December 8, 1998
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 5th Street, NW
Mail Stop 6-9
Washington, DC 20549
Re: File No. S7-26-98
Dear Mr. Katz:
MONY Securities Corporation (MSC) would like to comment on SEC Release No. 34-40518; File No. S7-26-98 (Books and Records Requirements for Brokers and Dealers under the Securities and Exchange Act of 1934).
MSC is a broker/dealer registered with the SEC and the NASD (also registered with the SEC as an investment adviser). It is a wholly-owned subsidiary of MONY Life Insurance Company, a member of the MONY Group. MSC has approximately 2,300 Registered Representatives operating throughout the United States and Europe. It operates through about 75 OSJ and Branch Offices. The majority of products sold are mutual funds and variable contracts but does a limited general securities business.
The original proposal issued in 1996 grew out of draft proposals of the North American Securities Administrators Association (NASAA) whose members were concerned about the accessibility of books and records on a timely basis for broker/dealers operating within their respective states. We, along with many other broker/dealers and industry groups, commented extensively on that 1996 proposal.
Much of this letter’s comments were contained in our letter dated December 23, 1996 but are again included in large part as we feel they have not been adequately considered or addressed in the current proposal.
Since 1996, many of us in the industry have worked diligently in different forums with NASAA and the SEC to forge some compromises. In many instances much progress was made. However, there are still several areas of great concern to broker/dealers, like our own, where we feel relief is needed. The Securities Industry Association ("SIA") and the American Council of Life Insurance ("ACLI") will file detailed letters addressing certain specific concerns. MSC shares these views and supports their recommendations. Our letter, therefore, will be limited to some very specific major points.
As pointed out in our 1996 letter, the original NASAA proposals had in mind broker/dealers who were mainly in the general securities business and not those where the large majority of sales are registered investment companies. Certainly the NASAA committee meetings open to the industry did not contemplate any application to variable contract sales which generally do not come under the various state securities laws and regulations but rather state insurance department regulations. We strongly recommend that variable contracts be exempted from any subsequently approved rule. Traditionally the customer account records (applications), compensation records, advertising files, and complaint files are maintained at the home office of the insurance companies, especially where proprietary products are involved.
Particularly troubling is the introduction into regulations of the broad definition of local office which would include any location where two or more associated persons regularly conduct a securities business. Insurance company broker/dealers usually operate with Registered Representatives assigned to a designated NASD branch office but the actual location of the Registered Representative may be detached from the branch itself. The location may be a single person office, an office where two or three (or more) Registered Representatives have space (usually not paid by the broker-dealer) or perhaps, not uncommon, the Registered Representative’s private residence. Many times the Registered Representative "regularly conducts business" at the client’s home or place of business or even a location entirely independent of the Registered Representative and the client.
Although the re-proposal does eliminate the "one person local office," it still does not go far enough. In many instances, a Registered Representative who is a selling representative has an associated person who is registered to handle basically administrative functions but performs other tasks that require registration even though that individual would not be considered a "selling representative" nor receive transaction based compensation.
In our case, it is estimated we would have approximately 150 two person offices. These offices are ever changing either by location or the addition or subtraction of an associated person. We would suggest that the already in place NASD Branch Office Definition continue to be the standard but if the new local office definition is to survive, that the number of associated persons be set at five…the original industry recommendation to NASAA.
One must remember that many two person offices are minimal producers and are engaged in either fixed insurance product sales or variable product sales.
Provision is made for electronic recordkeeping and for same day production of records. We would suggest, should the current proposal survive, that the same day requirement be extended to three business days to allow for either electronic downloading or overnight mail services.
A state depository is proposed for a one person office. We question why such a system should not be made as an alternative to the local office retention requirements. The states have argued the need to have the records within their borders, so why not allow a broker/dealer to designate alternatively to a state one central or multiple locations within the state’s borders. Where an associated person is assigned to a branch for supervisory purposes, then the required books and records would follow that system.
