LINDA L. RITTENHOUSE
Legislative & Regulatory Affairs
Tel: (804) 963-6828
Fax: (804) 980-9730
November 9, 1998
Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20549
Re: SEC File No. S7-26-98óBooks and Records Requirements for Brokers and Dealers Under the Securities Exchange Act of 1934
Dear Mr. Katz:
The Association for Investment Management and Research (AIMR) is pleased to comment on the Securities and Exchange Commission's reproposed amendments to its broker-dealer books and records rules. The Advocacy Advisory Committee (AIMR Committee) offers its comments below.
The reproposed amendments seek to clarify and expand recordkeeping requirements with respect to purchase and sale documents, customer records, associated person records, customer complaints and certain other matters, with the overall objective of requiring broker-dealers to maintain the types of information that will assist securities regulators when conducting sales practice examinations.
The AIMR Committee supports efforts to encourage the maintenance of meaningful and orderly records to ensure the integrity of the industry and increase customer protection. It recognizes, however, that the expansion of recordkeeping and retention rules may impose an economic burden on the firms required to maintain such records. Thus, the AIMR Committee believes that the additional compliance measures that would result from the amendments must be carefully balanced against the potential benefits to investors and the securities industry.
AIMR's Standards and Policy Subcommittee submitted a comment letter on the rule amendments originally proposed in 1996, in which it supported major aspects of the proposal. The AIMR Committee thus limits its comments in this letter to the reproposed amendments regarding the updating of customer account records, as discussed below.
Customer Account Records
The originally proposed amendments required the broker-dealer to create account forms for each customer containing basic background information about the customer, including its investment objectives. Under the original proposal, that portion of the account form would require updating at least annually.
As reproposed, the amendments would not require the broker-dealer to maintain an "account form," but instead would require that "records" for each natural person customer account be kept. The broker-dealer would be required to update information in these records regarding the customer's investment objectives at least once every 36 months.
AIMR supported the original proposal to require annual updating in this area in the belief that it is essential for a broker-dealer to maintain reasonably current information about a customer's investment objectives to ensure that the customer's account is properly handled, and that the customer is afforded the chance to participate in appropriate investment opportunities. It is the responsibility of AIMR members to consider carefully the appropriateness and suitability of a given investment or course of investment action to the needs and circumstances of the customer for which it is intended and to ensure that the customer is fully aware of the investment policies, strategies, and selection procedures that are being applied to the investment of the customer's funds. The most important factor to be considered in matching appropriateness and suitability of an investment with a customer's needs and circumstances is measuring that customer's tolerance for risk.
The effort to determine the needs, circumstances, and risk tolerance of a customer is not a one-time proposition. Investment recommendations or decisions are usually part of an ongoing process that takes into account the diversity and changing nature of considerations that make up customer facts. The passage of time is almost bound to produce changes that are important with respect to investment objectives or to risk tolerance.
Under the AIMR Standards of Professional Conduct, AIMR members must make reasonable inquiry into a client's financial situation, investment experience, and investment objectives prior to making any investment recommendations. This requires the more than 30,000 AIMR members to update this information as necessary, but no "less frequently than annually to allow the members to adjust their investment recommendations to reflect changed circumstances."
Under the AIMR Standards of Professional Conduct, AIMR members must make reasonable inquiry into a clients financial situation, investment experience, and investment objectives prior to making any investment recommendations. This requires the more than 30,000 AIMR members to update this information as necessary, but no "less frequently than annually to allow the members to adjust their investment recommendations to reflect changed circumstances."
Accordingly, the AIMR Committee does not support the change from annual updates of the customers investment objectives to requiring that they be made every 36 months. The proposing release states that commenters objected to the annual updating, on the basis that investment objectives can change frequently, and thus cause records to quickly become outdated. The AIMR Committee does not believe that extending by threefold the period for updating such important information is a positive response to this issue. Given the AIMR Committees belief that information regarding investment objectives must be timely to be meaningful, it favors adoption of a requirement that the portion of a customers record pertaining to its investment objectives be updated at least annually.
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The AIMR Committee appreciates the opportunity to comment on this area. If you have any questions pertaining to this letter, please do not hesitate to contact me at the above-referenced numbers.
/s/ Linda L. Rittenhouse
Linda L. Rittenhouse
cc: Advocacy Distribution List