From: []
Sent: Tuesday, April 13, 2004 3:36 PM
Subject: File No. S7-06-04

Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609

RE: Release Nos. 33-8358; IC-26341-1; File No. S7-06-04

Dear Mr. Katz:

Woodbury Financial Services, Inc. appreciates the opportunity to comment on the Securities and Exchange Commission's (the "Commission") proposed two new rules, 15c2-2 and 15c2-3 (the "Proposed Rules"). These Rules would require broker-dealers to provide their customers with targeted information at the "point of sale" and in transaction confirmations regarding the costs and conflicts of interest that arise from the distribution of mutual fund shares, unit investment trust ("UIT") interests (including variable life insurance and variable annuities), and municipal fund securities used for education savings (so-called "529 plans"). The Proposed Rules and discussion are set forth in a 120-page release published by the Commission on January 29, 2004, No. 33-8358; 34-49148; IC-26341; File S7-06-04 (the "Proposing Release"). Besides the new rules, amendments are also proposed to Rule 10b-10 (regulating the content of confirmations) to harmonize the new and existing disclosure requirements.

The Proposing Release raises a host of issues ranging from major policy considerations to technical and logistical problems likely to be encountered if the Proposed Rules are adopted and implemented. The following are some of the significant policy issues presented by the Proposed Rules.

Costs to Customer Already Disclosed - Full disclosure about the out-of-pocket costs a customer will incur as a result of purchasing a Covered Security is essential in the principal-agency relationship between a broker-dealer and its customer, but existing requirements under Rule 10b-10 and prospectus disclosure requirements address those concerns. All other distribution-related costs paid, directly or indirectly, by a mutual fund complex are reflected in each fund's bottom line performance. Fund performance is a straightforward and a well-publicized benchmark that is easily understood by a retail investor. While all the cost data is academically interesting, the apparent target audience is ill-equipped to use the data but, ultimately will have to pay for it through increased brokerage costs.

Distribution Costs Should Be Disclosed by Funds - Disclosure of distribution costs is fundamentally the obligation of the mutual fund complex since it controls all of these costs and the myriad of ways in which those costs are incurred. Prospectus disclosure can identify those costs and the fund's historical performance and cost data simply and accurately report the effects of those costs. The data gathering, administrative and disclosure burdens (and related liability for data errors) is being unfairly transferred to the brokerage industry. A predicate underlying the Commission's reasoning is that more detailed disclosure will force the industry to lower costs, and that lower costs will result in better investment performance. Of course, it is the mutual fund industry that controls those costs and there are many more variables affecting investment performance. The Commission is likely underestimating the dramatically increased cost of obtaining and delivering these disclosures, which will be largely borne by investors.

Fund Companies Not Required to Provide Information to Broker-Dealers - In order to comply with the disclosure requirements, broker-dealers would need additional information from mutual fund companies, which they are not mandated to provide by the Proposed Rules.

Disclosure Requirements are Complex - The required disclosures in the Proposed Rules are extremely complex and equally difficult for the average retail investor to comprehend. Forecasts of future hypothetical expenses may be confusing and could be potentially misleading. The quantity of information to be disclosed rises to the level of analyst information, rather than investor information. When given a one- or two-page disclosure document two times for every transaction, one wonders whether a retail customer would quickly become numb from the volume of data.

Conflict Disclosures Unnecessarily Detailed for Retail Customers - Disclosure of conflicts of interest are important to an investor's decision-making, but identifying conflict does not require the degree of detail prescribed by the Proposed Rules. The mandated level of detail is disproportionately expensive to obtain for firms, especially those with a parent controlling funds or variable products and multiple broker-dealers and investment advisers when judged by how the average retail investor could or would use the information. Specific dollar amounts over a short time frame have no context to reasonably enable the client's decision process relative to the potential for conflict. Also, it would be virtually impossible for firms to comply with the section of Proposed Rule 15c2-2 that requires disclosure of certain "anticipated" compensation. The disclosure requirements for conflicts of interest also cover sales contests, which may be short-lived and require nearly real-time updating in the disclosures.

Disclosure Requirements are Repetitive - The disclosure requirements are repetitive. They create many new disclosure requirements for broker-dealers to make not once but twice (and sometimes even three separate times in the case of certain oral point of sale disclosures). One-time disclosure should be sufficient if the disclosure is made in writing. Furthermore, disclosure must be made on a transaction-by-trans action basis, regardless of whether it is appropriate. Given the cost associated with implementing the Proposed Rules, there is little benefit in requiring disclosure of the same information three separate times, i.e., in the face-to-face meeting, in the prospectus, and on the confirmation. Moreover, customers cannot avoid the deluge of paper and information even if they would choose to do so.

Implementation Costs over $780,000 on Average per Broker-Dealer - Compliance with the Proposed Rules would require extensive changes to existing software systems, among other expenses. The Commission estimates that the one-time and annual cost to implement both of the Proposed Rules would total about $781,000, on average, per broker-dealer with an annual cost thereafter of about $540,000, on average, per broker-dealer. Actual costs would vary widely among independent contractor broker-dealers depending upon the capabilities of their internal or external data processing systems and arrangements. The Commission has solicited comments about the accuracy of its estimates.

