December 24, 1996 Jonathan G. Katz, Secretary Securities and Exchange Commission 450 Fifth St. , NW, Stop 6-9 Washington, DC 20549 re: File No. S7-27-96 Dear Secretary Katz: In NASD Notice to Members 96-80 the SEC invited comment on elements of the proposed SEC amendments to Rules 17-a-3 and 17a-4. Our firm is doing much of what the NASAA requests, so the regulations, in some cases, is congruent with what we are already doing. There are several portions of the amendments that appear to be "ill conceived," however. Those areas include: 1. The "comprehensive update" for ALL customer account forms 2. The "annual update" of customer account forms 3. The keeping of document at "office" locations and potential conflict with current NASD regulations 4. The recording of specific commission remuneration allocated to the registered representative (broker) on EACH transaction (ticket) 5. The requirement to keep "client trading records for each associated person" 1. COMPREHENSIVE UPDATE OF ALL ACCOUNTS It appears that he SEC wishes firms to update ALL account forms to reflect the new "investment objective" information regarding risk and a required "annual update" thereafter. This requirement is obviously "burdensome," expensive, and somewhat impractical for our firm and others. These requirements would force us to ADD ADDITIONAL STAFF to our broker-dealer. We are staffed to meet the day-to-day needs of our brokerage business, but NOT STAFFED TO HANDLE such a large undertaking as these proposed changes would require. These two items could seriously impact the capital structure of the firm, and, if we see a severe market downturn, may impact the survival of the firm. The man-hours in registered representative time as well as necessity to increase the home staff will have a direct impact on profitability of my firm because of this large undertaking. Our firm has over 4,000 active accounts. At an estimated cost (which includes postage, handling, and time spent by administrative personal handling inquiries and performing "follow-up" tasks) is conservatively estimated at $3 per account. This would result in a cost to the firm of over $12,000 just to "update" all the firm's active accounts. That amount of money equates to 23% of 1995 net profits (as per 1995 Audited Financials and before taxes). This clearly demonstrates this requirement's significant impact on our firm. As far as the updating of ALL past clients and ALL current clients for a new account form, that would prove to be a VERY LARGE task, given our current level of staffing. This large endeavor is like doing the past 10 years of new account work in one year! I think it is unfair that the SEC force such a large undertaking on smaller firms with small staffs. In addition, the SEC is making us update information on clients that MAY NEVER TRADE WITH US AGAIN. Why should information be gather, on an "after the fact" basis from clients who were "one time trades," died, or went to a discounted broker after their trade with us (which would result in DUPLICATION of effort!)? Furthermore, if the client fails to respond to our request for the updated new account form and does not wish to perform another trade with us, we have no "leverage" to get the client to comply. That would possibly put our firm in jeopardy of being in violation of the new proposed rule when we have no "control" over the persons expected to bring us into compliance. Perhaps an updating procedure every 5 years would have more meaning and make more "sense" to obtain updated client information or at the time of each trade the new account form could be updated. To make the rule simple and CLEAR it should achieve the SEC's policy to require any NEW customers to have completed the updated new account form. This would make the rule clear, give us some "leverage" to achieve customer cooperation in completing the updated account form, and alleviate significant effort for questionable results in getting updated account forms from people who are no longer customers. Please strongly consider making changes in the current proposed changes. 2. ANNUAL UPDATE OF ACCOUNTS The annual update of all client accounts is "overkill." Clients objectives, in my humble experience, DO NOT CHANGE EACH and EVERY YEAR. It normally takes a significant event in a customer's life to alter their investment objectives. An ANNUAL update of those new account forms is unwarranted and merely a "paperwork" burden on my firm, my staff AND my customers. Most broker-dealers will simply send a "negative response" notice to all the existing customers to notify them of any investment objective changes and consider the lack of response a to mean that they have no changes. I would expect a return from customers to be considerably less than 1% each year. With such a small amount of change, I feel that the expense and effort to achieve less then a 1% response to be unjustified. As over 29% of our business is "mutual funds," (as per 1995 Audited Financials) our expected holding period is longer than ONE YEAR. Many of the customers expect to hold the mutual fund investment for over 5 years. It seems that annual updating of these client accounts is a wasted exercise with only RARE exceptions. Those "rare exceptions" usually contact the representative and that change is made known to the representative at that time. A complete revision of all accounts yearly is not necessary to find these "exceptions." A regulation to require an annual update of the new account form, especially in the investment objective area, seems to be an antithesis to the investment philosophy normally espoused by regulators and experts. Generally this group recommends "long term" investment objectives to be implemented for customers. Should the orientation of firms now be focused on short term time horizons for investing? Given that 29% of our business is mutual funds, the Amendments should, at the VERY LEAST, make exception for customers of Series 6 registered representatives. This group of brokers should not be required to make an annual update given the nature of the investment product that they are limited to selling. There is a tendency to "lump" all registered representatives together while their selling activity and products differ significantly, there is often no distinction by the regulators in promulgating regulations. Sometimes, as a regulator "removed" from the populace, it is not understood that people here in the midwest do not wished to be "bothered" for paperwork that they view as useless or unnecessary. Essentially ALL of my clients would view this and an unwelcome intrusion to collect paperwork that they completed once. As this is an intrusion on the time of the investor, it is expected that many clients will not respond to the request for the updating. 