Wachovia to buy A.G. Edwards

For $6.8 billion in cash and stock Wachovia is buying AG Edwards, and will become the second largest brokerage firm in the country.

Also somewhat surprising is the announcement that the firm will be headquartered in St. Louis, the home of AG Edwards, rather than Richmond, where Wachovia is headquartered.

Reshuffling Merrill

Co-presidents? Usually a sign of indecision, Merrill Lynch announced a new management team, led by co-presidents, according to Registered Rep magazine. Supposedly the move is designed to better integrate Global Markets, Investment Banking and Global Wealth Management.

And the impact on the institutional and retail brokers? No comment from Merrill.

Spagetti Bowl Of Regulators

A recent and quite critical comment on securities regulation:

If you look at a chart or a diagram of the regulatory structure in the United States, what you see is really almost a spaghetti bowl of regulators. We have a multilayered, multifaceted regulatory structure that--to my way of thinking--is unnecessarily complicated. And there's lots of overlap and duplication and inconsistency among all of those regulators.

That, in a nutshell is one of the significant problems with our system - too many regulators with too many rules and too many different views. But the comment is not the interesting part of the story, it is the commentator - Mary Shapiro, Chairman and CEO of the NASD. Ms. Shapiro made the comment after a meeting with the Securities Industry and Financial Markets Association's Regional Firms Committee.

The merger of the NASD and the NYSE is aimed at fixing some of this issue, and On Wall Street has an update and analysis of the issues in its June 1 issue.

Branch Office Economics

A common phenonem in the retail brokerage industry is the hiring of top reps of one firm by the BOM of another. Otherwise known as a "raid", the practice seems to ebb and flow with the economy, as firms attempt to beef up the retain sales force.

My involvement in this disputes usually comes after the fact, when I am retained to represent the departing brokers, or the raiding firm, or the raided firm, and the focus is not on why the raid occurred, but dealing with the outcome. Who gets the customers, how do we protect our trade secrets, and who is going to pay how much to whom?

But Registered Rep has piece here on a different view of the practice - its all about economy of scale. An interesting read, but no real surprise - top producers are more profitable.

No Mas - SEC Does Not Appeal Merrill Rule Decision

The SEC had until yesterday to file an appeal of the court decision which struck the so-called Merrill Lynch Rule - and apparently decided not to do so, according to various press reports.

The next few weeks will be interesting, as the Commission needs to deal with the void created by the absence of the rule, which effectively allowed broker-dealers to charge wrap fees for financial advice, without being registered as an investment advisor.

However, the situation is hardly the dire circumstance that some of the media is portraying. The New York Post described the situation by saying "Wall Street is scrambling to deal with nearly $300 billion of client money suddenly thrown into limbo thanks to a slap in the face from SEC boss Chris Cox."

"dire circumstance"? "slap in the face"? A bit of hyperbole, even for the Post. The fact is that the situation is hardly dire. The court decision simply puts us back to where we were before the Merrill Lynch Rule, and to where we have been for some 50 plus years. Brokerage firms can only provide financial advice if it is incidental to their business of buying and selling stocks.

The the increasing popularity of wrap fee accounts - where investors pay a flat fee regardless of how many trades they enter - the line between a broker and an investment advisor has certainly become blurred, and subject to interpretation. Brokerage firms are now faced with a decision - create a registered investment advisory subsidary and move the fee based accounts to the sub, or make sure that the fee based accounts are paying for executions, and not advice.

Of course, the second choice is not what firms want to do. They want to ultimately be responsible for investment decisions and they want to get paid for the advice that accompanies those investment decisions.

While registering as an investment advisor adds to the regulatory burden and cost, it is now the only way to address this situation - the alternative being to give up providing advice on portfolio management and financial planning.

Of course, Congress could fix this all in a flash - exempt broker-dealers from the registration requirements of the Investment Advisor's Act. Given the fact that broker-dealers already operate in the most regulated arena in the world, there simply is no reason for this divide in our regulatory scheme. Let's fix the situatio by allowing broker-dealers to provide advice, and keeping the current scheme where investment advisors do not charge transaction based fees.

Nice and simple. If you want to be a full service financial firm, you become a broker-dealer. If you want to provide financial planning and investment advice, without transaction based fees, you become an investment advisor.

Is Congress listening?

SEC Imposters!

The SEC issued a release on Friday warning brokerage firms that individuals have been discovered posing as SEC investigators in order to gain access to confidential records.

Partial Not Guity Verdict in Squawk Box Trial

A federal court criminal jury in Brooklyn came to a partial verdict today in the Squawk Box trial - not guilty on all of the securities fraud charges. The jury remained deadlocked on the conspiracy charge.

Prosecutors accused former stock brokers at Merrill Lynch, Citigroup and Lehman Brothers of taking bribes in exchange for allowing day traders at the now-defunct broker-dealer A.B. Watley Inc. to listen to their firms' squawk boxes through open telephone lines. The traders thereby obtained information regarding large blocks of stock that were being purchased or sold, and traded on the basis of that information, which is known as front-running.

The only guilty verdict was against a former Merrill broker, who was accused of participating in the scheme and telling his assistant to lie to government investigators about it. He was found guilty on one count of witness tampering and one count of making false statements.

While there is still a civil case pending by the SEC, the verdicts are yet another example of a potential defendant being acquited of the substantive charges and being convicted of lying to investigators. Can you say "Martha Stewart"?