April 3, 2005
Please accept this communication as further comment on the Commissions proposal to adopt Rules 15c2-2 and 15c2-3, requiring broker-dealers to make additional disclosures to customers in connection with mutual funds securities transactions. I previously submitted a comment letter jointly with the President/CEO of my firm, Rhodes Securities, Inc. on this proposal when it was originally issued. I appreciate the opportunity to comment further.
I understand and agree with the goals behind these proposals. Investors should have easy access to the information they need to make an intelligent decision about their investment choices, in advance of their transactions, available from the person who is trying to sell it to them. This information should be understandable and readily comparable, allowing the investor to make informed decisions about the objectives, risks, and overall expenses of each fund that they are considering.
In a perfect world, every customer would have plenty of time to sit down with his adviser to discuss each and every investment alternative fully before each and every purchase was made. However, that is simply not reality. In this hurry-up, just-do-it world, any client who chooses to establish a relationship with and trust an investment professional to recommend security positions for him is often not interested in taking the time to discuss each transaction thoroughly. Though each customer should have the capability of getting any information he wants about any portfolio at any time before, during, or after his purchases, most would probably waive that action more often than not. To force a broker to discuss each and every position considered in each and every transaction to the length that the proposal discusses would be over-burdensome at best and lethal to the entire mutual fund industry at worst. Established clients are already complaining about the additional amount of paperwork they are being asked to complete from other recent initiatives such as AML, Books and Records Rules, Breakpoint Disclosure documents, etc.; to add on another layer of forced disclosure would surely prompt some of them to begin questioning the wisdom in investing in a type of security that seems to have had more than its share of problems lately. Requiring this same level of disclosure for every purchase, such as when adding additional money to an already-established position, is likely to send some of them in to massive sell-offs of mutual funds to buy something less burdensome if not more risky - like individual stocks.
Additionally, adding any information to the transaction confirmation already ignored by most investors is, in my opinion, a huge waste of resources. Most customers I know barely even look at their confirmations, much less study them closely. By the time a confirm is received by the client, the trade is already done and they consider the decision-making process over. Using this medium to fulfill disclosure requirements aimed at educating a customer about which fund to buy after he has already made that decision would make no sense to me or them whatsoever.
As the chief compliance officer of a small firm that has been deluged in the last eighteen months with new disclosure requirements in the running of our every day business, to add the point of sale requirements for each and every purchase can be summed up in five words. It simply will not happen. In my experience, you can make policies like this all day long and brokers will only do what they feel is reasonable or they will quit selling that product. To add the expense in resources necessary to enforce these requirements would require the already maxed out compliance budgets of many small firms like mine to consider getting out of the business - in mutual funds, at least. There surely must be a better way.
The suggestion I like the best is that of some generic disclosure, giving overall information about each class of fund, discussed in detail by the broker with the client when considering his first mutual fund purchase. A clients basic understanding of the entire mutual fund picture and how it works would be the goal. Specific numbers would be available upon request about any and all the possibilities considered at this point, similar to the sales process in any other industry. The customer would sign off on a statement for his file as having received, discussed, and understood the overall disclosure, also stating that he knows that he may request more detailed information at any time for any future investment possibility. Further information updates could then be sent to the client as needed, with a new, full-disclosure converstation and document only being required when switching firms or when major changes occur in the industry. This would limit the costs incurred while still protecting the investors right to easily acquired information about his investments. I dont think any investment professional would have a problem with a system such as that.
If you have any questions regarding my comments here, please feel free to contact me by email at sm@rsi2.com. Once again, thank you for the opportunity to comment further on this very important issue.
Respectfully submitted,
Sandra T. Masek Ray, CRCP
EVP/Chief Compliance Officer
Rhodes Securities, Inc.
Fort Worth, Texas 76102
Member NASD/SIPC/SIA