This past November, the SEC proposed an industry-supported rule to exempt broker/dealers from being subject to investment adviser rules when using nondiscretionary fee accounts. The exemption would apply as long as clients receive a disclosure that the fee-based account is in fact a brokerage account. The growing use of accounts like Merrill Lynch's Unlimited Advantage prompted the proposal.

"If they impose investment adviser requirements on those [fee] arrangements, it will discourage their growth," says Michael Udoff, an associate general counsel at the SIA in New York. "Any kind of program that offers alternative compensation methods--fee arrangements--is a good thing."

The industry has complained that the Advisers Act requirement for prior written customer approval for principal trades hurts wrap-fee customers--especially in fixed-income accounts. The same problem could occur in nondiscretionary fee programs if they're treated as advisory accounts.

In addition, some commissionable products such as syndicate and UITs are ending up in fee accounts. Under adviser regulations, all compensation has to be disclosed, which would highlight for clients the cost of paying both fees and commissions (see "Reverse Churning Policies," below). An exemption would limit disclosures.

Investment advisers don't like the proposed exemption for Wall Street. "Here goes the SEC again, giving another loophole to brokerage firms," one IA gripes.

The public is entitled to "full disclosure of compensation, qualification and competence of the individual financial consultant through a form such as the ADV," says Nigel Taylor, a CFP in Santa Monica, Calif. Taylor argues that all fee accounts should be considered advisory accounts.

"We don't object to stockbrokers offering investment advice," says Duane Thompson, director of government relations for the Financial Planning Association in Washington, D.C. "We just want a level playing field."

"If it quacks like a duck and walks like a duck, then it is a duck," Taylor adds.

But Udoff's disagrees. "Those kinds of comments totally ignore the fact that as brokerage accounts, these accounts remain subject to all regulations under the 1934 Act, as well as NYSE and NASD rules," he says.

Ask investment advisers "if they would like to trade regulations," Udoff adds. "I don't think they'd be interested."

One of the chief differences between the regulatory treatment of advisory accounts and brokerage accounts is disclosure of compensation. Investment advisers must disclose all pay and possible conflicts, while brokers are limited to what's disclosed in prospectuses and confirms.

When reps put commissioned products in a fee account, the problem of "double dipping" or "reverse churning" arises. How do firms address this issue?

Numerous firms contacted for this story did not return calls. Salomon Smith Barney is the exception. SSB has taken several steps to avoid double dipping, says Pam Parker, director of AssetOne for SSB. "If the client buys syndicate while in AssetOne, we hold it for six months. We don't bill on it." Likewise, if clients move a front-end load fund or a UIT into AssetOne, they don't get billed on it, she says.

Although a client may have paid commissions at one point, it would be a client's choice to convert to AssetOne, Parker says. "It's a service program. They like the comfort of everything being in one place. When they go to sell their position, [the commission] is covered."

Other firms follow similar policies. "Some [brokerage] firms ask reps to waive an advisory fee for two to three years to minimize conflicts of interest," says Nancy Lininger, who runs The Consortium, a compliance consulting firm in Camarillo, Calif.