Advisors May Have to Tell More

The Securities and Exchange Commission staff is likely to propose a rule requiring investment advisors to disclose far more detail about potential conflicts of interest, an SEC official said Wednesday.

“The current disclosure form is old and tired and could be improved dramatically,” said Barry Barbash, the SEC’s investment management director.

The SEC proposal would change the “ADV” form distributed to investors and filed with the SEC by 23,000 advisor and financial planning firms. The form would ask advisors to disclose more specific information about their investments and compensation, Barbash said.

Some advisors have financial stakes in investments they recommend to customers, Barbash said. Many also receive commissions from insurance companies, brokerages or mutual fund families if they make a sale. Planners are supposed to offer objective advice on how to manage personal finances, including taxes, insurance and investments.

In 1995, the SEC alleged that Meridian Investment Co. failed to disclose to clients its economic interest in a marina project. Meridian, a unit of Reading, Pa.-based Meridian Bancorp, invested $4 million of employee benefit assets in the marina after receiving pledges from the project developers to help Meridian win a state pension contract, the SEC alleged.

Meridian agreed to settle the charges without admitting or denying wrongdoing.

The SEC proposal, expected to be submitted by staff to commissioners by year-end, also may require advisors to disclose services they receive under “soft-dollar” arrangements with brokerages, Barbash said.

Under these arrangements, brokerages offer rebates on the commissions they charge advisors. Advisors are restricted under SEC rules to accept only rebates that advance investor research. A recent audit of 325 advisors and brokerages found indications that some advisors were using soft dollars to pay for dental bills, cars and office remodeling.

The SEC conducted separate audits last year of hundreds of small financial planners in an attempt to identify compliance issues in this under-regulated sector. The audit exposed potential conflicts of interest among some planners who received commissions for selling insurance, mutual funds or stock.

“It’s amazing what some planners get away with now,” said J. Michael Martin, a Columbia, Md., advisor who was on the board of the National Assn. of Personal Financial Advisors, a trade group of small advisors. “I’m a big fan of the SEC idea, because what some planners recommend is influenced by their expectation of receiving commissions.”

Although the vast majority of planners receive commissions, the current ADV form asks the planner to check a box only if he or she receives commissions or has an interest in a firm that receives commissions, Martin said. He said the form should request details of who pays the planner’s commission and the size of this payment.

State regulators have been working with the SEC in developing a new ADV form.