March 31, 1997

Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW, Stop 6-9
Washington, DC 20549 via e-mail

RE: Proposed Amendments to Broker/Dealers Books and Records Rules under the Securities Exchange Act of 1934; File No. S7-27-96

Dear Mr. Katz:

I would like to take this opportunity to comment on the recent proposed amendments to SEC Rules 17a-3 and 17a-4 contained in Release Number 34-37850.

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 (The New England), which, in turn, is a wholly owned subsidiary of Metropolitan Life Insurance Company. The New England 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 3000 registered representatives licensed in all 50 states. The vast majority of these registered representatives are agents of The New England. If appropriately licensed and registered, they are able to sell all the financial products and services offered by The New England and New England Securities.

As the Compliance Officer of New England Securities, I am concerned that the provisions of this rule proposal would have a very significant negative effect on New England Securities and on other broker-dealers. Among other things, they would increase the cost of doing business substantially, while providing little additional protection to the investing public.

M. E. Toland
March 31, 1997

It appears that these rule proposals were written based on concerns raised by members of one organization, that is, the North American Securities Administrators Association (NASAA). There appears to be little or no input from other regulatory bodies, such as the New York Stock Exchange or the National Association of Securities Dealers, Inc. There also does not appear to have been any input from broker-dealers, or industry organizations such as the Securities Industry Association, the Investment Company Institute, or the American Council of Life Insurance.

The self-regulatory organizations have a very significant role in regulating broker-dealers, and, in my experience, the SEC has usually coordinated the rule making process among the self-regulatory organizations, industry groups, and broker-dealers, as well as with NASAA. It appears that the Commission did not take advantage of this process when proposing this rule. While I appreciate the SEC's submitting the proposal for comment, I think that this proposal would have been better if there were input from other organizations much earlier in the process.

A second general concern I have with the proposal is that it is 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.

There are a number of provisions in this proposal that I would like to comment on, but the most significant are those addressing Account Forms and Local Offices.

Section (a)(16) ACCOUNT FORM

The proposal requires an account form for every customer account. This account form will contain specific information for customers who are natural persons and for customers who are other than natural persons. New England Securities has been obtaining information for our customer accounts based upon the requirements of NASD Conduct Rules 3110 and 2310. There are significant differences between the current NASD rules and the proposed SEC rules. In most cases, the SEC proposed rules require broker-dealers to obtain more information about their customers, however, the NASD rules, in at least two situations, are more stringent than that proposed by the SEC . The NASD requires broker-dealers to obtain information on the customer's tax status and whether the customer is an associated person of another NASD member. This information is not required by the SEC proposal. Further, the NASD differentiates between accounts for
M. E. Toland
March 31, 1997

which members recommend securities and those for which the member makes no recommendations, has different provisions for institutional accounts and for money market fund accounts, and has specific customer account information requirements for options accounts.

Although I have not reviewed the New York Stock Exchange or other self-regulatory rules, it is reasonable to assume that those rules are somewhat different from the proposed rules. Likewise, many states also have different requirements for customer account information.

I recommend that the SEC take this opportunity to standardize the information that broker-dealers should obtain from their customers. This should be done as part of a combined process with participation of all interested parties.

The proposal requires that broker-dealers obtain the required new account information on all existing accounts. I estimate that New England Securities has more than 500,000 customer accounts. These include general securities accounts that are maintained on a fully disclosed basis with our clearing broker, mutual fund accounts with The New England Fund Group, an affiliated company, mutual fund accounts held with non-affiliated mutual funds, limited partnership accounts, variable annuities, and variable life insurance policies. Our procedures call for our registered representatives to obtain customer account information as required currently by the NASD.

The additional information that we, and other broker-dealers, would have to obtain beyond what is required by the NASD, appears to be: telephone number, marital status, number of dependents, and educational level. To contact each existing customer to obtain the above additional information about them, would involve an administrative and financial burden on broker-dealers that would be extremely high. The benefits, either for the customer or for the broker-dealer, would be negligible.

I recommend that the SEC consider, as an alternative, requiring the customer account information be obtained for accounts opened after a certain date. This would be consistent with other rule changes that the SEC has enacted in the past.

