Date: March 27, 1997
To: Jonathan G. Katz, Secretary
Securities and Exchange Commission
via e-mail address
Fr: AAG Securities, Inc.
Re: "Books and Records Requirements for Brokers and Dealers Under the SEC Act of 1934
(SEC Act Release No. 34-37850; File No. S7-27-96)
Dear Mr. Katz,
AAG Securities is a small introducing broker/dealer with a diverse network of approximately 280 independent brokers operating in all states but New York. Although we are small, we are still subject to every regulation that applies to broker/dealer operations. Our major concerns with the Proposed as written are: 1)The extra burden that will be imposed on our broker/dealer to comply with additional regulations in an already highly regulated environment, and more importantly 2)The additional (and possible anti-competitive) costs that our broker/dealer will have to absorb to implement and monitor the changes that would become necessary by the Proposal.
Under proposed changes to Rule 17a-3, the Proposal would require broker/dealers to keep additional information on brokerage memoranda, revise new account forms, keep more records on associated persons and customer complaints and require new exception reporting. Under, proposed changes to Rule 17a-4, the Proposal would require broker dealers to change its record retention procedures relating to advertising, registration information, audits/exam reports, recommendations, manuals, correspondence and contracts. The Rule 17a-4 proposed changes would also require broker dealers to maintain certain records at each local branch office, designate a principal over "books and records" compliance, and otherwise make changes to already existing rules on the preservation of correspondence and contracts.
It is our understanding that the Proposal's aim may be to counter books and records accessibility concerns by members of the North American Securities Administrations Association ("NASAA"). We believe that the existing regulatory structure allows for reasonable records, maintenance thereof and accessibility within a "reasonable" time period. There also seems to be a NASAA concern over the marketing of penny stocks. State regulators have authority to obtain necessary records from broker/dealers operating in their jurisdiction and to enforce their statutes as presently written. Perhaps if certain broker dealers have on-going problems producing records for States, then the States could take appropriate action against the non-compliant broker/dealers during or after State examinations. However, to mandate stringent procedures on all broker/dealers would be unfair, anti-competitive and very costly. Specific changes or clarifications to existing Penny Stock Federal or State regulations would perhaps help offset NASAA concern in this area.
Smaller broker/dealers are at a natural competitive disadvantage to begin with. Many times smaller operations have to compete by offering their selling representatives compensation that is equal or greater than what representatives could obtain from a larger broker/dealer. Not until the smaller broker/dealer has time to gain representatives, increase volume of transactions, develop systems, add staff, etc. can they begin to recover their costs. The Proposal would add additional responsibilities to smaller b/ds, which would impede the ability for them to compete. Less effective regulation is always more preferable to more, and perhaps, in some cases, non-effective regulation.
Many of the provisions of the Proposal will create pressures for small broker/dealers to create and
develop additional technology and systems capable of handling the requirements. This is an area where small broker/dealers are at an extreme competitive disadvantage because of their lack of capital needed to finance such endeavors. Usually smaller broker/dealers have a combination of systems and paper-based recordkeeping that is adequate enough for the structure and volume of business done. These records are currently available at the Federal and State levels. However, requiring many records at various branch offices located in up to 50 States would cause undue hardships in the workhours and other expenses associated with it.
It is our opinion that the entire Proposal (as written) be substantially modified or withdrawn at this time. However, we would like to offer some additional information to consider for this and perhaps future less burdensome Proposals:
In addition to reviewing the Proposal on our own, we have reviewed the response of the Securities Industry Association (SIA), which we maintain a current membership. The letter sent by C. Evan Stewart (SIA's Federal Regulation Committee Chair) details and echoes much of the same concerns that AAG Securities already had. We are in agreement with the SIA's letter and concerns.
