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News February 28, 2005 Issue

NASD to SEC: Advisers Should Disclose That They Aren't Brokers

When it comes to disclosing the differences between brokers and advisers, the NASD is taking the position that whatís good for the goose is good for the gander.

In a recent comment letter on the proposed fee-based brokerage rule, the NASD argued that the ruleís proposed disclosures should not be required because they wrongly imply that a firmís duties and obligations are greater with respect to advisory accounts than for brokerage accounts. Brokerage investors, said the regulator, are "fully protected" and therefore the disclosure is "unnecessary and misleading."

If, nonetheless, the SEC decides to require the disclosure, then the SEC "should require similar disclosure with respect to investment adviser accounts," said the NASD.

Specifically, the NASD suggested that advisers:

  • disclose that their accounts are advisory accounts and not brokerage accounts;
  • state that, as a consequence, the clientís rights and firmís duties and obligations to the customer, including the scope of the firmís obligations under federal law, may differ; and
  • identify an appropriate person at the firm with whom the client can discuss the differences, including a clear explanation of the meaning and scope of the investment adviserís general, implied duty to the customer.

Like the Securities Industry Association, the NASD submitted matrices comparing broker and adviser regulation, both at the firm and individual level.

In other news: Morgan Lewis & Bockius partner Steven Stone submitted a comment letter arguing against treating discretionary brokerage accounts as advisory accounts. Stone argued that that approach "breaks with longstanding interpretation" by the SEC and staff and runs contrary to Congressís intent.

Meanwhile, the post-comment period lobbying has begun. The Securities Industry Association, accompanied by representatives from several major Wall Street firms as well as outside lawyer Barry Barbash of Shearman & Sterling, met with Commissioners Cynthia Glassman, Paul Atkins, and Roel Campos. The Investment Counsel Association of America, along with the Consumer Federation of America, also met with those three commissioners.