The growth of nondiscretionary fee accounts and discount options has created a potential regulatory trap for brokerage firms. So in November, the SEC proposed a rule to solve the problem.

As full-service firms separate the cost of a transaction from the price of advice, they risk coming under the fiduciary standards of the Advisers Act of 1940. That would mean firms wouldn't be able to trade as principals, and reporting and disclosure requirements would be stepped up.

Historically, brokers have been exempt from the Advisers Act based on the fact that their advice giving is incidental to their fundamental business of executing trades. But with Prudential Securities unbundling transactions and advice, and Merrill Lynch and Morgan Stanley Dean Witter offering execution-only services, a defined portion of commissions and fees can now be attributed to advice--which leaves the exemption in question.

Therefore, the SEC is proposing that firms can remain exempt if they market nondiscretionary fee accounts as brokerage accounts. Fee-based programs "essentially re-price traditional full-service brokerage programs but do not fundamentally change their nature," the SEC argues in the proposal.

"Really, it was all the press around Merrill Lynch's asset-based program launched last summer that had us take a look at the issue," says Robert Plaze, associate director in the SEC's division of investment management. Advisers Act requirements are "outdated," he adds.

"The SEC is to be commended for its recognition that our industry is evolving," says Christopher Davis, executive director of the Money Management Institute, which represents fee-based brokerage and money manager interests. The rule prevents a "dual registration straight jacket," he says.

But the National Association of Personal Financial Advisors, a fee-only group, worries that maintaining the exemption will hurt disclosure. "It's unfortunate that the brokerage community won't be providing the level of disclosure the public is entitled to," says Chairman Gary Schatsky.

Plaze says brokers already provide extensive disclosure. "There is always someone saying [disclosure] should be a few inches more this way or that way," he says.

The proposed rule can be viewed at Comments are due Jan. 14.