Date: 06/12/2000 11:18 PM Subject: Proposed Revisions to Form ADV and Related Rules Mr. Jonathan G. Katz Secretary U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D. C. 20549 Subject: Proposed Revisions to Form ADV and Related Rules File No. S7-10-00 Dear Mr. Katz: We would like to make the following comments concerning the above referenced subjects. As a background to our comments, Lehrer Management Company, Inc. is a 20 year-old independent fee-only investment adviser providing services to individuals, couples, Trusts, IRA's, and Retirement Plans. We manage over $200 million but do not manage mutual funds. We are an Associate Member of the Investment Company Institute and generally endorse the comments which have been submitted by that organization. We would like to make the following additional comments: General Comments on Implementation of the IARD and ADV Revisions As a single investment adviser, we believe that on balance we will be worse off with the proposed changes. The proposed revisions are a double-edged sword. On one hand the ability to file both with the SEC and the various States by means of the internet should save, perhaps, one-man hour of time, two at most, depending upon the nature of the revisions. The cost savings probably range from $25 to $50, maybe $100 if we include the cost of express mail. On the other hand, the initial IARD registration fees would be $400 to $800 and would more than offset such savings. If we assume a similar situation for all other investment advisers, and that the average cost is $600 for the initial registration, then for 8,000 investment advisers the total cost would be $4,800,000 against savings of at most $800,000. Thus, the first year there would be no net savings but rather an overall cost of $4,000,000. The continuing annual fees after the first year will be $2,400,000 assuming an annual fee of $300 per adviser not including additional charges for state notice filings. The savings to investment advisers would be 8,000 times $100 or $800,000. Thus, the succeeding years of electronic registration would generate a net cost to the investment advisers of $1,600,000 each year. The advisers apparently get little or no measurable benefits at a substantial cost. We do not perceive any measurable benefits to society as a whole. It is true that having the required information on the Internet will make it available not only to the clients of the investment adviser but to the general public as well. The adviser will derive little or no benefit from this because the adviser under the revised ADV rules must now not only provide each new client with a brochure but also send a revised brochure annually to each client. In addition, each adviser must send each client a brochure when there is a material revision in the brochure. Previously, the adviser could send a questionnaire once a year to each client asking if they wished to receive an updated brochure. In my experience less than 10% of the clients request a brochure. The inefficiencies in sending every client a brochure is discussed below. Cost/Benefit Details To quote from page 38 of the above referenced document: "Currently our rules require initial delivery of the brochure but no further brochure delivery unless the client accepts the adviser's annual offer. The anti-fraud provisions of the Act require, however, an adviser to fully disclose information about all material conflicts, which requires the adviser to correct previous disclosure about conflicts to clients." " We believe it is incumbent upon an adviser, as a fiduciary, to keep its clients apprised of material changes in its operations, its fees, key advisory personnel, and other information provided in the advisory brochure. Mutual fund shareholders are not required to rely on information in stale prospectuses; we see no reason why advisory clients should rely on stale brochures. Therefore, we are proposing to require that an adviser provide clients with written brochure updates whenever information in the brochure becomes materially incorrect, and include these updates with brochures delivered to prospective clients." The requirement to send brochures to all clients is in basic conflict with the fundamental philosophy of electronic filing. The objectives of the IARD are: 1. Ease regulatory burdens on advisers by permitting a single electronic filing to satisfy SEC and State filing requirements. 2. Improve public access to information about advisers. 3. Help the SEC monitor advisers and administer the Federal securities laws. On one hand electronic filing represents the application of new technology to simplify the filing process and provide improved public access to informatio n. On the other hand, the new requirement to send brochures and updates annually to every existing client creates a new huge requirement employing old technology (the postal system) the disadvantages of which far outweigh any savings to be effected through electronic filing. We believe that sending brochures to the public will result in a better-educated public is not realistic as well as being wasteful. Most of the brochures will be discarded unopened and of those that are opened only a few will be read. Every year we send out forms to our clients asking if they wish to receive an updated brochure - less than 10% are returned. This is strong evidence to suggest that if we had mailed brochures instead more than 90% of them would have been discarded unread. An environmental impact study would probably reveal that the waste in the new brochure requirement would be substantial. Approximately 8,000 advisers are registered with the SEC. Assume each year one annual updated brochure is provided and one amended brochure each consisting of six pages. On average, each adviser has 50 clients. The total number of pages is therefore: 8,000 X 6 X 2 X 50 = 4,800,000 pages If we assume that only 10% of the pages are read, then over 4,300,000 are wasted along with the natural resources, postage, and labor necessary to produce and deliver them. The fact that such a requirement exists for mutual funds does not mean that it is the optimum approach. We are not realizing the full potential of the Internet if we are still sending people documents that are available on the Internet. We believe a better solution is to have each investment adviser notify its existing clients that the brochure is available on the Internet or can be requested from the company. Such a notice should be provided once a year. The brochure should be modified to inform new clients that the brochure is available on the Internet. Hardship Exemption It is proposed that an adviser that files electronically could request a temporary hardship exemption if unexpected difficulties prevent it from filing, such as a computer malfunction or electrical outage. The exemption would be available upon filing and allow an adviser to delay the deadline for seven business days. Given the general unreliability of PC's and the difficulty of getting competent people to maintain and fix them, fourteen business days would probably be a more realistic number. Use of Stickers The use of stickers to update brochures is a messy business at best and may not be applicable in the case of more extensive changes. Lehrer Management Co., Inc. appreciates the opportunity to offer these comments on the Commission's proposals. If you have any questions concerning them, please contact the undersigned at (408) 996-3369. Yours truly, Norman H. Lehrer, President Lehrer Management Co., Inc. Page 3 of 3