December 9, 1998
Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Re: Books and Records Requirements for Brokers and Dealers Under the Securities Exchange Act of 1934
Release No. 34-40518
File No. S7-26-98
Dear Mr. Katz:
The Maryland Securities Division, Office of the Attorney General, appreciates the opportunity to comment on the proposed revisions of the books and records requirements for brokers and dealers under the Securities Exchange Act of 1934. Maryland considers this rule proposal particularly important in light of the National Securities Markets Improvement Act of 1996 ("NSMIA") prohibition against State books and records rules that differ from or are in addition to the federal requirements. This NSMIA provision placed with the Securities and Exchange Commission ("SEC") the considerable responsibility to establish and maintain a regulatory system adequate to protect small investors from broker-dealer malfeasance.
This responsibility cannot be taken lightly. Marylands enforcement docket contains a myriad of cases against stockbrokers who defrauded their individual customers. Many of those cases involve stockbrokers who worked from single-person offices that operated far removed from the supervision of the broker-dealers headquarters and its compliance staff. At least two of our pending cases involve individual stockbrokers who were the sole licensee in the office. In one of those cases the stockbroker misappropriated in excess of $500,000; in the other the licensee operated a ponzi scheme that generated losses exceeding three million dollars. Without immediate on-site access to the books and records in those offices, our ability to bring enforcement proceedings would have been severely hampered.
The pending rule proposal requires that records be maintained only at offices where at least two or more licensed persons regularly conduct business. Our experience indicates that the proposal will prevent quick detection of frauds during routine and "for cause" on-site examinations of single-person offices. Core books and records will not be required to be maintained at such offices. If the records are not available, we will be prevented from taking quick action to stop the wrongdoer and protect any assets that may remain. Defrauded investors will not be well-served if regulators are forced to wait for subpoena production of basic records, and while we wait, the perpetrator of the fraud dissipates remaining assets and destroys any records.
The Maryland Securities Division supports the Commissions proposal including the order ticket and account information verification requirements. We believe, however, that the Commission should not diminish investor protections by further loosening the requirements for maintaining records. We urge the Commission to require records on-site at all broker-dealer offices, and not only at those offices with at least two licensees. Maintaining this critical enforcement tool provides significant investor protection while being no more burdensome on broker-dealers than the books and records requirements with which industry routinely complied prior to NSMIA.
We appreciate the opportunity to comment on the proposal and are available to provide any additional information you may require.
Melanie Senter Lubin
Maryland Securities Division
Office of the Attorney General
200 St. Paul Place, 20th Floor
Baltimore, Maryland 21202-2020