Fund Democracy

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Barbarians at the Gate, On Wall Street (June 2000) & Financial Planning Magazine (June 2000).

Abstract: When is a broker an investment adviser? According to the SEC, the answer shouldn’t depend on whether the broker is paid for providing advisory services.  That quixotic stance is the position taken by the SEC in a new rule it proposed last year. In effect, brokers will get a free pass from regulation as investment advisers as long as they don’t exercise discretion over clients’ accounts, or they are compensated solely on a transaction/commission basis.  The article explains why the SEC is adopting the rule, and responds to Chairman Levitt's recent proposal to enhance the rule's disclaimer requirement.  (The full text of these articles is available to On Wall Street and Financial Planning Magazine subscribers.)

The Merrill Rule, named after the sponsor of the program that stirred the Commission to action, will strip investors of the fundamental protections that Congress provided against unscrupulous investment advisers.  Brokers who provide investment advice as a principal component of their services will not be subject to the same disclosure requirements that apply to all other investment advisers.  Nor will they have to obtain clients' permission before selling securities to clients out of the brokers' own inventory.  The Commission's recent proposals to combat pay-to-play practices and require investment advisers to post their registration forms on the Internet will do much to deter fraud in the investment adviser industry.  It is unfortunate and ironic that the combined benefits of these proposals will be outweighed by the fraudulent practices that will result from the SEC's adoption of the Merrill Rule.  If you think that the SEC is making a mistake, then let Chairman Levitt know!

You can view online the SEC's proposal and links to public comment letters on the proposal.  The Merrill Rule also was a topic during the first panel at the SEC's May 23 conference on investment adviser regulation.  For related press articles, see: Paul Farrell, Gordon Gekko Still Rules Wall Street: Ethics Losing to Greed -- Where's the SEC? CBS.Marketwatch.com (May 30, 2000); Christopher Schmitt, Battle Continues Over Exemption for Flat-Fee Accounts, TheStreet.com (May 23, 2000); Christopher Schmitt, Battle Continues Over Exemption for Flat-Fee Accounts, TheStreet.com (May 23, 2000); and Christopher Schmitt, Wall Street Wants Flat-Fee Accounts Exempted from Investment-Adviser Rules, TheStreet.com (May 5, 2000).

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