Princor Financial Services Corporation
February 6, 2004
By E-Mail rule-comments@NSEC.gov
Re: File No. SR-NASD-2003-104
We appreciate the opportunity to provide the U.S. Securities and Exchange Commission (SEC) with comments on the NASD's proposed amendment to NASD Rule 3010(g)(2). Under the proposed rule the SEC seeks comments on the proposed rule change, and in particular the primary residence exception, and the divergent proposals by the NASD and the New York Stock Exchange (NYSE) with respect to NYSE's proposed annual 50 business day limitation on engaging in securities activities from a primary residence.
Princor Financial Services Corporation (Princor) is a registered broker-dealer and a wholly owned company of the Principal Financial Group and an affiliated company of Principal Life Insurance Company. Princor offers proprietary and non-proprietary securities products to its registered representatives to meet their retail and non-retail clients' needs. These products include mutual funds, variable annuities, variable life insurance policies and general securities. Princor has approximately 4,400 registered representatives and is registered to conduct securities business in all fifty states. Its sales force is geographically dispersed in approximately 1100 offices. By the nature of its business, and in order to adequately address the expectations of those clients in remote locations, Princor is organized so that a substantial percentage of its registered representatives operate out of one person or two person offices (approximately 900 "detached" offices). Princor currently has 42 NASD branch offices. These branches are generally offices on premises of unaffiliated financial institutions such as banks, and any location that is identified to the public as a location at which Princor conducts securities business.
As proposed, the new definition of a "branch office" would significantly impact how Princor organizes its field sales offices and the costs of operating such offices. While we agree that a uniform definition of "branch office" between the NASD and the state securities commissioners would have benefits for broker-dealer firms, we believe that significant changes are necessary to the proposal.
The NASD maintains that the proposal will result in cost savings to broker-dealers while providing investor protections. Contrary to the NASD's belief, as proposed, the new definition of a "branch office" would significantly increase our costs. Currently, we are assessed $3,150 by the NASD on annual basis for the registration of 42 branch offices. Under the NASD proposal, it is anticipated that we would have approximately 1100 branch offices. Assuming the current NASD branch office fee of $75.00, it would cost us annually $82,500 in NASD branch office registration fees, a significant annual increase over our current costs.
We also believe that whether a location is registered as a branch office or not has no impact on a firm's responsibility to supervise its registered representatives since broker-dealers are required to visit both registered and non-registered offices on a periodic basis. Provided there are safeguards in place to protect investors, we take the position, that the NASD's current branch office definition provides such necessary safeguards.
The proposed rule contains an exception from the definition of "branch office" for a registered representative's primary residence as long as certain conditions are met. We agree that a registered representative's primary residence should not be required to be registered as a branch office. However, several of the conditions are too restrictive, and will result in the registration of most primary residences at a significant cost. The rule allows for an exemption for any location that is the registered representative's primary residence as long as various conditions are met including customer funds are not "handled" at the location. Additionally, the proposed rules exempts from registration a location that is used primarily for non-securities business and from which less than 25 securities transactions are effected annually.
In small towns, sales of fixed and variable insurance products often occur at the customer's home where the registered representative obtains an application, along with a check made payable to the product sponsor. Under this proposal the registered representative could accept the application and the check and mail them to his or her broker-dealer on the way home, but the registered representative could not take the application and the check to his or her primary residence to review, copy, fax, mail or forward to the firm. The same practical difficulty applies if a customer has a stock certificate that needs to be re-registered or sold. We suggest that the NASD modify the proposed rule to allow representatives to handle customer funds as long as checks, and other forms of payments are made payable to product sponsors.
The proposal also exempts from registration any office which effects no more than 25 securities transactions and which is primarily used for non-securities business. We find this exemption unclear, as there is no discussion of what constitutes a securities transaction. For example, if a representative submits five mutual fund family applications, each with five mutual funds chosen, would this equal 25 transactions and exceed the exemption or would this only constitute five transactions? How would automatic monthly investment plans count against the total? Does the sale of a 401(k) or 403(b) plan to an employer and the subsequent participation of employees count as one transaction? What if a representative increases the face amount of a variable life insurance policy resulting in additional annual premium-is this a transaction? When a representative receives a "split" of commission on a securities transaction executed by another representative, does that count toward the 25? It would very difficult for a broker-dealer to track all of these types of transactions to determine if an office needs to become registered.
We also believe that the threshold for triggering branch office registration is too low under this proposed exemption. While some of the our firm's offices might fall under this exemption, 25 transactions is too low to result in any meaningful number of exemptions, which raises a question as to the purpose and usefulness of this proposed exemption.
As an alternative, we suggest gross dealer concession as a threshold for registration. This would allow for easy tracking by the broker-dealer and satisfactory criteria for the regulators in registered offices over a certain size. Of course, this number would need to be regularly assessed to adjust for inflation and general business levels.
Lastly, Princor supports the NASD's decision to not adopt the 50-day residency rule.
In conclusion, we strongly urge the SEC to carefully consider the potential consequences of the proposed rule for the industry. Thank for you for the opportunity to comment. Please free to contact me at 1-515-248-3082 should you have any questions.