Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: File No. S7-26-98, Books and Records Requirements for Brokers and Dealers
Under the Securities Exchange Act of 1934
Dear Mr. Katz:
Web Street Securities, Inc. welcomes the opportunity to respond to the reproposed amendments imposing additional books and records requirements on registered broker-dealers, File No. S7-26-98, Books and Records Requirements for Brokers and Dealers Under the Securities Exchange Act of 1934. We also appreciate the extension of the comment period. As Web Street is an on-line broker-dealer, we thought it necessary to comment on this particular rule and how we believe it would affect brokers such as our firm.
The release, dated October 2, 1998, states that the original amendments were proposed in 1996 in response to concerns raised by the North American Securities Administrators Association (NASAA). Recently, the amendments were reproposed in order to take into account the comments which were submitted during the comment period of the 1996 proposal. The comments, which have been incorporated as amendments, seek to clarify and expand the scope of record-keeping requirements with regard to purchase and sale documents, customer records, associated person records, customer complaints and certain other matters. Specifically, the reproposed books and records rules are designed to assist securities regulators when conducting sales practice examinations. The reproposed amendments, if adopted, are aimed to protect investors from illegal sales practices.
Web Street fully understands the importance of protecting individual investors from illegal sales practices and misguided brokers. The principal purpose of this letter is to identify the salient distinguishing characteristics of on-line discount brokerage firms that we believe render the reproposed amendments unduly burdensome to on- line brokerage firms-namely, that on-line brokers do not participate in the solicitation of the sale of securities, nor do such firms render investment advice. An on-line securities broker firm serves as a liaison through which the investor is given an avenue to execute trades. Decisions as to what securities are purchased and sold lie strictly with the investor. If the reproposed amendments were adopted, it would add onerous reporting requirements (with no discernible investor benefit) to the substantial reporting requirements that are already in place.
Specifically, Web Street finds the following sections of the rule problematic:
The proposed amendment suggests that a firm which utilizes an electronic system to generate an order ticket, modify that particular system if it is unable to capture the identity of the person entering each order and then create a separate record which will identify the specific person executing the trade. We submit that this amendment would be unduly burdensome for on-line brokers. In working with an on-line brokerage firm, the investor in most transactions will be the person executing the order. This section of the amendment appears to be relevant to full service firms, since those firms could have various brokers effecting a trade.
As noted above, on-line brokerage firms do not give investment advice; they are merely a device for investors to invest without having to pay full service brokerage commissions. The research and decision that precede each trade is undertaken solely by the investor. The reason why investors choose to invest through an on-line firm (in addition to cost savings) is precisely because they retain control over their investments and financial planning. There is no investor expectation, nor is it feasible, for an on-line firm to gauge the investment patterns of each customer.
The explanation for this proposed section is that it would aid examiners in identifying possible trading or sales practice violations, such as churning, trading ahead of customers, or front-running. Because on-line brokers do not have discretionary authority to trade any customer accounts, we believe on-line brokers should be excluded from the application of this amendment.
Because on-line broker-dealers do not receive compensation based on the dollar volume of trades, there are no commissions that would make this amendment appropriate for on-line brokers.
Web Street believes that the amendment which would require a firm to have a local office in each state "where two or more associated persons regularly conduct a securities business" to be quite cumbersome and difficult for an on- line brokerage firm to comply with. The on-line business (which is, by definition, Internet-based) is conducted in every state within the United States, and we are therefor licensed in all 50 states. We do however, agree that subsection 4, "Alternative Means of Record Retention" (which states that broker-dealers which have more technologically advanced systems may provide securities regulators with records at a local office in a timely manner without actually keeping the records at a local office), would provide relief. This language would suit on-line brokers which may do business in a particular state, but do not operate an office within that particular state.
As discussed, Web Street does not have any objections to the existing reporting requirements; however, we believe that on-line discount broker-dealers should not be required to comply with amendments that are not associated with their segment of the industry.
We request that you consider these comments during your decision process. If you have any questions or require additional information, please do not hesitate to contact me at (847) 267-1800 ext. 4444.
Very truly yours,