Knowing When to Fold 'Em

Thompson, Duane
July 2005
Journal of Financial Planning;Jul2005, Vol. 18 Issue 7, p20
Academic Journal
This article discusses the recent adoption of a broker and dealer exemption by the U.S. Securities and Exchange Commission (SEC), as of July 2005. Its unwavering mantra all along has been that fee-based brokerage programs help align the interests of the broker more closely with the customer. I have no problem with that. I do have a problem with how they are regulated in offering those programs under sales agent rules--along with the tremendous amount of confusion the SEC has generated among investors by allowing brokerage firms to hold out as financial consultants without being subject to fiduciary adviser rules. When the SEC hastily proposed the broker/dealer exemption in 1999, it was forced to bypass, somehow, the statutory exemption for broker/dealers in the Investment Advisers Act of 1940. Under the 1999 proposal, the SEC decided to avoid the issue. As ludicrous as this dire warning to stay away from a commonsense definition might sound, the problem with it is that the Financial Planning Association and others objecting to the rule never suggested brokers should not provide broad advice about markets, or advice in connection with a transaction where they are paid through a commission. Thus, the SEC leaves the door wide open for a heated debate over what part of financial planning is solely incidental, while it closes the door shut and says stockbrokers may continue to use confusing marketing terms that imply comprehensive advice. The other key change in the final rule that may only be a cosmetic change is the disclosure requirement.


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