From: Neal Nakagiri [nnakagiri@afgweb.com]
Sent: Monday, April 12, 2004 2:24 PM
To: 'rule-comments@sec.gov'
Subject: SEC File No. S7-06-04

Thank you for allowing me the opportunity to comment on this far-ranging
proposal. 

I am the President and CEO of Associated Securities Corp. a retail-oriented
BD that has approximately 265 men and women working as independent
contractor registered reps.  I have been in the securities business since
1976, starting as a member of the examining staff of the Los Angeles NASD
office, and becoming chief compliance officer at two NYSE regional BD's and
Jefferies and Company, before joining ASC in 1985.   Prior to becoming CEO,
I was chief compliance officer, general counsel and chief operating officer
of ASC.  I am a former arbitrator with the Pacific Exchange and the National
Futures Association.  I served on the Los Angeles NASD District Committee
from 2001 to 2003, and I currently serve on the NASD's National Adjudicatory
Council.  

The views expressed here are solely my own, and may or may not reflect the
views and opinions of the other staff and registered personnel of my firm. 

Meaningful disclosure of material information needed to make an informed
investment decision

Although I have no objection to meaningful disclosure of information that
might have a material effect on an investor's decision to purchase a mutual
fund, I am concerned that the proposal seems to contain a certain amount of
overkill.  I start with the premise that if a customer is inclined to
purchase a mutual fund with any kind of sales charge--front-end commission,
back-end load, or whatever you want to call it--then there is an immediate
and material conflict of interest between the customer and the registered
rep making the recommendation to buy.  Under present conditions, if there is
no purchase made, then the registered rep is not paid at all.  Full and
complete disclosure of the amount of compensation as a standardized
percentage of the investment amount is clearly the most meaningful and
important means of addressing this actual conflict of interest between the
customer and the rep.  This disclosure is already contained (or should be
included), in the prospectus, and no meaningful purpose is served by adding
another piece of paper to the transaction process.  I believe that the cost
of including personalized calculations of commissions, and other revenue
sharing information on each transaction for each client would be extremely
costly, which would only serve to drive BD's and reps away from the mutual
fund business.

In addition to disclosure of the commission, the registered rep is also
bound by NASD rules, to make only a suitable recommendation to a customer,
in terms of a possible mutual fund purchase.  This suitability obligation
acts as a very strong counter-balance to the alleged "evils" that are
described in the proposal.  The vast majority of the registered reps that I
have known over the years, have enough integrity to only recommend a mutual
fund that they believe is suitable for the customer, regardless of whether
or not there are big or small commissions attached.  In fact, I am observing
experienced registered reps terminating their registrations with NASD BD's
and becoming fee-only, investment advisors under federal and/or state law.
This enables those persons to "sell" investment advice only, without the
apparent "taint" of being a mutual fund salesman.  In fact, as an investment
advisor with a clear fiduciary duty to the client, the "best" mutual fund
for the client may now very well be any mutual fund that can be purchased as
cheaply as possible--including load funds at NAV and true no-load funds.  I
believe the proposal will continue to drive registered reps out of the
business and away from selling mutual funds for a commission.

Revenue-sharing

I have no problem with disclosing the fact of revenue-sharing between a
mutual fund and a BD.   I would certainly recommend that such disclosure
follow other SEC disclosure schemes--that such disclosure be accomplished by
means of the mutual fund prospectus, or the mutual fund website, or the BD
website.  The best place for this disclosure is the mutual fund prospectus.
To force BD's to put this information on a pre-transaction piece of paper,
and/or on a post-transaction confirmation, would be both costly and
inefficient.  Instead, a reference to the prospectus and the relevant
website(s) should be sufficient.

Preferential payouts

I have no problem with disclosing the fact of preferential payout grids to
registered reps for selling a certain mutual fund over another mutual fund.
If the BD makes a business decision to pay a rep more money for selling a
particular mutual fund, the BD should be allowed to do so.

Suitability of B and C shares

There has been a lot of discussion about the suitability of B shares and C
shares over the past few years.  If the SEC believes that such classes of
shares are inappropriate, the SEC should move to ban the offering of such
shares.  To allow a mutual fund to create and offer B and C shares, but then
tell BD's that such shares are "bad" for investors, or nearly always
unsuitable, is simply unfair.

If the sale of the typical mutual fund is made too complex, I believe there
will be less availability and less recommending of a mutual fund to a
smaller investor--exactly the type of investor who is quite often the
typical customer for a mutual fund, in terms of experience, knowledge and
amount of investable assets.  As the cost of providing information about
mutual funds increases, the size of the customer account will increase, in
order for the mutual fund, the BD and the rep to cover their respective
costs and make a reasonable profit in servicing the clientele.

Thank you again for the opportunity to comment on this very important
proposal.
      

Sincerely,

Neal E. Nakagiri

President and CEO
Associated Securities Corp.
310-670-0800, ext. 235
Fax 310--258-6502
nnakagiri@afgweb.com