December 9, 1998
Jonathan G. Katz
Secretary
450 Fifth Street, NW, Stop 6-9
Washington, DC 20549
RE: SEC File No. S7-26-98 Books and Records Requirements for Brokers and Dealers Under the Securities Exchange Act of 1934.
Dear Mr. Katz:
I would like to take this opportunity to comment on the recently proposed amendments to SEC Rules 17a-3 and 17a-4 contained in Release Number 34-40518.
New England Securities is a broker dealer registered with the NASD since 1969. It is a wholly owned subsidiary of New England Life Insurance Company (New England Financial), which, in turn, is a wholly owned subsidiary of Metropolitan Life Insurance Company. New England Financial is a diversified financial services company that offers a wide range of financial products and services, including traditional life insurance, and, through New England Securities, mutual funds, variable life insurance, variable annuities, and general securities.
New England Securities has approximately 3500 registered representatives and is licensed in all 50 states. The vast majority of these registered representatives are agents of New England Financial. If appropriately licensed and registered, they are able to sell all the financial products and services offered by New England Financial and New England Securities.
On March 31, 1997, New England Securities submitted a comment letter in response to the SEC’s original proposal on this matter. In it we outlined several concerns about the original proposal. We appreciate that the SEC has reconsidered its original proposal, made several adjustments to it, and issued the revised proposal for industry and public comment. We are still concerned that the revised proposals will impose significant costs and burdens on broker-dealers without a significant benefit to the investing public.
Mr. Jonathan G. Katz
December 9, 1998
Page Two
I would like to comment on two major issues that give us concern, local offices and customer account records.
LOCAL OFFICES
As I had indicated in our previous comment letter, we had a general concern with the fact that the proposal was written with one type of broker-dealer in mind; that is, a firm that maintains a branch office system where registered representatives conduct their securities business at the branch office location, and where there is an on-site supervisor. While this may be typical of a full service general securities broker-dealer, there are many broker-dealers, especially those associated with life insurance companies, where registered representatives work at locations which are not branch offices of the broker-dealer. The proposed definition of Local Office seems to me to consider only the former description. I am concerned that the revised definition of a Local Office does nothing to change that perception. The revised definition merely attempts to eliminate one person locations, but in reality, it does not do even that.
The proposed definition of "local office" is "any location where two or more persons regularly conduct the business of handling funds or securities or effecting any transactions in, or inducing or attempting to induce the purchase or sale of any security, or otherwise soliciting transactions or accounts for a member, broker or dealer."
As we discussed in our previous comment letter, this definition ignores the established definitions of Office of Supervisory Jurisdiction, Branch Offices, and Non-branch Locations established by the NASD in its Conduct Rules. These current definitions differentiate locations based on the types of business conducted at the locations, and the method by which the broker-dealer communicates the location to the public. They establish a functional standard for determining whether a location is a Branch Office, rather than a numeric standard as the Commission is proposing. These rules, which have been in place since 1989, recognize that broker-dealers do not all conform to one particular model of a broker-dealer.
New England Securities, as well as many other life insurance affiliated broker-dealers, has a number of registered representatives who maintain offices separate from their branch offices. Many work at unaffiliated insurance agencies. Many work out of their own homes. New England Securities does not own these offices, and contributes no support to
Mr. Jonathan G. Katz
December 9, 1998
Page Three
these offices other than the commissions that are paid to the registered representatives for sales of securities. In compliance with current NASD Conduct Rules, we have established specific standards on how registered representatives who work from non-branch locations can hold themselves out to the public, and how they must disclose their registered status with New England Securities to the public. We also have a detailed supervisory program in place for such non-branch locations.
We have also established specific books and records requirements at our Branch Offices. These Branch Offices are General Agencies of New England Financial, our parent company.
The proposed rules would mandate that we require registered representatives to maintain extensive sets of books and records at what are now non-branch locations.
Another issue related to local offices concerns us. The proposed rules provide that books and records that relate to an office that does not meet the definition of local office (usually a one person office) must either be maintained at the office or aggregated with the records of one or more such offices or associated persons at a state record depository designated by the member. I am at a loss to understand how this can be accomplished. Assume for example, that New England Securities has two registered representatives located in the State of Maine, one in Lewiston, and the other in Biddeford. They both are supervised by our General Agent in the Bedford, New Hampshire Branch Office. They have no association with each other than as registered representatives of New England Securities and agents of New England Financial. Where would New England Securities maintain a state record depository? Who would staff it? It seems to me that the effect of this is to bring the definition of local office back to the original proposal where any location, even one where there is only one registered representative, is considered a local office under this proposal.
