August 23, 2004
Dear SEC Commissioners:
Thank you for inviting additional public comment on the proposed rule entitled Certain Broker-Dealers Deemed Not To Be Investment Advisers the Rule as proposed on November 4, 1999.
Ive followed this proposed rule and the many comments about it since it was initially proposed. In my professional capacity I serve not only as the Managing Director of an SEC Registered Investment Advisory firm, but as the Chief Compliance Officer as well. The financial planning profession has been my calling for more than two decades, and I am also active as an NASD member firm Registered Representative. Based upon this experience I feel qualified to comment on the proposed rule, and more importantly upon its ramifications in the public marketplace.
I believe the proposed Rule is detrimental to consumer protection by allowing broker-dealers to avoid the blanket fiduciary protections of the Investment Advisers Act of 1940. By eliminating special compensation as a critical element in the contractual relationship, the Rule permits stockbrokers to misrepresent their fundamental sales role as one of a fiduciary adviser receiving a fee for advice.
This in turn places financial planners at a competitive disadvantage by allowing brokers to market programs appearing similar to the offerings of financial planners or investment advisors, under less rigorous regulatory standards for disclosure and advertising. In reality the consumer may receive a totally different set of services and a totally different standard of care. Many consumers are unable to recognize that their advisor is regulated as a salesperson and that buyer beware aptly describes the standard of behavior prevalent at many firms.
One need look no further than the daily advertisements in major publications and broadcast media to conclude that the brokerage firms taking advantage of this proposed rule are not selling transaction capabilities. In fact they are selling advice. Advice is the cornerstone of their advertised and promoted value added proposition.
American financial consumers deserve the higher standards mandated by the 1940 Investment Advisors act when they place their trust in someone who they view despite the form of registration to be their advisor.
Even sophisticated financial consumers should not be expected to understand the nuances incumbent upon differing standards of care due to a firms choice of regulatory filings necessary to conduct business. The typical investor hasnt got a chance at discerning these distinctions. The proposed rule blurs the line to an indiscernible distinction and this must not be deemed to be acceptable.
It would not be fair to suggest that merely registering as an investment advisor assures that a firms customer will receive a higher standard of care. That alone, of course is not sufficient. It is however a good first step.
The key to defining a need to register is simple. Is the firm in question offering the fee in lieu of commission marketing itself as a provider of advice - in any form or manner relative to which securities to trade or hold? If so that firm should be required to register under the Investment Advisors Act of 1940.
If ALL that the firm is doing is executing trades and perhaps offering minimal suggestions on how to best execute a transaction totally initiated by the customer the firm is a brokerage firm. In determining the nature of the relationship between the firm and its customer you may wish to examine such evidence as advertisements used by the firm in question, titles given to representatives, the nature of research supplied to customers, whether transactions are solicited, if there is a pattern indicating trades in securities in which the firm makes a market or has some other interest or relationship with the issuer, if the customer is served by a call center or by a personal consultant or some similar title, and if the customers consultant in fact receives compensation based upon the amount of fees the customer generates as opposed to an online or call center discount brokerage style of business.
In considering future regulation I encourage the SEC to prohibit brokers who claim the solely incidental exemption from marketing their services as advisory services. Id encourage you to prohibit such brokers from using the terms financial, retirement, wealth, or similar terms in combination with advice, consult, counsel, plan, or any similar combination of words suggesting comprehensive financial planning services In like manner the SEC should prohibit individuals who are not covered by Investment Advisory Registration from using a title similar to financial planner.
In light of the above I respectfully request that the proposed rule Certain Broker-Dealers Deemed Not To Be Investment Advisers, be withdrawn in its entirety.
Thank you for your consideration,
Neal J. Solomon, CFP, CLU, ChFC