February 21, 2005
Sirs:
Our firm is an investment advisory firm registered under the Investment Advisor Act of 1940. