From: Ron Rhoades [rhoadeslaw@hotmail.com] Sent: Tuesday, February 17, 2004 9:46 AM To: rule-comments@sec.gov Subject: File No. S7-25-99 Feb. 17, 2004 The Honorable William H. Donaldson Chairman U.S. Securities and Exchange Commission 450 Fifth Street, N. W. Washington, D.C. 20549 Dear Chairman Donaldson: I urge the U.S. Securities and Exchange Commission (SEC, or the Commission) to reconsider the proposed rule (Rule 202(a)(11)-1; File No. S7-25-99) that would further reduce the protections offered by the Investment Advisers Act of 1940 (Advisers Act). A fiduciary cannot serve two masters. A registered investment adviser, and its investment advisory representatives, hold the position of trusted advisor and fiduciary to their clients. As such, they possess a duty to act in the best interests of their clients. The imposition of such a broad fiduciary duty upon registered investment advisers by the Investment Advisers Act of 1940 was confirmed by the U.S. Supreme Court in S.E.C. v. Capital Gains Bureau, 375 U.S. 180 (1963). In discussing the formation of the Investment Advisers Act of 1940, the U.S. Supreme Court noted this testimony before the Committees of the U.S. Senate by the president of the Investment Counsel Association of America, the leading investment counsel association: “[T]wo fundamental principles upon which the pioneers in this new profession undertook to meet the growing need for unbiased investment information and guidance were, first, that they would limit their efforts and activities to the study of investment problems from the investor’s standpoint, not engaging in any other activity, such as security selling or brokerage, which might directly or indirectly bias their investment judgment; and, second, that their remuneration for this work would consist solely of definite, professional fees fully disclosed in advance.” Id. at 190. As Chief Compliance Office and Director of Research of a fee-only registered investment adviser firm, I am charged with insuring our firm's adherence to this broad fiduciary duty. Rather than considering the requirements of the Investment Advisers Act of 1940 to be a burden, we believe the broad fiduciary duty imposed by the act is the fundamental source of our strength. It enables us to act as true stewards of our clients' wealth. As an independent fee-only firm providing services mostly to retirees, including many widows who possess very limited understanding of the world of investments, we are deeply committed to undertaking only those actions which are in our clients' best interests. As such, we endeavor to avoid the many conflicts of interest which are possessed by so many firms which operate as broker-dealers under the Securities Exchange Act of 1934. Following comprehensive planning for our clients, including the development of an Investment Policy Statement for each of our clients, we endeavor to have our clients invest in the best possible investment products. As we receive our compensation directly and solely from our clients, we are able to act completely objectively in the evaluation of the multitude of investment products available today. Our unbiased approach and our independence (by not receiving compensation from any broker-dealer or custodial firms or manufactuers of products) enables us to secure for our clients what we believe to be the best products for their situation. Our independence enables us to access products, if we choose, through many different broker-dealers and other distribution channels. By contrast, the principals of our firm have heard (recently) from several individual registered representatives of broker-dealer firms of situations in which they have been "pressured" to sell their own firm's "proprietary" mutual funds, to sell mutual funds in which their firm received extra compensation (i.e., "shelf fees"), to sell bonds which their firm had in inventory, and to sell products which had greater profits for the firm than lower-cost alternatives. Moreover, many registered representatives of broker-dealer firms are often not provided access to some of the lower-cost and better investment products available today, as they are not on their firms' "platform." Clearly the registered representatives of a broker-dealer firm, who are employed by and owe an allegiance to their firm, in such cases cannot also provide truly objective investment advice to their clients. A true fiduciary cannot serve two masters. As a Registered Investment Adviser firm, we provide a professional service to our client. We sell no products. By contrast, broker-dealer firms are involved in the selling of a product, and this has traditionally been their core function. In recent years brokerage firms have also engaged in the manufacture of products, thereby creating additional potential conflicts of interest for the registered representatives of those firms. Rather than blur the distinctions between brokerage and advisory services, those distinctions must be emphasized. It is critical to the reestablishment of trust and confidence by investors in Wall Street that registered representatives