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News August 8, 2005 Issue

IAA Opposes SIA’s Extension Request for Fee-Based Brokerage Rule

The Securities Industry Associationís recent request that the SEC hold off on the compliance date for certain aspects of the fee-based brokerage rule has provoked a strong response from the Investment Adviser Association.

In an unusually harsh letter sent to the SEC August 4, the IAA argued that the brokerage industry shouldnít be given any additional time, much less until April 1, 2006, as the SIA requested, to figure out which of its brokerage accounts are discretionary. The IAA noted that the SIA never raised timing as an issue during the five and a half year rulemaking process. The IAA took particular umbrage at the notion that the SIA needed extra time to figure out which accounts had "temporary or limited" discretion: "Having requested this special accommodation in the rule, we believe it is a bit disingenuous to now argue that determining compliance with this provision will involve Ďa labor-intensive and time-consuming process.í"

The IAA pointed out that the SIA waited three months after the final rule was adopted to raise its concerns. "[T]he SIA obviously is now balking at actually following through with the changes that the rule entails," said the IAA. "Despite praising the Commissionís adoption of the new rule, it is abundantly apparent that the SIA and its members are seeking to delay any rule that requires brokers to treat accounts as advisory accounts, whatever the circumstances."

Interestingly, the IAA did not object to extending the compliance date as applied to the financial planning aspects of the rule, as the SIA also had requested. IAA executive director David Tittsworth explained that his groupís membership was more directly affected by the discretionary account issue.

Will the SIA get its relief? SEC Division of Investment Management associate director Robert Plaze told IM Insight that "when we put a compliance date in a rulemaking, thatís our best estimate" of how long it should take to implement. But, he added, "you want it done right, as well as done timely." As a general matter, Plaze noted that "if we hear arguments that seem to be worthwhile" about "whatís a reasonable amount of time," the staff would be willing to consider granting an extension.

Interestingly, the SIA first submitted a July 26 letter indicating that the delay was necessary not only to provide time for the industry to address operational issues, but also for the SIA to submit a request for interpretative guidance regarding the financial planning prong of the rule, and the SEC or staff to provide that guidance. Two days later, however, the group submitted another request in lieu of the July 26 letter that did not mention the guidance.

"We decided that the two issues (the extension and interpretive guidance) were not co-dependent and could be dealt with separately," said SIA spokesperson Margaret Draper. She said the group still plans to request interpretive guidance.

In other news, the NYSE last week issued an information memo interpreting the exchangeís fee-based brokerage rule. Among other things, the memo strongly suggests that brokerage firms utilize exception reports to flag fee-based accounts with low levels of trading activity. Thatís advice that Morgan Stanley will be taking to heart: Last week, the firm settled NASD charges stemming from its failure to identify such accounts, to the tune of $6.1 million.