August 30, 2010
Elizabeth M. Murphy
Securities and Exchange Commission
100 F Street NE Washington, DC 20549
Re: File Number 4-606
I am writing in response to the Securities and Exchange Commission ("Commission's") request for public comment to inform its study of the obligations and standard of care of brokers, dealers, and investment advisers when providing personalized investment advice about securities to retail customers.
While the current suitability standards for broker-dealers contains requirements and obligations relating to specific recommendations, there exists a perceived gap on either continuing obligations to the client or ensuring advice is in the best interests of the client as under the Advisers Act. This perceived gap in standards is a contributing factor to the requirement under Section 913 that the Commission deliver a study on the matter.
To date, the Commission has received over 1,500 comments on this matter, representing varying opinions and arguments with respect to this important yet contentious issue.
As such, we would like to focus specifically on the guidance required under Section 913 for a standard of care for broker-dealers and their associated persons in their activities advising retail customers. Specifically, Section 913(g) states the limitation that the receipt of compensation based on commission or other standard compensation for the sale of securities shall not, in and of itself, be considered a violation of that standard.
To this, we are concerned as to what guidance will be given to the broker-dealers and their associated persons for determining what standards are entailed in the best interests of the client. While the Dodd-Frank Act stops short of clearly delineating a fiduciary standard, we feel the intention is for a more uniform standard of care. Compounding the problem is the issue of customer choice. Some retail customers prefer a fee-based arrangement while others prefer variable costs associated with their activities. Some retail investors have differing levels of financial sophistication ranging from widows and orphans to day-traders utilizing complex information and trading strategies. Working with broker-dealers, registered investment advisors, and FINRA (formerly the NASD), I have encountered customers with differing situations, needs, expertise, and expectations.
Further compounding the confusion is the explicit limitation in 913(g) that nothing shall require a continuing duty of care or loyalty to the customer after providing investment advice about securities. Clearly a one-size fits all approach to financial services is not in the intent of the Act.
The Act's prohibition on a continuing duty of care after providing advice and the Acts exclusion that there is no violation of a proposed standard by charging a commission is both confusing and counterintuitive to broker-dealers (and retail customers). This is the crux of the concern how can one act as a fiduciary or in the best interests of the client while charging a commission at all? Without resolving this issue, we are placed in an arena filled with even more uncertainty. If anything, it could be argued that the uncertainty described above creates an additional liability to firms. Can a broker-dealer or its associated persons satisfy a reasonable standard or requirement though additional disclosures? If the intent is customer protection or knowledge, is it a matter of the client acknowledging the preferred pricing method and acceptance of their choice? These thoughts imply a possible solution that a moderate but uniform standard framed around professionalism or disclosure as opposed to a fiduciary standard would be more industry appropriate.
While it is difficult to determine what the solution is, we urge that the Commission reflect upon this perplexing task with reason. Any recommendations by the Commission should promote the development of workable investment advice standards, easily understood by the client, able to be incorporated into the business practices of firms, a transparent regulatory framework, and minimize the potential for liabilities or ligation inherent in confounded or conflicting language.
I thank the Commission for the opportunity to comment and welcome future opportunities to provide input.
Chief Compliance Officer