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News October 4, 2004 Issue

Fee-Based Brokerage Comments

The SEC is expected to take action on the fee-based brokerage rule by year-end. In its most recent comment letter, the ICAA asked the SEC to:

  • treat all discretionary accounts as advisory accounts, regardless of the form of compensation;
  • clarify what "solely incidental" means, by defining what traditional brokerage services are and distinguishing core advisory services such as portfolio management, selection of portfolio managers, and asset allocation from "solely incidental" advice;
  • prohibit broker-dealers relying on the rule from prominently marketing their advisory services; and
  • enhance the required disclosure under the rule so that a typical investor can readily understand the implications of its account being a brokerage account.

Several broker-dealers said that a decision not to adopt a final rule would harm investors who have opened fee-based accounts. For example, Citigroup Global Markets, which includes Smith Barney, said that it has over 100,000 fee-based brokerage accounts totaling $18 billion in assets. For dual registrants, the fee-based brokerage product "fills a specific gap in the spectrum from traditional brokerage to managed accounts," it said.

The ICI said it supported the proposed rule, but recommended that the SEC study the broader issues raised by the proposal. Schwab & Co. said that "the time may be ripe for a comprehensive review of the separate statutory schemes for investment advisers and broker-dealers in light of how professional roles have changed over the years." Such a review "may lead to recommendations to Congress for fundamental reforms in how investment advisers and broker-dealers are regulated," it said.

Meanwhile, the Securities Industry Association and Financial Planning Association filed comment letters that, in part, criticized the otherís viewpoints. The SIA said that the FPA, in seeking "competitive advantages" under the rule, "totally ignore[s] the full panoply of rules and regulations to which broker-dealers are subject under the provisions of the Exchange Act." To illustrate their point, the SIAís comment letter provided a chart illustrating the range of regulatory requirements imposed on broker-dealers.