who also seek to provide investment advisory services adhere to the Investment Advisers Act of 1940. Rather than lessen the fiduciary role of those who seek to provide investment advisory services to clients, the Commission should act to clarify the fiduciary duty of broker-dealer firms who also seek to act under the Investment Advisers Act of 1940. Those who seek to provide investment advisory services should embrace the necessity to act in the best interests of the client, not seek to lessen their fiduciary role. For example, such broker-dealer firms should possess the specific duties, as a means of adhering to the broad fiduciary duty imposed by the Investment Advisers Act, to: (1) undertake full disclosure of ALL of the fees and compensation (including soft dollar compensation) they or their firm might receive (including but not limited to shelf fees, fees derived from trades undertaken by the mutual fund or other product, etc.) related to the sale of any investment product to an investment advisory clients, including but not limited to the disclosure of any sales incentives offered to either the firm or to individual registered representatives related to the sale of a recommended product; (2) adherence to their duty to act in the clients' best interest through an analysis of other investment options which might be available, prior to undertaking any recommendation, and disclosure of that analysis to the client (including an analysis of whether lower-cost investment products were available to the client); and (3) full disclosure of any and all conflicts of interest which may exist in the furnishing of investment advice, including but not limited to the fact that they may possess limited access to low-cost investment products which are not on their firms' "platform." In addition, the other requirements of the Investment Advisers Act of 1940 should be met, such as the requirement of a written fee agreement, the delivery of an informational brochure (or ADV, Part II), and full disclosure of many attributes of the firm and its representatives. I believe it is imperative that the Commission take prompt and decisive action that will help investors understand the distinctions between brokerage and advisory services. The Proposed Rule, if adopted, would further undercut the many protections afforded by the Investment Advisers Act of 1940, and its goal of providing investors with the alternative independent, objective advice. As existed in 1940, there is a growing need and demand for unbiased investment information and guidance. The fiduciary duty to act in the best interests of the client should not be compromised, as it would by this proposed rule. Rather, this fiduciary duty should be strengthened by a return to the fundamental goals of the Investment Advisers Act of 1940 - to protect investors by providing an avenue for the receipt of unbiased, objective advice. Registered representatives of broker-dealer firms who seek to offer investment advisory services should adhere to the strict requirements of the Investment Advisers Act of 1940, and should strictly adhere to their broad fiduciary duty to act solely in the best interests of the client. Additional regulations should strengthen the protections afforded investors by those who seek to provide investment advisory services, not weaken those protections. Now is not the time for the Commission to cause further confusion for the individual investor. Rather, the Commission should act to protect the interests of the individual investor (not the interests of broker-dealer firms) by revoking the Proposed Rule and instead adopting strict regulations which insure obedience to the broad fiduciary duty imposed by the Investment Advisers Act of 1940 by those who seek to provide investment advisory services. Furthermore, the Commission should act to publicize the distinctions between manufacturers and sellers of investment products and providers of investment advisory services, and the dramatic differences in the types of duties owed by each of the foregoing to the individual investor. A fiduciary cannot serve two masters. "The bests interests of the client" is not a standard which should be subjected to further compromise. The Commission should not act to further proceed down a "slippery slope," at the bottom of which is a complete erosion of the protections afforded investors who desire and seek objective, unbiased investment advisory services. I would welcome the opportunity to further address this issue with you, the Commissioners, or the Commission staff. I may be reached at 352.746.4460. Sincerely yours, Ron A. Rhoades, B.S., J.D. Chief Compliance Officer and Director of Research Joseph Capital Management, LLC A Fee-Only Registered Investment Advisory Firm 2450 N. Citrus Hills Blvd. Hernando, FL 34442-5348 Phone: 352.746.4460 Facsimile: 352.746.0816 E-mail: ron.rhoades@josephfinancialgroup.com _________________________________________________________________ Get a FREE online computer virus scan from McAfee when you click here. http://clinic.mcafee.com/clinic/ibuy/campaign.asp?cid=3963