Brokers’ sales to fee-based clients OKd

From Times Wire Services

The Securities and Exchange Commission approved a plan Wednesday to let brokerages sell securities to clients with fee-based accounts but will subject firms that do so to stiff consumer-protection requirements.

The SEC decided to require that securities firms give customers written notice before making so-called principal trades -- selling customers shares from the brokerages’ own accounts. The rules, passed on a 4-0 vote, are designed to be temporary while the SEC reviews how well they work.

The SEC took action after a federal appeals court rejected the agency’s regulations that allowed brokers to offer fee-based services without agreeing to act in the clients’ best interest and provide full disclosure of potential conflicts. Investor groups were concerned that brokers would saddle clients with underperforming stocks.

Fee-based accounts charge customers an annual fee for buying and selling securities, rather than charging commissions on a per-trade basis.


Under the rules adopted Wednesday, the SEC “required more extensive disclosure than we anticipated,” said Barbara Roper, director of investor protection at the Washington-based Consumer Federation of America. Such disclosure “should provide a significant heads-up to investors that they are in a conflicted relationship.”

The SEC rule, which expires at the end of 2009, will allow brokers who run fee-based accounts to meet the written notification requirements by providing a single disclosure statement on potential principal transactions. Oral notification is to be given by the broker before each transaction. Customers can revoke their consent.

The March court decision had the potential of forcing brokerage firms to close accounts with $300 billion in clients’ money by Oct. 1.

The SEC rule change “delivers increased consumer choice within the constraints set by the court,” Marc Lackritz, the president of the Securities Industry and Financial Markets Assn., said in a statement. The organization, whose members include Morgan Stanley and Merrill Lynch & Co., is Wall Street’s biggest lobbying group.


The new regulations, which take effect Sept. 30, prohibit brokers from making principal trades in fee-based accounts when the firm issues or underwrites the stock. Brokers would be allowed to sell clients municipal bonds they underwrite.

Investors were “faced with two less-than-satisfactory options” after the court decision, SEC Commissioner Kathleen L. Casey said. “They can return to a likely more costly commission- based brokerage account” or switch to an investment advisor, which would “make it unfeasible for them to purchase municipal securities,” she said.

The SEC also approved rules Wednesday that would let commercial banks sell securities such as mutual funds and variable annuities without having to register as brokers. The regulations also require Federal Reserve approval.