August 23, 2004
I respectfully request that the Proposed Rule be immediately withdrawn in its entirety. It offers no benefit to the investing public and no significant cost-savings or relief from a regulatory burden to broker-dealers BDs.
The investing public is absolutely unaware that similar-looking services offered by BDs and by Registered Investment Advisors RIAs are different in several crucial respects.
First, RIA reps must act as fiduciaries BD reps can sell anything suitable. This is a key distinction, and its practical implications cannot be overstated.
Second, RIA reps must disclose conflicts of interest BD reps now must disclose conflicts with respect to mutual funds but not with respect to individual equities. What rational policy supports this distinction?
Third, RIA reps must disclose their personal educational background and regulatory record through Form ADV or a similar document BD reps need not bring this up if it is embarassing. How is the public served by this?
Fourth, when RIA firms like ours offer financial advice, we provide comprehensive advice and charge directly for it. But under this proposed rule, when BDs offer nominally the same service, it must be solely incidental to brokerage services, even if special compensation i.e. a separate fee is charged for it. So my understanding is that, to be in compliance with the exemption, the BD rep must provide no more than an incidental planning service. Have you not seen the BD advertisements prominently playing up the advice angle while downplaying the brokerage angle? Has there been any enforcement in this area? In contrast, RIAs are required to actually deliver on their promises of comprehensive financial advice.
This proposed rule has been the de facto law of the land for almost five years, with a highly unusual written promise of no enforcement action for reliance upon it before adoption. Yet this rule serves no purpose other than to allow certain BD wolves to conceal themselves in sheeps clothing. Undoubtedly most BD reps act in entirely honorable fashion. Yet this Proposed Rule lets the bad apples among BD reps spread their creeping rot across the BD client base, and by association, across ours.
The multiple roles played by BD reps create many conflicts of interest, including direct incentives to push favored products, and incentives to create principal transactions e.g. to sell out of the firms inventory. In contrast, independent RIAs typically offer only financial planning and investment advice, and are generally free from these conflicts. Yet the proposed rule exempts BD reps and not RIA reps from any need to disclose these conflicts. This proposed rule is a holdover from before the many disclosures of BD wrongdoing, and should have been swept away with the SECs renewed focus on inappropriate BD behavior.
This proposals unique no-enforcement status helps to explain in no small part the huge growth in fee-based accounts at major BDs in the last five years. Independent RIAs have prospered as well during this time, even subject to the stricter rules of the Investment Advisers Act. BDs will not be harmed by being brought under the same Act when providing advisory services. The proposed rule provides far too vague an exemption, and permits them to market a very different service non-fiduciary, not fully disclosed as apparently the same service RIAs offer.
The Proposed Rule engenders confusion, permits looser standards of responsibility and disclosure, and is out of date with todays expectations of the SEC in light of public and Congressional outcry over past abuses. This rule serves only to promote continued abuse.
It is so flawed in its premises, it is not worth amending. It must simply be withdrawn.
P.S. Yes I am a representative of an independent RIA. I used to be affiliated with a BD and an insurance agency, but left both over concerns about inappropriate sales behavior. I have a clean regulatory record and a clean conscience.