I recommend that the SEC eliminate this definition of "local office" and use the existing concepts of Non-branch Locations, Branch offices, and Offices of Supervisory Jurisdiction that have been in effect since 1989. Broker-dealers should be allowed to continue to identify their office locations, and maintain books and records in branch office locations, in conformance with the existing NASD Conduct Rules.
Mr. Jonathan G. Katz
December 9, 1998
Page Four
With respect to books and records that would have to be maintained at non-branch locations, I recommend that the Commission establish a minimum level of records that each registered representative must maintain, if the person is not located at a branch office of the broker-dealer. Examples of these records would be copies of the following:
customer suitability information,
customer account statements,
correspondence,
customer complaints, and
checks.
By requiring registered representatives to maintain copies of these records, which they normally do anyway, broker-dealers can maintain their branch office systems, and state regulators can conduct their reviews of registered representatives regardless of where they are located.
CUSTOMER ACCOUNT RECORDS
Another issue that seems to reflect the proposal’s orientation toward the model of a full service general securities broker dealer is the account record for each customer. In most full service firms, a customer opens one "brokerage account" and all securities transactions flow through that brokerage account. At New England Securities, customers can open a brokerage account, but they may also maintain securities accounts directly with the issuers. For example, a customer may purchase, through New England Securities, a variable life insurance policy or variable annuity issued by New England Financial. The customer may also own shares of New England Funds, an affiliated fund group, or American Funds, a non-affiliated fund group, and hold those mutual funds through the respective mutual fund groups. In such an example, the customer may have five or more "accounts." Under the proposed rule, New England Securities would be required to send a copy of the customer’s account record every 36 months up to five times.
We could possibly solve this by having all of a customer’s securities positions held in a single brokerage account. This may not, however, be what the customer wants. There are certain advantages to the customer to hold securities directly with the issuer, especially if they are variable life insurance policies or variable annuities. New England Securities is planning to create a method of reporting all of a customer’s securities holdings in one record, but it may take a significant amount of time and resources to accomplish this.
Mr. Jonathan G. Katz
December 9, 1998
Page Five
I would request that the SEC clarify what it means by "account record."
I recommend that the Commission define "account" as one which is maintained directly by the broker-dealer, or, if the broker-dealer introduces its customer accounts to another broker-dealer under a fully-disclosed clearing arrangement, its clearing broker-dealer.
I would also recommend that the requirement to furnish a copy of the account record to the customer every 36 months apply only to accounts that are opened after a certain date. This would avoid considerable costs to all broker-dealers and would be consistent with other rule changes that the SEC has enacted in the past.
Other issues on which I would like to comment are:
1. Year 2000. If the proposed rules are enacted as they are currently written, New England Securities will need to make extensive changes to its computer systems. The computer systems of many of its affiliates and associated business entities will also have to be modified. All of these companies are dealing with the Year 2000 problem, and are devoting much of their computer resources to this extremely important issue. I recommend that the Commission not require any implementation of these rules until after the Year 2000 issue is resolved, and computer support resources can be devoted to this.
2. Records of Compliance with Securities Regulatory Rules. This proposal seems to say that a violation of self-regulatory rules is per se a violation of federal securities regulations. A broker-dealer is responsible for compliance with all rules of securities regulatory authorities governing the information required when opening or updating a customer account. This proposal has the potential to create jurisdictional confusion and uncertainty. I recommend that this provision be removed.
Again, I appreciate that the Commission has responded to the many letters from industry members opposing the original proposals. I think that there are still several provisions in the revised proposal that impose significant burdens on broker-dealers, especially those that do not fit the "general securities" model. These provisions will require a great deal of time and resources on the part of broker-dealers only for the purpose of satisfying state securities examiners, and will provide little benefit to the investing public.
Mr. Jonathan G. Katz
December 9, 1998
Page Six
The recent sanctions that the SEC took against firms such as Royal Alliance and NYLife Securities have emphasized to broker-dealers their responsibilities to supervise their registered representatives, especially those who operate out of non-branch locations. Many firms, including New England Securities, have reviewed their supervisory procedures and made enhancements to them. These enhancements have included more frequent supervisory visits to off-site registered representatives, including unannounced visits. I recommend that the Commission study how the securities industry has reacted to these cases, and what improvements broker-dealers have made to their supervisory programs. It may be that the problems that these books and records rule proposals have tried to address have already in large part been resolved.
I would welcome the opportunity to meet with members of the Commission Staff to discuss these proposals in more detail.
Sincerely,
Michael E. Toland