August 23, 2010
RE: File No. 4-606
To Whom It May Concern:
As a securities broker dealer registered with the Exchange, we appreciate the opportunity to comment on this study. We have addressed each issue for which comment was requested.
1) We feel the effectiveness of existing legal and regulatory standard of care for brokers, dealers, investment advisors and associated persons for providing personalized investment advice and recommendations is adequate.
2) We feel there are no shortcomings with the current standards in the protection of retail customers relating to the standards of care.
3) Retail customers may not fully understand that there are different standards of care applicable to brokers, dealers, investment advisors and associated persons of each. This could be explained with increased disclosure to retail customers.
4) We feel the differing standard of care is not a significant source of confusion for retail customers regarding the quality of personalized investment advice that retail customers receive. The quality is not affected by any confusion they may have.
5) We feel the current system of examinations of brokers, dealers, and investment advisers is adequate. The frequency of examinations of investment advisers could be shortened so that misappropriation of funds could be found more easily and the volume of data examined is not so extensive. The length of time of the examinations is reasonable in most cases.
6) We feel the regulation differences between brokers, dealers and investment advisers when providing personalized investment advice is appropriate because the type of advice given is different. Typically, registered representatives are typically giving advice surrounding a single investment within a portfolio, while investment advisers are advising based on a full portfolio or financial plan.
7) The current regulation and oversight of investment advisers provides adequate protection to retail customers in the instance of disclosure, however, the regulation and oversight of brokers and dealers is stronger overall because more rules and regulations exist, and there is more oversight at both the firm level and the SRO level.
8) The existing legal and regulatory standards of State regulators is adequate. The powers given the State regulators should not be decreased, or increased.
9) The potential impact on retail customers of applying the fiduciary care standard to the range of products and services offered by brokers and dealers would be detrimental. Retail customers with accounts under $100,000 would no longer be profitable for firms or their associated persons to service. The costs of the additional liability of a fiduciary standard and the required insurance coverage, would outweigh the fees earned for many advisers. A large portion of the investing public would be without adequate service if requirements of the Investment Advisers Act of 1940 were applied to all brokers, dealers and associated persons.
10) If the broker-dealer exclusion were to be eliminated, the impact and harm to retail customers would be wide-spread. Each recommendation could be viewed as personalized investment advice and such recommendations would no longer be available to small investors, as outlined in number 9. The additional litigation, insurance and oversight costs would require significantly higher levels of fees to be passed on to the lower net worth customers. The resources are not in place to regulate the hundreds of additional firms, and thousands of additional associated persons.
11) Since investment advisory accounts typically have higher minimum fees and account size, the lower net worth customers would not have access to the same level of service or care as higher net worth retail investors.
12) Changing the standard of care would not benefit retail customers in the protection from fraud, as the largest fraud cases in our recent history have stemmed from advisory activities. It would also reduce the access and availability to personalized investment advice for all but the high net worth customers, as explained above.
13) We feel that changing the standard of care guidelines could impact customers in many unintended ways, such as having to pay ongoing management or advisory fees instead of a one-time commission. The cost for brokers, dealers and their associated persons could be immense because of the requirement of maintaining dual registrations, and dealing with dual examination and bookkeeping requirements.
In conclusion, we would like to state our opposition to changing the standard of care for brokers, dealers and associated persons to a fiduciary standard as required under the Investment Advisers Act of 1940. We appreciate the opportunity to comment on this study.
The Leaders Group, Inc.