Subject: File No. S7-06-04
From: Richard M. Thalhammer

March 16, 2004

This is an obvious improvement over current practice. However, I think it could be improved by inclusion of an additional element in each case depicted on your proposed forms. That is, some sort of comparison between the recommended product and an equivalent product that isnt encumbered by the conflicts, sales charges and other tags that might be added due to the special dispensations from the mutual fund to the brokerage. For example, if the broker is pushing Mutual Fund AAA, because the broker gets some kickback, or even just a portion of the load, it would be most helpful to the unsophisticated buyer if the broker had to disclose that there was a comparable product out there that was no-load and no kickbacks. It would force the broker to truly persuade the buyer that the more expensive product was worth the extra money. As the proposal now stands, the broker still will be able to push the expensive product simply by telling the buyer that the product in question is the only one suited for the buyers needs. In individual equities, that might be the case, but given all the mutual funds that exist, a quick look at Morningstar will find, in almost every case, a variety of funds that offer very similar investment parameters, some load and some no-load, etc. It is by being able to compare what a broker is pushing with the rest of the funds in the same category that the buyer truly will have a legitimate opportunity to make a fair choice, as opposed to coercion.

Disclosure of all the costs, as the proposal now exists, will likely have minimal effect in discouraging the practices of brokers who push products that do more to line the brokers pockets than the investors. By analogy, if one went to a used car dealer who wanted to sell you an old junker, your proposal would require the dealer to disclose that the junker leaked oil, got poor mileage, had previously been wrecked, and was overdue for a new transmission. If the dealer could maintain that, nevertheless, this was the only car available to the buyer that would suit his/her needs, and the buyer didnt have the ability to shop around, the buyer likely would end up shelling out for the clunker. Only where the dealer is forced to point out the other cars on the lot that didnt have all those problems would the buyer be informed sufficiently to reject the bad choice.

Most people understand cars enough to avoid buying clunkers. But far fewer know how to research mutual funds and the tremendous complex variety of products available. Brokers take advantage of the lack of sophistication of their customers by pushing products that arent as suitable for the buyer as for the brokers financial statement.

If you ask an insurance agent, trying to sell you whole life, about term insurance, the agent will, however reluctantly, explain the differences and whats on the market. To be sure, the agent will still press the whole life policy, because that does best for the agents income, but that is okay, since the buyer now is informed enough to chose. A mutual fund salesperson should be required to tell every buyer about the other products available that are not as costly but will do the job for the customer, since the customer typically doesnt have the knowledge or ability to do that alone. Then, if the broker wants to try to persuade the customer to buy whatever the broker is pushing, the customer will be like the insurance buyer, capable of making the choice that suits the customer first.

Thanks for letting me have some input into your process.