March 7, 2006
March 7, 2006
United States Securities and Exchange Commission
Ms. Nancy Morris, Secretary
100 F Street, NE
Washington, DC 20549
Dear Ms. Morris:
I would like to thank the Commission for this opportunity to comment on the NASD's proposal to require principal pre-approval of certain correspondence of its member firms.
Requiring principal pre-approval, in and of itself, is not necessarily a bad idea, nor is it outrageously burdensome. What always becomes the burden is making sure that firms document and record keep excruciatingly detailed files to make sure they can prove to an examiner- inexperienced in running a company- but has a very long checklist, that they have followed a particularly narrowly written rule in every occurrence. Broker/dealers now are faced with time stamping a principal approval, whereby they can prove that something was "pre" or "post". The industry, once again, receives and unburdensome rule, which is universally applied.
For well run firms, who know their employees, the decision of whose correspondence to review in advance, and whose to review post-use, is one of informed management decision-making.
What is happening is that the NASD is slowly codifying every step each broker/dealer takes in relation with its customer, communication with the customer, and the customers' abilities to find broker/dealers who will nurture creative thinking and "over the top" service within their ranks. There are real reasons that many have fled the broker/dealer ranks to go to an RIA structure, and who took the next step to a Hedge Fund structure.
In the continual march toward the "Nanny State", where every action is done merely to cover ones tracks and keep lawyers and regulators at bay, broker/dealers become more rigid, less entrepreneurial, less creative, less personal, and less service oriented. They are also handcuffed in what they can and cannot do.
We are at the point where I (because I am the CEO) can't even handle my 80 year old mother's account without filing for a "limited resource exemption" annually, modify my Written Supervisory Procedures, and notify the Commission, ask someone in the firm to watch over what I do, and keep detailed records, "test" my procedures to see if they are adequate, and write a report that my procedures were adequate-each year, and present it to my board of directors. Consequently, I don't handle my 80 year old mother's account. The account is handled by a competitor, and relative stranger. (By the way, she doesn't have that much money, so the account is uneconomical, and gets handed down to the lowest broker available. Most larger firms don't want the recordkeeping burden of an account this small.) It is too much paperwork for me to do, as well. Neither would I be able to hand carry a check to her (when she is staying in my house) without filling out a log, and getting her to sign a receipt, where I then keep the receipt in the receipt log, and also a copy in her file. The irony, of course, is that my 16 year old (non-licensed, non-bonded, non-fingerprinted) daughter would subsequently take the check and deposit it at the bank for "Grandma", after "Grandma" has signed the check and it is now negotiable. Obviously, I paint this scenario to make a point.
After being licensed for 26 years, having run 4 broker/dealer firms, and having no complaints, I find today's environment stifling. There are bad business people "out there". There are good business people "out there". There are crooks and hucksters in every business, and we cannot protect all people from all crooks and all hucksters. Having a principal pre-approve every letter does not change the behavior of bad people. It only burdens good people who follow the rules anyway.
I would urge the SEC to refrain from looking at each rule individually, and examine the body of rules collectively to understand the real burden of compliance on firms, both large and small.
The NASD needs to return to a common sense approach to regulation. Most of us who sign our names on our Form BD do so with the full knowledge of the duty we have to our customers. Please allow those of us who are adults to run our companies as such. Those who behave like children should have different standards. Those that continually behave badly, should be under a microscope. Just as they (NASD) have designed "heightened supervision" for "bad" registered reps, the NASD should have a scheme of "heightened record-keeping" for those firms that deserve it. For those that do not, we should be able to do away with the myriad of red tape and regulation that burdens us to the point where I, as a small business owner, can again service my mother's account without it being a federal case, quite literally.
The NASD, we understand, is already developing "risk based" profiles of broker/dealers. If broker/dealers have patterns of complaints, violations, arbitrations, history of hiring persons with disclosures (which can also be ranked by risk), or other reasonable methodologies of risky broker/dealer behavior, NASD can place broker/dealers within categories of "heightened compliance review". They can package certain record keeping requirements and require that certain procedures be implemented in certain areas. Large firms, for example, might require "heightened procedures" in the Trading Department, but be free from those requirements in its Sales area, if they "earn" the right.
This way, not all are punished for the actions of a few, either within a firm, or among firms.
Does the punishment fit the crime? Each rule tends to be a punishment, and an attempt at corrective action for former bad behavior by someone. But not all broker/dealers exhibit bad behavior, nor do they exhibit bad behavior in each area of a large firm. NASD should implement corrective behavior in those firms or divisions of larger firms that deserve it. We now have a climate of blanket incremental burden-creep foisted on all firms universally, in insidious minute unburdensome increments.
Please do not implement yet another "unburdensome rule" and let us earn the right to NOT be burdened with the hundreds of small "unburdensome" regulations which collectively are killing our businesses.
Caroline B. Austin
CEO, Evolve Securities, Inc.