March 31, 1997
Mr. Jonathan G. Katz
Security and Exchange Commission
Mail Stop 6-9
450 Fifth Street, NW
Washington, DC 20549
Re: Books and Records Requirements for Broker Dealers
Under the Securities Exchange Act of 1934
Securities Exchange Act Release Number 34-37850
File Number S7-27-96
Dear Mr. Katz:
I am pleased to provide comments, on behalf of ManEquity, Inc. ("ManEquity"), concerning the proposed rule change regarding books and records requirements for broker dealers currently under consideration by the Securities and Exchange Commission ("the Commission"). ManEquity has reviewed the release and is of the opinion that it should be reconsidered by the Commission and that variable insurance products, distributed by broker dealers, be exempt from the proposed rule changes.
ManEquity is a broker dealer, based in Toronto, Ontario, Canada, that currently focuses exclusively on distributing variable insurance products on behalf of affiliated life insurance companies. ManEquity is a subsidiary of The Manufacturers Life Insurance Company, which also has its home office in Toronto, Ontario, Canada.
ManEquity distributes variable insurance products via approximately 600 registered representatives located in 14 regional offices and numerous local offices in the United States.
ManEquity objects to the current form of the proposed rule change and strongly urges the Commission to exempt variable insurance products for several crucial reasons. First, the Commission has stated that its primary intent in proposing the rule change is to obligate broker dealers to maintain certain records at the local level in order to provide state securities regulators easier access to such information.
ManEquity currently distributes only variable insurance products, therefore the major benefit cited by the Commission would be absent since the majority of states do not define such products as securities pursuant to their statutes. Generally, states regulate such products through their insurance regulatory agencies and not the securities regulatory agency.
The electronic age has brought forth many improvements to allow broker dealers and regulators more immediate and efficient access to information. Many broker dealers store necessary documentation on computer networks via electronic scanning. This sort of information could be made available to a state regulator very rapidly. The concept of mandating original documentation within each jurisdiction a broker dealer conducts business is both old-fashioned and extremely inefficient.
As a subsidiary of a life insurance company and a distributor of variable insurance products, ManEquity is familiar with the filing and examination requirements of state insurance regulators. Although most insurance companies have centralized their administrative, processing and record keeping functions, it is interesting to note that there does not appear to be any complaints by state insurance regulators regarding a lack of information or their inability to gather necessary information. Evidently state insurance regulators are neither deterred by nor suffer from the absence of original documentation in their jurisdictions.
Moreover, if the state securities regulator is experiencing difficulty in obtaining certain documentation from broker dealers the answer is to pursue enforcement actions against the offending broker dealers. If current requirements are not being enforced, the addition of another rule is not the answer.
This proposal by the Commission, made in response to purported obstacles facing state securities regulators, is much too broad and burdensome to justify on the basis of securing original documentation.
Second, ManEquity believes that implementation of this change in its current
form will result in an unnecessary economic burden to ManEquity and all other similarly
geographically diverse broker dealers given the definition of "local office" contained in the
proposed rule change. Many broker dealer firms have centralized their book and record keeping function to ensure proper documentation and efficiency of effort. The proposed
rule change will reverse this trend overnight and require broker dealers to review and
most likely amend their current supervisory structures as well as disperse the book and record keeping/retention function. The result of these processes is likely to be a chaotic
and highly localized record keeping environment that will not provide the state regulator with necessary information and provide added costs to broker dealers and their clients.
Thirdly, the proposed requirement mandating an annual update of a client's account form and investment objectives seems inapplicable and unnecessary for the variable insurance products broker dealer. ManEquity already obtains suitability
information by way of the product application and performs an analysis of such information for each sale. Any subsequent sales to the same individual requires the collection and analysis of such information each time, including suitability and investment objective information. In ManEquity's view, the cost of obtaining information on an annual basis would be much higher than the Commission has estimated and would not provide useful information that is not already available through a review of product application forms.
ManEquity's customers would derive no value from the annual requirement and would be likely to ignore such requests for information. The concept of classifications for certain risks does not lend itself to uniform application to a broker dealer's client base. As for variable insurance products, ManEquity already provides a prospectus for each product that describes the underlying investment options and the risks contained therein.
ManEquity believes that the rule changes proposed in Securities Exchange Act Release Number 34-37850 should not apply to the sale of variable insurance products by
broker dealers. The goals cited by the Commission, in proposing this rule change, cannot
be realized and the burdens associated with the imposition of the rule are too great to be placed upon broker dealers and their clients for variable insurance product sales.
ManEquity is cognizant of the various market conduct challenges facing the
financial services industry today and understands the Commission's desire to encourage
greater communication between broker and client. But no matter how desirable the
results, the Commission must not lose sight of the impact these rules would have upon broker dealers distributing variable insurance products. The proposed changes will not provide the benefits the Commission seeks and will prove to be excessively burdensome to broker dealers.
ManEquity respectfully requests that the Commission reconsider this proposal and exempt the sale of variable insurance products from its requirements.
Very truly yours,
Brian H. Buckley
Secretary and General Counsel