- Associated Persons Records Rule 17a-3(a)(20) & (21):
- We recommend that these proposals be modified or withdrawn. Proposed Rule (20) & (21) above will put undue strain on smaller broker/dealers to constantly monitor the percentage of business that is done at a specific location and also make certain that the records are constantly at the proper location. Many times representatives "come and go" in this business for various reasons. In addition, smaller broker/dealers may not have the staff or current systems capability to constantly monitor the volume at these locations. All b/ds are responsible to comply with existing Federal (NASD) and State Branch Office Registration requirements, which is enough burden in and of itself.
- Account Forms Rule 17a-3(a)(16):
- We recommend that Subscription/Mail Order (see below) based broker/dealers and only broker/dealers who do not have a substantial amount of "speculative" business be exempt from the Account Forms requirements in the proposed rule.
- Many firms have "niche" markets (e.g. 403(b) retirement plans) which are generally funded with non-speculative diversified investments like mutual funds. It will be too costly and ineffective to monitor any specific percentages of "speculative" investments for most broker/dealers, who either do not deal in them or do so on a very limited scale. It will be difficult for a b/d to determine what is "speculative" and also to monitor those percentages in the customer's accounts. Existing suitability regulations seem to cover this area enough. What happens when customers have frequent changes (albeit some minor) in their allocations? What happens if the changes are verbal? We also object to the 1-year updating requirement for investment objectives on account forms. This requirement is very burdensome for all (especially small) broker dealers with limited personnel, systems and capitalization.
- Complaint Rule 17a-3(a)(17):
- We recommend the proposal to keep records of "oral " complaints to be withdrawn. There are to many circumstances where oral communication from customers may or may not be deemed to be an official "compliant". We would not want representatives in the field making decisions about whether or not a compliant is "official" and/or make some type of "legal" interpretation if it really involved fraud or theft. Most b/ds already train and supervise representatives to report these items to the broker dealers, who can look into them realistically. We believe that a simple (as proposed in this Rule change) requirement that a "Notice" be given to customers is sufficient.
- Complaint Rule 17a-3(a)(17): (Cont.)
- We recommend clarification on who is responsible to place the notice on "Account Statements". Many broker dealers (especially smaller ones) utilize the "Subscription" (or Mail Order) method of selling packaged products (mainly Mutual Funds and Variable Annuities). Under this method, the "Account" is not held with the selling broker/dealer but ultimately lies with the Issuer. The role of the broker/dealer is to forward the application (after suitability is done, of course) via "Mail" to the Issuer. The broker/dealer does not send any statements direct to the customer, this is handled by the Issuer. The Proposal requires broker/dealers to provide routine notification in "account statements" that customers should set their complaints in writing .
- The Proposal as written is not clear. Will "Subscription/Mail Order" broker/dealers (vs. Introducing broker/dealers) be exempt from this requirement? If not, will the Issuers be required to place a statement for each b/d on their statements? Alternatively, if b/d's do not produce their own statements, can't a simple statement be added to the b/d's new account form disclosure to cover this notice to customers? In cases where securities business is introduced through an arrangement with a clearing (i.e. non-Subscription business)broker/dealer, whose responsibility is it to place the disclosure (the introducing or clearing b/d)?
- Miscellaneous Rules 17a-3(a)(18) & (19):
- We believe that existing SEC/NASD regulations are in place to adequately address the records and reports covered by the proposed Rule changes. Systems would have to be altered to capture the newly required information and procedures would have to be implemented to monitor compliance with the same. This would be burdensome and expensive.
- Misc. Local Office Records Rule 17a-4(1):
- This appears to be an attempt to make "uniform" records available in State jurisdictions. We do not object totally to the concept, but wish to express our concern that any SEC/NASD required rules here will not solve the problem of various States separate recordkeeping rules. Some States rules are obviously overburdomsome (e.g. some states even require corporate records in the branch!) and need to conform to any "National" standard. Broker/Dealers should be given some flexibility in how they determine to keep the minimum records at the branches.
Thank you for extending the deadline for important comments on this Proposal. For a smaller broker/dealer, whose employees are often required to do multiple tasks, the extra time was needed. Should you need any additional information or clarifications from us, please do not hesitate to call AAG Securities at (513) 333 - 6030.