January 20, 2005
With regard to the SEC's reasoning for this rule, one should first think: How will an individual customer be able to distinguish between incidental and specific advice? Customers often assume when a broker tells them a stock is good to buy, that the person making that recommendation is giving specific advice to them. There is no amount of disclosure, especially in 8 point type, that will distinguish this to make most (client's) feel otherwise. Based on litigation matters I see frequently, this is already on ongoing problem. Fortunately we at least have a contract between an Adviser and the Adviser's client to help formally distinguish the relationship. Advisory relationships have already been clouded with the advent of fee based brokerage, now you are asking the investor to make a determination as whether or not the advice given is specific and leaving it to the firm to provide additional monitoring as to discretionary, non-discretionary and/or control issues. This is dangerous for both the Firm and the investors. The issue isn't that the advise is discretionary, it is that the advice is specific and a fee is being paid (see below).
Why further confuse the line between Investment Advisers and broker/dealers? Congress felt an Advisor had a fiduciary responsibility that was so important they wrote the Investment Advisers Act, to fully disclose conflicts (see 1, below)? The SEC is charged with the responsibility to protect the customer and provide the rules and guidance for fair-play. When the NASD addressed this in Notice to Members (03-68), November 2003, inclusive of the Tully report while awaiting this proposed rule, it noted that firms are already providing the fee based service without investment advice. If a client is being charged a fee over and above what they reasonably would have been charged were they paying "transactional costs", i.e. a commission then they are paying for advice; they have every reason to assume it is specific and the person that is rendering it is acting as an Adviser.
Footnote number 8 in this SEC proposal (see S. REP., NO 76-1/75, 76th Congress, 3d Sess.22 (1940)) speaks to the real issue- expand the definition of "commission".
Please excuse the simplicity of this comment. When I first saw this proposal, I felt terrible I was unable to take the time to make a submission. I have been in the industry for almost 20 years and feel there will be nothing but problems from adopting this proposed Rule.
Thank you for your time and consideration.
1. From SEC v. Capital Gaines Bureau Research, 375 U.S. 180 (1963) The Investment Advisers Act of 1940 was the last in a series of Acts designed to eliminate certain abuses in the securities industry, abuses which were found to have contributed to the stock market crash of 1929 and the depression of the 1930's. 7 It was preceded by the Securities Act of 1933, 8 the Securities Exchange Act of 1934, 9 the Public Utility Holding Company Act of 1935, 10 the Trust Indenture Act of 1939, 11 and the Investment Company Act of 1940. 12 A fundamental purpose, common to these statutes, was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry. 13 As we recently said in a related context, "It requires but little appreciation . . . of what happened in this country during the 1920's and 1930's to realize how essential it is that the highest ethical standards prevail" [375 U.S. 180, 187] in every facet of the securities industry. Silver v. New York Stock Exchange, 373 U.S. 341, 366
Broker Dealer, RIA Compliance & Consulting