Subject: File No. S7-06-04
From: Stephen A. Batman, CEO
Affiliation: 1st Global
April 4, 2005
Sent on behalf of Stephen Batman
To whom it may concern:
1st Global Capital Corp. ("1st Global") is a fully disclosed retail broker-dealer registered to conduct business in all domestic jurisdictions, with over 1200 Registered Representatives offering securities services through nearly 600 branch and non-branch locations.
As the Chief Executive Officer of 1st Global, I appreciate the opportunity to submit comments on the issues raised in the above captioned proposed rule by the SEC.
1st Global is not in favor of the adoption of the proposal as it is currently drafted. We believe that the adoption of these proposed rules would have substantial negative unintended consequences for the financial services industry and our clients. We are primarily concerned that compliance with the proposed rules, principally the creation and maintenance of the point of sale disclosure, will be so extremely burdensome and costly that members will be forced to limit significantly the number of Covered Securities they approve for sale. We believe that there is a more efficient and effective way to accomplish the goals underlying the proposal. Simply stated, we believe the mutual fund/529/variable product principal underwriter/distributor/issuer ("mutual fund") should be primarily responsible for disclosing the costs of its products and broker-dealers should be primarily responsible for disclosure of their conflicts of interest.
The mutual fund industry is in the best position to develop and ensure the availability of the cost disclosures and, before the SEC radically changes the entire concept of disclosure with respect to products sold by prospectus, it should conduct a thorough review and evaluation of current prospectus disclosure and, at a minimum, implement its revised disclosure regime by creating a new, simplified cost disclosure form modeled on the form in the current proposal. Broker-dealers could use this mutual fund created point of sale cost disclosure material with their clients to disclose cost information. That would ensure centralization of the creation of the form and result in substantial cost savings to the industry. Quite simply, why should broker-dealers individually have to create detailed cost summaries of each fund that is available in their system? That means two thousand broker-dealers have to go through the time and expense to create the same form. Alternatively, the mutual fund can create the form and make it available to those two thousand broker-dealers. Which makes more sense?
The crux of the issue is that prospectuses are not easily understandable and there is a search underway for a more appropriate mechanism of disclosure. We do not object to providing disclosures about cost information that is more easily understandable to consumers. However, we do object to the attempt to transfer the responsibility for disclosing traditional prospectus information from the issuer of the securities to the seller. We also object to the fact that the new proposal does little if anything to alleviate the industry's concern about the astronomically high costs of the original proposal.
In summary, mutual fund specific information related to costs should be disclosed at the point of sale via the prospectus and a mutual fund produced point of sale form focused solely on costs of the mutual fund. Thereafter, transaction specific information related to costs could be provided via the confirmation. We support the element of the proposal dealing with adding the additional cost information on the confirmation.
Please note, however, that we do not support the element of the proposal that calls for broker-dealer conflict of interest and special incentive information to be included on the confirmation. We believe that disclosure related to broker-dealer conflict of interests and special incentives should reside exclusively with the broker-dealer and that it should be accomplished through point of sale disclosure only. Furthermore, we believe that the format of the disclosure need not be mutual fund specific. It should be broker-dealer specific and identify the mutual fund companies with whom the broker-dealer has a relationship which causes a conflict of interest. For example, rather than having the conflict question being tied to the particular mutual fund and requiring a Yes or No as the current proposal contemplate. We believe that the questions should be converted to the following format:
The following fund or its affiliates pay our firm extra to promote their funds over other funds: X, Y & Z.
We pay our personnel more for selling the following funds then for selling other funds we offer: X, Y & Z.
Ask for a summary of the special incentives we receive to sell this fund. This information is not available in the fund prospectus. You can request this information by calling (800) 888-8888 or review it online at www.brokerwebsite.com/specialincentives.
This format would provide the investor with the exact same information but do so it a far more effective and efficient manner.
As to the inclusion of information of this type on the confirmation, why provide redundant information? The information on the proposed confirmation that relates to conflicts and special incentives is exactly the same as the information on the proposed point of sale form. Most broker-dealers are not self-clearing. Confirmations are produced by a clearing firm and/or directly by the mutual fund company on behalf of the introducing broker-dealer. This will cause mutual fund companies/clearing firms to have to track information that they are not in the best position to track. Alternatively, it would cause introducing firms to have to mail out supplemental conflict of interest and special incentive mailings to supplement the confirmation. Considering that the information would have been presumably already provided at the point of sale, this appears redundant and not cost effective. More importantly, to the extent that the answer to both conflict questions is No and a firm does not receive special incentives to sell a particular mutual fund, including the negative responses provides no value to the investor at all. Therefore, in the event that the Commission determines that conflict and special incentive information must be present on confirmations, there should be an exception whereby the information does not need to be present on a particular confirmation when the answer to both questions is negative. Requiring such disclosure where there is no conflict and no special incentives serves no regulatory purpose whatsoever. The sole result is an increase in costs that inevitably will make there way to the consumer.
In summary, 1st Global is of the opinion that at point of sale a broker-dealer should disclose cost information in the form of a universal disclosure form created by the mutual fund company distributor of the fund (as opposed to a form created and maintain by the broker-dealer) and conflict information in the form of a general disclosure document prepared by the broker-dealer which lists the mutual fund companies it has relationships with which cause a conflict along with a citation to more details on the broker-dealer's website. Additionally, we are of the opinion that the confirmation should include more detailed cost information as spelled out in the proposal but that it should not include any conflict information.
Again, we thank the Commission for the opportunity to comment on these important issues.
Stephen A. Batman
8150 North Central Expressway, Suite 500 Dallas, TX 75206
Securities offered through 1st Global Capital Corp.
Advisory services offered through 1st Global Advisors, Inc.
Insurance services offered through 1st Global Insurance Services, Inc.
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