3. REQUIRING DOCUMENTS TO BE KEPT AT OFFICE OR ORIGINATION The new Amendments appear to conflict with what the NASD already has in place. The NASD defines what an "OSJ" and a "Branch" office is an what records are to be kept at these locations. It appears that the amendments are inconsistent with the current definitions and requirements. With records kept at the office location (which is never defined as a Branch or OSJ), it appears that significant duplication would be made by keeping those same records in both an OSJ and a "home office" location would be extremely redundant. NASAA's admitted problem with not having the records at the location was delays and difficulties in getting said records from the "home office." It would seem to make sense to promulgate a rule giving the state commissioners more "clout" in obtaining the records needed and the time frame in which they receive them than to add redundancy to the broker-dealer system. Our firm has many Series 6 representatives whose primary business is selling insurance products through their own businesses. The securities sales they DO perform are often done from these offices. The level of sophistication with regard to record-keeping of the "occasional" sellers of mutual funds/variable annuities if very minimal. If fact, the Series 26 is designed for that very purpose. It appears that we are attempting to make "Series 26 Principals" out of Series 6 licensed persons. I think that is improper and the retention and record requirements delegated to these persons is not in keeping with quality regulatory procedures. 4. INDIVIDUAL COMMISSION "PAYOUT" NOTED ON EACH ORDER MEMORANDUM (TICKET) Putting the commission paid to the registered representative on EACH "ticket" is simply UNWARRANTED. That information can be calculated for an examiner on request so there is no need to put it on each TICKET. As a small firm, to implement this procedure into an automated computer system would be HIGHLY EXPENSIVE and have a direct affect on the viability of our business. The information is already available to regulators, the insistence to make it available on EACH TICKET for a regulators review results in VERY COSTLY expense to our broker-dealer. As quickly as orders move sometimes, it enhances the chance of errors on other areas of the ticket and may delay entry of other orders due to the delay of calculating the commission each time for each broker when the order ticket is entered. Even considering a simple FLAT percentage payout, to do it on EACH "TICKET" is REDUNDANT and unnecessary, as all one would have to do is provide the percentage payout for that rep and it could be easily calculated for any regulatory inquiry. Even a more complicated system would lend itself well to such a computation, but to require repeated computations on each order ticket is an additional burden to broker dealers that is entirely UNNECESSARY! 5. KEEPING CLIENT TRADING RECORDS BY INDIVIDUAL BROKER The requirement for keeping trading records on each associated person (broker or registered representative) as a separate, chronological ordered record creates an undue burden on our firm. We do not keep records on an automated system, but manually. The NASD/SEC requirements are currently met by filing each trade confirmation and order ticket in chronological order. Another copy of the trade ticked it placed in an individual client FILE. The clients files are grouped by "associated person" so that we have access to any information regarding that "associated persons" customers. To require that we institute yet another "system" and keep a record by each "associated person's" activities is adding time and significant COST to our operation. IF we were automated, this task MIGHT be simpler, but we are NOT automated, so a whole NEW set of additional records would require considerable time and effort by the staff that is already "strained" by record keeping requirements currently in existence. As each trade is approved by a principal, that "associated persons" activities are already currently monitored by that system, a new one is NOT needed. F. Request for Comment As per your request for comment found on page 669 of the November 27, 1996 NASD Notice to Members, I would like to respond to each paragraph. (i) The proposed collection of information is NOT necessary in regard to the aforementioned. The state agencies, in my humble opinion, can function with the information currently provided by NASD/SEC regulations. The State Agencies are often headed by political appointees that change frequently. These Agencies are sometimes staffed by less sophisticated and untrained personnel. It seems that other SRO's (NASD and SEC) are able to derive the information needed for regulation from information currently required, so it would follow that the states should be able to perform the same function under current regulations. (ii) As stated earlier, the proposed 12 month update of new accounts would cost our firm over 23% of last year's profits to perform this requirement. The mandate for records for each "associated persons" would almost force automation of records versus the manual system we currently use successfully. This would mean spending between 20% and 80% of last year's profit to accomplish automation. If an addition five minutes (due to our "manual system") are spent calculating the individual registered representative's commission on each order memorandum (ticket), and we do 500 tickets per month, that equates to over 40 additional hours of work per month or 480 hours per year. This would cost our firm over 10% of last year's net profits. The net results would be to cost our firm over 50% of last year's net profits from the proposed amendments. By any objective measure, that is a SIGNIFICANT IMPACT on our small brokerage firm, as, I am sure, it will be on other small firms. (iii) Firms could enhance the quality, clarity, and utility of information with more minor changes than those proposed in the Amendment. (iv) The burden of collection could be minimized through information technology, but that technology comes at a significant cost. For firms that have never been visited by a State Regulatory Agency, these additional costs seem superfluous. Again, the information is there and can be addressed upon request of the regulatory agency. To create large expenditures of money and manpower to have it "instantaneously" available, when it is available with reasonable notice, is NON-PRODUCTIVE. Perhaps the other thing that need be noted here is that if more regulations would create less customer problems, then we should have fewer criminals in our country because we have more laws on the books than ever before! I have been told that the securities industry is the 2nd industry with respect to the amount of pages of regulation at the federal level--I was told that the number one spot belongs to regulation of firearms (no factual basis, just "heard" this from a friend). Please take the preceding comments into consideration BEFORE implementing the Amendments to 17a-3 and 17a-4. Feel free to contact me by phone or letter with any questions or comments you might have. Sincerely, Robert L. Hamman President cc: Office of Management and Budget Attention: Desk Officer for the Securities and Exchange Commission