In a move that could change the way brokers and advisers sell mutual funds, the Securities and Exchange Commission has released a new report examining public and industry perspectives on investment advisors and broker/dealers.

The study was conducted by the RAND Corp.'s Center for Corporate Ethics, Law, and Governance after a Court of Appeals last March overturned a 2005 SEC rule permitting non-adviser broker/dealers to charge fees to investors based on account size.

"The Commission has been anxious to receive RAND's study of the investment adviser and broker/dealer industries, and the nature of their relationships with customers," said SEC Chairman Christopher Cox. "The report will assist the Commission's efforts to update our regulations to improve investor protection in today's new marketplace."

At nearly 220 pages in its final draft form, the report is comprehensive, thorough and unsurprising in its measured approach, financial experts said.

"The basic findings of the study are sound and, in fact, obvious to those working on the issue," said Barbara Roper, director of investor protection for the Consumer Federation of America. "The report is useful and fills in the details, but doesn't necessarily break new ground."

Roper said the RAND report verifies that the boundaries between broker/dealers and financial advisers have blurred in recent years and that investors don't understand the difference.

By definition, a broker trades mutual funds and securities on behalf of others, a dealer buys and sells securities for their own accounts, and an investment adviser is someone who provides advice.

The introduction of fee-based brokerage programs; interchangeable, generic titles such as adviser, financial adviser and financial consultant; and "we-do-it-all" advertisements make it difficult for investors to know the difference between broker/dealers and investment advisers, the report found.

"Nobody calls themselves a broker anymore," said Duane Thompson, managing director of the Financial Planning Association's Washington office. "They all have titles like vice president, investment. Consumers are confused by the number of titles and they don't understand the legal nuances."

"If investors don't understand the difference, it suggests they don't go out shopping for a broker," Roper said. "If you are giving advice, you have a fiduciary duty to work on behalf of your client's best interests. If you are selling securities, you have other responsibilities."

Adding to the problem is the increasing amount of overlap in these two formerly distinct areas. Many registered firms are involved in complex, multifaceted relationships spanning a variety of business activities. Firms are also continually evolving and bundling their products and services in response to market demands and the regulatory environment.

RAND analyzed approximately 15,000 firms in the fourth quarter of 2006 and found that a majority of them were engaged, either directly or indirectly, as an investment adviser or as a broker/dealer, but not both.

The report found that as a firm's assets grow, so does its range of services. Larger firms frequently are affiliated with other financial services firms or conduct a significant amount of business in both the investment advisory and brokerage fields.

Smaller firms tend to provide a more limited and focused range of either investment advisory or brokerage services.

This overlap is eroding existing regulations, namely the Securities and Exchange Act of 1934 for brokers and dealers and the Investment Advisers Act of 1940 for investment advisers.

Many experts are concerned that investors may lose the fiduciary protections of these acts if the SEC were to support a blended form of regulation for brokers and advisers.

The SEC attempted this a few years ago with a 2005 rule called "Certain Broker-Dealers Deemed Not to Be Investment Advisers"-also known as the "Merrill Lynch Rule"-which would have allowed brokers to call themselves financial advisers and charge fees for information without being subject to the same regulations as independent advisers.

The FPA challenged the regulation, and it was eventually overturned, prompting the SEC to commission the RAND report.

"The Merrill Lynch Rule was an ill-conceived rule on the part of the SEC," Roper said. "We supported the FPA lawsuit, but the court didn't solve the biggest problem, leaving us with a far-from-ideal situation. Regulatory status should be determined by what you do. If you give advice, you should be an adviser. If you sell products, you should be a broker. If you do both, you should be a financial planner.

"We'll never be able to get investors to understand a policy that makes no sense," Roper added.

Investment advisers and broker/dealers are required to provide disclosures to clients and potential clients, but the report found that most disclosures aren't written in a way that is understandable to the average investor. On top of that, investors don't take the necessary time and effort to read and understand them.

"Current disclosures are not readable for the average layperson," Roper said. "We need a plain-English disclosure rule that explains services, compensation, conflicts of interests and a track record of past performance."

(c) 2008 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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