May 12, 2008
Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE,
Washington, DC 20549-1090
Reference : File Number S7-06-08 Amendment Regulation S-P: Privacy of Consumer Financial Information and Safeguarding Personal Information
Request For Comment
Dear Ms. Morris:
As requested, we provide our firm's comment to the referenced proposed expanded regulations. We believe the proposal is a gross step over regulation and will negatively impact small broker dealers and small registered investment advisory firms using the commission's ten year estimated increased compliance cost of $118,000.
We offer no comment for transfer agents, medium size firms, large firms or registered representatives moving from one firm to another.
While the commission's statistics are very detailed, it appears that the majority of the information and proposed regulations are drawn from the banking industry.
Our position is that neither broker dealers nor investment advisers are banks and, therefore, much of the information provided is not applicable to broker dealers and investment advisers, and more particularly small firms. This in and of itself will adversely affect the consumer. The very people you are trying to protect. More regulation is not always the answer.
Secondly, the commission in its proposal appears to have moved away from the original intent of Regulation S-P, protecting individual private information, to protecting firm's from security breaches in research reports and general firm operation.
The safeguards and prevention of cyber attacks is a worthy topic, but this, we feel should be addressed in separate legislation and regulation. Successful cyber attacks could have a substantial impact on the US and global financial markets, particularly in view of the $516 Trillion in derivatives which are dependent on counterparties fulfilling their obligations.
The banking industry faces its own problems as a result of its own conduct in continuing mass mailing credit card applications and the pursuit of online banking, despite huge, but specifically undisclosed amounts of losses by the banks.
It appears to be true that individual identity theft is a serious problem in our country, however, there are no statistics that prove that the ability to obtain information to perpetrate identity theft is derived from small broker dealer or investment advisory firms.
Therefore, creating a huge amount of regulation and the staff to police the regulation, when the source of the problem is not the small broker dealer and investment adviser, does not seem prudent.
Utilizing the commission's estimates for all categories of small firms, the commission appears to be proposing to increase the compliance cost for all small entities by $1.4 Billion over ten years to comply with the proposed regulation. Absent from the detailed studies is how and who shall pay for the proposed additional cost.
Our firm supports prudent regulations by FINRA, MSRB, and the Securities and Exchange Commission to insure the integrity of the US financial system. We support prosecution of fraudulent securities being allowed to be purchased and sold in the US financial markets which, some people feel, recently brought our country to the verge of a 1903s style depression.
We feel that the appropriate use of regulatory resources should be directed to areas which pose the greatest financial risk to our securities markets and very limited resources should be devoted to areas which pose minimal financial risk to the financial markets.
Several areas that deserve the commission's attention is the issuance of fraudulent securitized debt obligation and the fraudulent sales practices which it is estimated may result in $500 billion to $1 trillion in loses, the security or lack thereof for the financial system in the $516 trillion in derivatives market along with counter party risks, the impact of doing away with the up tick rule in short selling, and the recent suggestion that Form ADV Part II should be amended and posted on the internet, which endangers both advisory firms and their officers from their own privacy and identity theft issues.
The following is a profile for excluding small broker dealers (introducing and limited ) broker dealers and small investment advisers from the proposed amendment to regulation S-P.
1. Customer records are maintained in locked filing cabinets
2. Customer records are maintained at a large clearing firm such as National Financials, Southwest Securities, Inc., or First Southwest Securities
3. The firms do not maintain a web site or if one is maintained, no customer information is accessible
4. The firms discourage email contact with customers, but if contact is made the email is treated as correspondence.
5. The firms do not allow instant messaging nor chat room contact
6. The firms have not applied to FINRA for electronic media storage and therefore they have not established a third party vendor agreement to allow back up of firm information via the internet
7. The firms use off the shelf internet security software from MacAfee and Symantec to protect their computer systems
8. The firms have adopted procedures to address all existing Regulation S-P requirements, including document shredding.
We feel that small firms are unique and deserve relief from the proposed regulation. In a recent meeting with FINRA, FINRA represented that small firms are required to be subject to the same regulations are large firms, so that the public can feel the same level of confidence in their accounts being carried with small firms as they enjoy with large firms.
We feel this is not an appropriate position. While small firms are routinely cited for administrative rule violations, minimal lose of customer assets are normally involved. While large firms are not routinely cited for administrative rule violations, customers are subject to a large amount of fraud and lose of asset value.
Since no small firms have lost tens of billions or dollars so far in 2008, we feel a case of can be made that small firms offer more security to customers through prudent management practices than large Wall Street broker dealers and banks.
Based on the above profile, the unique nature of small firm operations, and the overall high quality of security and privacy afforded customers of small firms, we feel that it would be a huge unneeded burden for small firms to be required to spend $18,000 in year one and $10,000 each year thereafter for an estimated ten year cost of $118,000 to comply with the proposed new Regulation S-P. We also do not feel the proposal will result in prudent use of regulatory resources.
Very truly yours,
President and Executive Representative