We believe the current proposal is unnecessarily burdensome in light of costs and any benefits to be derived. We see this proposal as doing little to add to customer protection while adding significantly to costs which ultimately are borne by the consumer with little proven added benefit.
There is no significant documentation of problems surrounding the ability of a state to get the required records. Even if a few isolated instances have occurred in the past, the fact is that the very broker/dealers that would not produce the requested records in a timely manner most likely would be in violation of a new books and records regulation but would not advance customer protection which is the purpose. At the same time the large majority of broker/dealers who try hard to meet federal and state regulations would undergo significant costs to comply…expenditures which would be better aimed at an examination program, training, communication, etc.
One can always make a case for potential problems in small one or two person offices but some of the larger regulatory problems have occurred in firms where numerous Registered Representatives are located. The occasional problem in a small office should not tar the whole industry where independent contractors with proper supervision provide valuable investment services across America. Any problems should be addressed by a review of a firm’s supervisory structure, oversight and examination programs. No system or program can be perfect but can be measured against the Commission’s longstanding reasonable supervision standards.
As noted above, we request that this section not apply to Variable Contracts as to updating of information. Once a variable annuity or variable life contract is purchased, the contractholder has a contractual right to make more deposits into the contract and to offer sub-accounts as provided in the policy and prospectus. Updating on the broker/dealer records of any change in objectives or other financial information serves no real purpose. These products are sold on a long term basis extending over a number of years.
We would suggest that the updating apply only to active brokerage accounts where a Registered Representative is making investment recommendations.
The reproposed rules would establish a new record stating whether a broker/dealer has complied with applicable securities regulatory authorities governing the information required when opening or updating a customer account. We see no reason for such a record nor the benefit to a customer or regulator. Firms need to comply with each individual rule, a separate record confirming this seems to be a rule without a purpose.
The reproposal allows for greater flexibility in recordkeeping for compensation but adds a new requirement for non-monetary compensation. Such a requirement would necessitate costly new systems and be very difficult to administer. Compensation records should be limited to Internal Revenue reporting information.
It is difficult during this short comment period to obtain good estimates of costs to meet the proposed regulations. It is clear however, that with needed extensive system changes that would be required, that the costs would be substantial. Most of the costs would, for our firm, be connected to the local office provision both in systems and supervisory and examination costs to assure compliance.
Certainly some new books and records will eventually be adopted and firms will be required to make changes both to their various computer systems as well as the oversight given through their audit programs. We urge the Commission to adopt a reasonable implementation schedule.
In its Policy Statement on Regulatory Moratorium to Facilitate the Year 2000 Conversion, the Commission has recognized the need to suspend the imposition of new rules that require major reprogramming during the period June 1, 1999 and March 31, 2000. It is clear the current proposals will require firms to undertake major reprogramming. Resources today are stretched to the limits and any ability to undertake studies as to needed systems changes cannot occur until well into the year 2000. Therefore any implementation schedule should take this into consideration.
We submit that the issue should not be "books and records" but supervision. The SEC has always had as its’ cornerstone "reasonable supervision." We urge the Commission not to abandon that view. There have been several notable cases where supervision proved to fall short and the SEC and NASD have addressed these situations with commensurate actions. The industry has taken note of these cases and is moving aggressively to meet the changing marketplace and distribution systems.
Compliance and audit staffs have been augmented…visit programs adjusted to provide for more frequent examinations including unannounced audits. The audit programs have been improved to go beyond checklists to provide adequate documentation, written reports and follow ups to correct any deficiencies.
We recognize that standardized books and records serve their purpose for the orderly conducting of a securities business. We accept the concept of the need for a state to examine a broker/dealer’s business within its borders and for the residents of its state. However, we do seriously question the expansion of records, and the detailed requirements, to all broker/dealers where one size does not fit all in this vastly diverse securities community. As each proposal is considered for adoption, we only ask that the costs of implementation be carefully weighed against any expected consumer protection benefit.
We appreciate the opportunity to comment on these proposals and request careful consideration of our views and those expressed in other industry letters referenced above.
Sincerely,
Edward E. Hill, CLU
Senior Vice President – Compliance
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