is doing the talking here. This is the firm of cheerleader-analyst Henry Blodgett, one of the firms implicated in countless brokerage scandals over the past several years. Arguably most of the activities for which the firm has been penalized would have been strongly discouraged had fiduciary duties been imposed on every one of their Financial Advisors.

Not to pick on Merrill. This isnt unique, and a brief review of any major magazine with wirehouse ads, or the company web sites, will show that there is a new positioning of these firms and especially, the fee-based accounts.

Where does the rubber meet the road? When a client loses money, and looks to the legal system for redress. And there, a second issue comes into play. Broker-dealers force their customers into mandatory arbitration through NASD Dispute Resolution. Speaking as an attorney who has represented individuals in this process, I believe that this system is not in the best interest of clients. A fiduciary would not impose industry arbitration on its clients in fact doing so is arguably a breach of fiduciary duty itself. Yet this is the system of redress for an investor who has been wronged.

So lets look at the life cycle of the wronged client. They see adds in newspapers and magazines talking about financial advice. They visit the company web site and see discussions about comprehensive financial advice. They meet with a Financial Advisor who reviews the big picture. They are sold - well who knows what? It could be any of the products that have led to regulatory actions in the last couple of years. An inappropriate Variable Annuity, an dozen high-expense in-house mutual funds, a mix of mutual fund B shares instead of above-breakpoint A shares, the latest closed-end mutual fund thats giving a nice payout to the registered representative, or the fund-du-jour whose wholesaler bought lunch for the office this week.

The client eventually sees the recommendations as being not-in-their-best-interest and seeks redress. Only then will he be surprised to find out that his Financial Advisor was not an Adviser, and that the advice he paid for came without guarantees. The only rules were caveat emptor and the more-lenient suitability standards that apply to registered representatives. And that he is left to the process of manadatory, industry arbitration where fiduciary duty is not exactly respected as driving the broker-client relationship. And he learns that unless he has lost at least many tens of thousands of dollars the process probably is not worth their effort. In fact the firms may drag out the process to make it as costly as possible...7/19/04 - Merrill Lynch, Morgan Stanley, and Citigroup fined 250,000 for failure to produce documents in discovery - my experience suggests this is routine. He might not even be able to find an attorney who would take the case.

Is this the desired outcome? Or would it be better to acknowledge that brokers positioning themselves as Financial Advisors and overseeing fee-based accounts better take on the duties and responsibilities that come with the relationship? And in the United States that means registering as an Investment Adviser under the 1940 Act and by extension, being a fiduciary.

When legislature drafted the Investment Advisers Act of 1940, fiduciary duty was specifically included in the language of the statute. And this was done for a reason: to delineate those who provide disinterested advice from those who sell products, with the goal of protecting investors. Lets not let 64 years fog the memory of the purpose of this important Act by giving a free pass to the firms it was specifically designed for.

Thaddeus Tad Borek

Attorney at Law
Principal, Borek Financial Management
CA-Registered Investment Adviser
703 Market Street, Suite 1014
San Francisco, CA 94103