The Commission does not seem to have taken into account the full costs to broker-dealers that would be associated with implementing these Proposed Rules. The Commission's cost estimates focus on the requirements to report the prescribed data in point of sale and confirmation disclosures, but do not appear to recognize the substantial processes and cost of setting up systems and procedures to gather the data with the prescribed frequency (generally quarterly), especially with affiliated entities. The Commission's own estimate is that Rules 15c2-2 and 15c2-3 would cost the industry at least $1.3 billion to implement. The Commission estimates that Rule 15c2-2 would cost the industry approximately $2 billion in annual recurring costs after initial implementation. The Commission estimates that this cost is $160 million more than the current Rule 10b-10 confirmations that Rule 15c2-2 rule would replace. And the Commission estimates that Rule 15c2-3 would impose an annual recurring cost of almost $1 billion. All of the Rule 15c2-3 costs would be new costs for the industry. Including the costs of the remaining portion of Rule 10b-10, the Commission estimates that combined recurring costs for these rules (not including the initial implementation costs) will be nearly $7.5 billion per year. By the Commission's own estimate, the year-one costs of these rules, including both the implementation cost and the first year of annual recurring costs, would be nearly $9 billion.

The proposed rule would require firms like Woodbury Financial to design a completely new system to create an entirely new written disclosure document and ensure that the disclosure document is available for distribution to clients at every location in which the firm meets with clients. It would require another system to ensure that the information in the disclosure document is available at every location where the firm accepts telephone calls from clients. It would require every firm that accepts mutual fund orders over electronic channels to reprogram all of those order-entry systems to give this disclosure before any order could be accepted. Moreover, every firm would be required to establish and monitor supervisory and compliance procedures to ensure that the disclosures are made in customer interaction (including live meetings and telephone calls) before a mutual fund order is accepted. In sum, the implementation cost of the proposed rules (even considering the number of very small brokerage firms) will be more on the order of $500,000 per firm, and the annual costs of maintaining and updating these systems and procedures will also be on the order of $500,000 per firm. The Commission estimates that the confirm disclosure changes in proposed Rule 15c2-2 would impose an average one-time implementation cost of $157,000 per broker-dealer, and have an annual recurring cost of $368,000 per firm. Once again, the cost of creating an entirely new confirmation statement, with multiple complex new data feeds and complex new calculations personalized for every transaction, and the continuing cost of producing those confirmation within the very compressed time in which confirmations must be sent, are likely to be far higher than the Commission estimates.

Oral Disclosures Difficult to Present - The Commission's analysis fails to address how the prescribed quantitative and qualitative data can be fairly and reasonably presented orally to a retail customer. The Commission envisions a one- or two-page point of sale disclosure, including explanatory material. How are retail customers likely to react to a 10+ minute recitation of numerical and statistical data, together with related explanations, over the telephone for each transaction?

Timing of Some Disclosure Delivery is Problematic - Under some circumstances envisioned by Proposed Rule 12c2-3, the "point of sale" delivery time would occur prior to the broker-dealer's having transaction-specific information used in calculating the prescribed disclosures.

Rules Will Force Fewer Fund Options for Investors - The complexity of the rules and disclosure requirements would prompt broker-dealers to reduce the number of mutual funds they offer for sale in order to minimize the number of funds about which the firm needs to maintain data.

Prospectus Discounted as Disclosure Tool - The Proposed Rules discount the prospectus as a disclosure tool. Most of the required information is more appropriately placed in a prospectus. Mutual fund companies are in the best position to accurately describe the costs which they directly or indirectly control.

Insurance Disclosures Not Coordinated With Insurance Regulators - The Proposed Rules cover disclosure of information related to insurance business that is unrelated to variable insurance products. The Commission should coordinate with NAIC to address these issues but is unlikely to do so.

Customer's Right to Terminate Order Not Quantified - The Proposed Rule 15c2-3 provision for a customer's right to terminate an order placed prior to disclosure does not indicate how long that termination right continues.

Product-Specific Disclosures Must be Tailored - The Proposed Rules also require tailored disclosures regarding conflicts and issues arising from product-specific features such as mutual fund breakpoints, sales of B shares, and bonus annuities.

Negative Disclosures Required Even When Nothing to Disclose - The Proposed Rules not only require affirmative disclosures, but also require negative disclosures when the firm and/or representative has nothing to disclose.

We respectfully request that the Commission: realize the complexities and burdensome tasks they are proposing to place on member broker-dealers who represent the independent contractor registered representatives who generate over $7 billion in annual gross revenues would require inestimable costs in dollars and other resources. Further we request that the Commission realize that the proposed required disclosures would only serve to heighten the confusion of an already totally confused investing public that is in dire need of competent investment advice

A brief review of the Proposing Release has led us to conclude that this proposal could have as broad an effect on retail broker-dealers as the recently enacted Books and Records rule modifications. In fact, in respect to the proposed point of sale elements, fundamental changes in order receipt procedures would be in order. We share the opinion with several other broker-dealers that we should ensure that any such changes are well thought out and that all market participants be given an opportunity to thoroughly review and then comment on the proposal. For this reason, Woodbury Financial respectfully requests that you extend the comment period on this rule proposal to July 12, 2004 so that all interested parties can be given an opportunity to effecting analyze and offer a critique of the proposal.

Respectfully submitted,

James M. Odland
Vice President and Chief Legal Officer
Woodbury Financial Services, Inc


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