The proposed rule also requires firms to update customer information "if required" on an annual basis thereafter. The rule gives no guidance on what "if required" means. Lacking this guidance, broker-dealers would likely have to update this information on all of their customer accounts each year, regardless of the level of activity, and regardless of the type of securities the customer holds. Customers who have accounts with more than one broker-dealer, or who own mutual funds with several fund groups, or who have
M. E. Toland
March 31, 1997

variable insurance products with more than one life insurance company would be inundated each year with requests for information on their personal situation, financial information, and investment objectives. The cost of doing this to the entire securities industry would be enormous.

I believe that broker-dealers should be allowed to establish procedures for updating customer account information based on the type of business they do, and not have it mandated by these regulations.

Section(f)(2) LOCAL OFFICE

The proposed definition of "local office" is "any location where an associated person regularly conducts 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."

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. These rules, which have been in place since 1989, recognize that broker-dealers do not all conform to the standard 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 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 have also established specific books and records requirements at our branch offices. These branch offices are General Agencies of The New England, our parent company.

M. E. Toland
March 31, 1997

The proposed rules would mandate that we require registered representatives to maintain elaborate sets of books and records at what are now non-branch locations. New England Securities has no ownership control over these locations in the sense that, when registered representatives terminate their registration with New England Securities, they take these books and records with them. Once they leave, New England Securities would have no legal access to them.

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.

Other Issues

1. The proposal requires that "every member, broker or dealer shall designate a principal to ensure compliance with this section and s240.17a-3 that require approval of a record by a principal." It is unclear to me what this principal's responsibilities and liabilities would be. This principal would, in most cases, be a part of the Compliance Department or Operations Department of the broker-dealer. Normally the branch office managers are held responsible for compliance of registered representatives under their supervision. If a registered representative fails to comply with these rules, would this "designated principal" be held responsible? The responsibilities of this principal should be clarified in any rules that are adopted under this proposal.

2. The proposal requires that all outgoing correspondence of the broker-dealer be approved by a principal of the member. This provision is overly broad and appears to mean that a registered principal would have to approve every piece of correspondence that is issued by a broker-dealer, including non-securities material such as payment of bills. It also conflicts with NASD Conduct Rule 3010(d) which provides that a principal must approve correspondence of its registered representatives pertaining to the solicitation or execution of any securities transaction, but not all correspondence. The proposal is also in conflict with a current proposal by the NASD in Notice To Members 96-82 which would require firms to establish reasonable procedures for the supervision of correspondence relating to their business, but would not require endorsement of each item of correspondence.

M. E. Toland
March 31, 1997

3. The proposal requires broker-dealers to establish "a client trading record listing all trades in chronological order for all customers of each associated person, including the items specified in paragraph (a)(1) of this section and the total dollar amount of remuneration per trade (if applicable) to the associated person." This proposal appears to assume that all broker-dealers operate under the "wire house" model of a securities firm where all securities transactions for customers are executed in a single brokerage account. New England Securities, as well as a large number of life insurance company affiliated broker-dealers, does not have a single brokerage account for all customer accounts.

While we do have a brokerage account where general securities and some mutual fund transactions are executed, customer transactions are also executed on separate systems. For example, variable annuities and variable life insurance issued by New England Life Insurance Company are maintained on computer systems operated by New England Life. Mutual fund transactions and accounts are maintained by affiliated mutual fund companies and non-affiliated mutual fund companies. All of these use separate computer systems. New England Securities would be required to download data from these systems for the sole purpose of creating this report. New England Securities has current plans to consolidate the information from the internal systems, but we expect that it will take a long time to be able to download data from outside sources such as unaffiliated mutual fund companies.

My experience in discussing this issue with industry colleagues has shown that many other broker-dealers, especially those affiliated with life insurance companies, process customer transactions on separate computer systems, and this part of the rule proposal would cause problems for those as well.


I recommend that the Securities and Exchange Commission withdraw this rule proposal, and, in its stead, establish a Task Force consisting of staff of the Securities and Exchange Commission, state regulators, self-regulatory organizations, broker-dealers, and industry organizations. This Task Force would review the current standards and requirements relating to books and records, and jointly develop a series of uniform standards that would be cost effective and provide a uniform measure of safeguards for customers.

M. E. Toland
March 31, 1997

This type of Task Force served the securities industry very well when it developed a uniform set of standards for the Continuing Education of registered representatives. Such an approach could go a long way towards providing consistency in books and records requirements of broker-dealers, satisfy the concerns of a wide number of participants in the industry, and serve to protect the investing public.

I would welcome the opportunity to meet with you or a member of the staff of the SEC to discuss this further.


Michael E. Toland