WASHINGTON -- Reacting to sharp criticism, the head of the

Securities and Exchange Commission

Tuesday said the agency is weighing changes in a plan to exempt a new breed of

flat-fee investment accounts from investor protection safeguards.

"We are sensitive to the concerns many of you have that these accounts have the potential to mislead investors," Chairman

Arthur Levitt

said at a meeting of investment professionals and regulators. "Based on your comments, we are now considering more specific disclosure requirements in the final rule."

Rather than charge per-trade commissions, the new accounts levy annual fees pegged to the value of assets. At the urging of the brokerage industry, the SEC is considering a rule that would exempt these accounts from the

Investment Advisers Act

of 1940, a centerpiece of the nation's securities laws. If adopted, the exemption would remove vital protections, consumer advocates warn.

At a meeting to discuss the role of investment advisers, Levitt acknowledged criticism of the proposed rule, but stopped short of providing specifics of any changes. The issue arises because the new accounts' fees could legally be considered "special compensation" -- essentially, payment for advice -- and that has traditionally kicked in coverage of the 1940 act.

If the new accounts are subject to the act, broker-dealers must make detailed disclosures about such things as whether they have a financial interest in anything they recommend, or whether they've been the subject of disciplinary actions. They have a higher duty to clients, and to putting client interests ahead of their own. And they are restricted in trading directly with their clients, such as when their firm may have a particular security it wants to push.

But if the new accounts aren't subject to the act, they're considered to be ordinary brokerage accounts, and a different standard prevails. Generally, brokers must only make "suitable" recommendations for each client. The industry says the new plans simply reprice existing services, and thus shouldn't be subject to the 1940 act any more than traditional commission accounts.

The SEC, working closely with the industry, proposed the new rule, which would exempt the new accounts if three conditions are met:

If the accounts are "nondiscretionary," meaning that brokers must get client approval before making any trades.

If advice to clients is "solely incidental" to the straightforward business of buying and selling investments.

If a broker-dealer discloses to customers that their accounts are brokerage accounts -- that is, sales accounts for buying and selling securities, and not the kind of advisory accounts protected by the 1940 act.

Although depicted as only a pricing move, the rule proposal has put a spotlight on the role of advice in offering the accounts. Brokerage firms have made advice a key selling point of the new accounts, although they say it remains secondary to actual trading -- and hence, not subject to the 1940 act.

Consumer advocates and others have complained that the advice is not incidental, but the very reason many investors would open such accounts. Exempting the accounts would allow the big firms to deliver sales pitches under the guise of objective advice, and without the safeguards of the 1940 act, they say.

Tuesday, the battle continued.

"There's been confusion," said Paul S. Gottlieb, first vice president and assistant general counsel of

Merrill Lynch

, which has quickly attracted nearly $90 billion to the new accounts. "It's only a repricing. Traditional full service brokerage includes advice -- it's incidental to the trade, but it's there. Advice has been with the brokerage industry since the beginning."

Roy T. Diliberto, president of the

Financial Planning Association

, complained that if financial planners delivering advice are subject to the act, then broker-dealers providing advice should be, too.

"Functionally, it's the same thing," he said. "All you need to do is watch television

or look at the full-page ads and see what's being promoted -- advice is being promoted. I don't understand why this exception is necessary."

The SEC could approve a final rule as soon as this summer.