Subject: File No. S7-06-04
From: Laurie Lennox, Vice President and Chief Compliance Officer
Affiliation: Commonwealth Financial Network
RE: Point of Sale Disclosure Requirements and Confirmation Requirements for Transactions in Mutual Funds, College Savings Plans, and Certain Other Securities
Dear Mr. Katz,
Commonwealth Equity Services, LLP doing business as Commonwealth Financial Network (Commonwealth) is a fully disclosed retail broker-dealer registered to conduct business in all domestic jurisdictions, with over 1,000 Registered Representatives offering securities services through over 675 branch offices distributed nationwide.
As Chief Compliance Officer, I appreciate the opportunity to submit comments to the Commission on the issues raised in the above captioned proposed rule. Please note that Commonwealth lauds any effort to enhance or refine investor's knowledge of the securities products and concepts. Commonwealth's business model is based on an independent contractor type arrangement where most of our representatives are operating in one person branch offices in the communities in which they reside. This close tie to the community usually results in a more personal representative-client relationship than may be seen in a traditional wirehouse type broker dealer. Our representatives generally work from a financial planning basis versus a transactional basis. Our representatives listen closely to their clients needs, assess the client's financial situation and come to a determination of possible suitable investments for the client to consider.
It is also important to note that Commonwealth does not have proprietary products, nor do we hold sale contests for products or offer recommendations based on any ulterior incentives to the firm from product manufacturers. Commonwealth maintains several hundred mutual fund and variable contract selling agreements with numerous investment firms. By offering a wide array of product types and manufacturers, we allow our representatives the opportunity to offer the product that best fits each individual client.
It is from this perspective that I offer the following comments opposing the adoption of the proposed Point of Sale and Confirmation Requirements rule:
The Prospectus as Point of Sale Disclosure Document
It is a long-established requirement that offers of investment company and variable contract securities may only be made by prospectus, and that a prospectus must be provided to the potential investor prior to the sale or at the latest at the time of sale confirmation. In order to comply with the prospectus requirement, Commonwealth requires it's representatives to provide potential investors with a prospectus prior to or at the time the order is placed and to evidence that delivery with a prospectus receipt signed by the investor. The required receipt also includes important multi-class share pricing disclosure information to ensure that the client is fully informed of the pricing structures available. Our position is that, currently, the prospectus is the point of sale disclosure to the potential investor and that our procedure for prospectus delivery, as well as the discussions between our representatives and the client about the client's financial goals and needs provide a sound basis for product disclosure.
While the Commission's proposed Point of Sale Disclosure (POS) forms provide additional disclosure that may be useful to investors, we believe that the proposed POS form would be best served if it was made part of the manufacturer's product's prospectus, or at minimum, a supplement to the prospectus. This would ensure that all clients receive complete and correct pricing information in a consistent and comparable format.
Point of Sale Disclosure Form by Individual Product
Our understanding of the proposed rule would require each broker dealer firm to develop, customize and maintain POS forms for each of the individual mutual fund and variable product that is offered by the broker dealer. Taking into account the Commission's analysis of costs of adopting the proposed rule, we still believe that this requirement would be an undue burden to our general operations. Our firm would have to create an extensive library of POS forms, as we have an open platform of investment company and variable contract securities and selling arrangements with hundreds of product sponsors. By requiring each firm to create their own documents, you run the risk of errant or incorrect expense information (e.g., transposing a number) on the form or misinterpretation of the numbers, thereby inadvertently misrepresenting the product. Additionally, the costs involved in creating this POS library could potentially lead to broker dealers cutting back on the number of products they might offer to a potential client.
Either of these above possibilities may hinder investor protection. If there is an inadvertent error on the POS form, it may cause client confusion when they read the 'correct' information in the prospectus. If a broker dealer needs to limit its product line due to costs of maintaining a POS library, it may not otherwise be able to offer the best possible product to address the client's financial goals.
While we do believe the POS disclosure has merit, we strongly believe that in the interest of clarity, consistency and economy the proper place for the disclosure is in the product prospectus. The manufacturer's have to produce a prospectus regardless, adding one or two more pages to a document that is already tens of pages in length makes more sense than several thousand broker dealer creating a new document industry.
Investor Burden of Multiple Disclosure Documents
Commonwealth believes that providing fewer disclosure documents that are succinct, informative and easier to read, are in the client's best interest. In Commonwealth's case, under the Commission's proposed rule, a potential investor will be presented with at least three separate disclosure documents. The product prospectus, the proposed POS form, and Commonwealth's Prospectus Receipt form. Our concern is that this multiple disclosure document approach creates a potential information overload that could make the client tune out the very information we are trying to convey.
In closing, Commonwealth's supports the Commission's efforts to improve investor education and knowledge and, in general, agrees with the disclosure information being proposed. However, we firmly believe that this disclosure information should be incorporated into the prospectus of each product. By placing the POS disclosure into the prospectus and by making prospectuses easier to read, we feel the best interests of potential investors will be best served.
I appreciate your consideration of our comments in the rule proposal process.
Vice President and Chief Compliance Officer
Commonwealth Financial Network
29 Sawyer Road
Waltham, MA 02453
(781) 736-7980 ext. 9619