June 7, 2000
Honorable Arthur Levitt Jr.
Securities and Exchange Commission
550 Fifth Street, N.W.
Re: SEC Release No. IA-1862; 34-42620.
The proposed Rule hurts the investor, for the following reasons.
-- it creates an unlevel playing field between large broker dealer firms and smaller investment advisory firms which are providing the same investment services.
-- broker-dealers would take advantage of the exception by not having to disclose as much disciplinary information or other information on the firm as advisers are required to disclose in the new Form ADV, even though BDs will be providing the same non-discretionary advisory services;
-- BD representatives are subject to a less stringent customer 'suitability' rule, and are not generally considered to have a fiduciary loyalty to the client as are registered investment advisers;
-- the required "brokerage account" disclaimer will not be understood by the public and is completely inadequate. The public will be unduly influenced by the heavy marketing of the advisory services instead of the brokerage services and therefore assume that the services are advisory, not transaction-oriented services.
-- BD representatives are not subject to the same state competency requirements (the new Series 65 competency exam) as for those generally providing investment advice to the public on behalf of state and federally registered investment advisers.
The proposed rule hurts investment advisers for the following reasons.
-- broker-dealers can use client testimonials in advertising; advisers are strictly prohibited from using them.
-- broker-dealers that are not also registered investment advisers will avoid the costs of compliance required under the 1940 Investment Advisers Act, even though they will be able to provide the same services except for discretionary activities.
-- broker-dealers that are not registered investment advisers will not incur the significant costs associated with major revisions to the new Form ADV, as proposed in SEC Release No. IA-1862; 34-42620.
-- broker-dealers will have less liability because of the more stringent fiduciary duty under the 1940 Act.
* The SEC's image of championing the investor will be harmed by adopting the rule.
-- Major consumer organizations, including the Consumer Federation of America and AARP, are strongly opposed.
-- Commission support of functional regulation of the financial services industry, as communicated to Congress during hearings on Glass-Steagall reform, will be called into question by the Commission's subsequent support to exempt extensive investment advisory activities from the 1940 Act.
K. Larry Hastie, MBA, PhD
Pattern Recognition Management
455 E Eishenhower Pkwy, Suite 200
Ann Arbor, MI 48108