From: Matthew B. Bishop
Sent: April 3, 2005
Subject: File No. S7-06-04

Dear Sir or Madam:

I was in attendance at the 2004 NASD Spring Securities Conference when former SEC Chairman Bill Donaldson outlined his initiative for transparency in the securities industry. Mr. Donaldson qualified his remarks by stating that the goal for pure transparency was perhaps impossible to reach, but still more could be done at the present time to protect the integrity of our markets and safeguard investors.

Generally, I applaud the intent of your efforts to outline and detail what the actual costs of ownership are from fund to fund and to attempt to provide a uniform comparison of ownership costs for fund investors. Truth is always the best policy, and I particularly applaud your efforts to force the disclosure of directed brokerage and preferential incentive compensation rates for sales of “preferred” proprietary funds. As a small application way broker-dealer, we have never received directed brokerage nor offered any proprietary products, so your efforts to force disclosure of these heretofore undisclosed payments will enhance, in our view, the disclosure that a customer receives prior to the purchase of a particular fund. Certainly the investor will be able to evaluate, for the first time, a full and fair disclosure of obvious conflicts of interest such as directed brokerage or sales incentives for proprietary funds, which have, sadly, not been disclosed previously by the large wirehouses absent legal action by New York State Attorney General Elliot Spitzer.

However, my concern with your proposal centers on its limitation in scope. Given that the Commission has acknowledged in its proposal that conflicts of interest such as directed brokerage between large fund complexes and large wirehouses are problematic for market integrity and investor protection, why are only investment company products such as 529 plans, mutual funds, and variable products being targeted? Certainly, separately managed accounts at the large wirehouses, which involve significant principal trades and cross-agency trades, should also be subjected to this proposed rulemaking. Are not investors in separately managed accounts equally entitled to understand what the true costs of ownership are? Would this not be consistent with and enhance the objectives of market integrity and investor protection, to require products similar to mutual funds, such as separately managed accounts, to provide the same/similar level of disclosure concerning the costs of ownership and related conflicts of interest?

Our firm’s concern is that, in the Commission’s efforts to enhance and promote transparency, the Commission will succeed with respect to mutual funds, but will fail with respect to requiring disclosure for mutual fund-like competitor products. In other words, mutual funds will become more transparent whereas other significant mutual fund-like competitor products, such as separately managed accounts, will become less transparent given that no disclosures will be required for these products. To use an analogy, all of the risks of eating apples will be given via a warning label on each apple available for sale at your local grocer, yet no warning labels will be required for the sale of oranges. As a consumer, logic suggests that the apple with a warning label must, all other things being equal, be more hazardous for consumption that the orange which requires no added disclosure for its sale and purchase by consumers. After all, if oranges were hazardous in any respect, would not a regulatory authority (e.g. the SEC) have imposed a similar warning label requirement on oranges just as it did for apples?

The Commission is tinkering with the fiscal health of our society by limiting the scope of this proposal. Nearly 80% of US households own mutual funds and arguably, mutual funds, even with their past abuses, have been the quintessential methods by which American investors built their financial security. With the US Savings rate below 1%, the SEC is playing with fire by requiring the investment company products to disclose while permitting mutual fund-like competitor products to “slip below” the radar of customer disclosure regulations which would better permit an apples to oranges comparison of mutual fund to mutual fund-like products such as A shares versus a separately managed account. By not closing this loophole, the Commission risks hemorrhaging investor mutual fund assets into products like separately managed accounts, that by not requiring a same/similar standard for disclosure, appear to the untrained, ill-informed investor’s eye to be less costly via a lack of disclosure than a fully disclosed mutual fund.

As a small firm, our concern is that brokers at the large wirehouses market (in a misleading way) their separately managed account offerings as less costly than mutual funds. This misrepresentation is made by some Reps at the large wirehouses by stating that the broker charges less than 200 basis points (bps) for the “advice” portion of the account. (Whether Registered Representatives under the Securities Exchange Act of 1934 can provide the same/similar level of investment advice as Investment Advisor Representatives under the Investment Advisors Act of 1940 is an issue that the Commission is currently deliberating and I will take no further mention of this topic herein.) Yet, a material omission by this large wirehouse Rep is a failure to inform the client of the applicable trading costs including, but not limited to, ticket charges which may result in excessive costs for smaller accounts.

Due to the gravity of the matter on which I write to the Commission, I must suggest that as regulators you may very well be unaware as to the true naiveté of even otherwise sophisticated customers. Customers are confused about what the actual costs of ownership are. Whereas many customers are generally informed that there are costs to ownership of mutual funds, it has been our overwhelming experience that customers have no clue as to what the cost of ownership of mutual fund-like products such as separately managed accounts. We hear regularly at our firm from prospective customers that “XYZ Wirehouse does not charge me anything for managing my money in individual stocks.” One of our firm’s principals, being shocked upon hearing this from a prospective customer with $500,000 in investable assets, inquired as to how the wirehouse paid their light bill. The prospect replied, “I don’t know, but they don’t make anything off of my account.” It is our earnest belief that this poor misguided woman had the broker’s portion of the management fee waived (approximately 50 bps on the total 150 bps management fee) and that the broker misrepresented to his customer that she was paying “nothing” for the broker’s services. Full and fair disclosure to include mutual fund-like competitor products such as separately managed accounts will curb this abuse. (Alternatively, the Commission can prohibit Broker-Dealers registered under the Securities Exchange Act of 1934 from dispensing advice which should only be rendered by proper registration under the 1940 Investment Advisors Act.)

Now comes your proposal with this added burden on investment company products, customers will be more easily persuaded to purchase separately managed accounts, wholly unaware that the trading costs with respect to principal and cross-agency trades are several percentage points additional to the management fee which is fully disclosed. My question to the Commission is how have you best protected the investor without simultaneously requiring transparency for mutual fund-like competitor products such as separately managed accounts?

I sincerely hope the Commission takes time to further research the concerns I have expressed herein. I thank you for your time in reading my response and would be delighted to speak with any Commission personnel who would like to speak with me further concerning these matters.

Matthew B. Bishop, Esq., CPA/PFS, CLU, ChFC, CFP®
President & General Counsel
Bull & Bear Brokerage Services, Inc.
6817 Southpoint Parkway
Suite 1003
Jacksonville, Florida 32216