In a move that may be the opening salvo in a fight for unified investor protection rules, the SEC is seeking information from potential contractors to conduct a study about how investments and advice are marketed to individual investors. A round of focus groups conducted in early 2005 for the SEC with individual investors showed that such investors are confused by the multitude of titles used by investment professionals, the roles those professionals play in interactions with investors, fees and commissions, and the wording of disclosures.
"I don't know the difference. I mean I've got a guy that gives me advice. I don't know what he is." That comment, from a participant in one of the investor focus groups, sums up the confusion that many investors feel and is in large part what is prompting the new SEC study. The focus groups comprised individual investors who had investment accounts (outside of employer retirement plans) with between $2,000 and $499,000 in assets, and were conducted in Baltimore and Memphis by Siegel & Gale, LLC, and Gelb Consulting Group.
According to the new SEC Request for Information, the Commission is looking to gather information on how a number of issues affect individual investors, including: how investment professionals use titles and marketing; fees and costs to investors; compensation from "other sources" to broker/dealers and investment advisors for offering financial products, accounts, programs, and services; disclosures; and investors' perceptions about what "duties and obligations they are owed" by B/Ds and advisors.
When the SEC's Broker/Dealer Exemption rule, SEC Rule 202(a)(11)-1, went into effect this year, under which broker/dealers could open fee-based brokerage accounts but are not required to register as investment advisors unless they have discretion, B/Ds won the right to be governed by suitability rules instead of the fiduciary rules that investment advisors are subject to.
One custodian to independent advisors, TD Ameritrade Institutional, based in Jersey City, New Jersey, thinks the investment industry should do better by individual investors. The firm has conducted two studies of its own with individual investors, and their findings agree with the SEC focus group's reports of investor confusion. TD Ameritrade Institutional President Tom Bradley applauds the SEC's move to gather more information. "My perception is that [the SEC] viewed this as kind of a short-term solution, and they recognized that they had to do further studies. They did look at our two studies as well," says Bradley, "and now they've announced that they are going to take a hard look at this.
"What you have here [with 202] is something that started off trying to provide better service to investors, and that's allowing brokers to provide their brokerage services for a fee, which many believe is better than a commission-based brokerage, but what you've ended up with is one service–and that's advice for a fee–under two different sets of rules," Bradley asserts. "That, we believe, is a bit of an absurdity. We think it confuses investors, we think that it exposes investors to potential harm because, frankly, the Investment Adviser Act of 1940 requires advisors to do what's in their best interest–it deems them to be a fiduciary. The brokerage rules were created under a different set of circumstances and deemed stockbrokers to be salespeople. Why shouldn't there be just one set of rules for this one service?"
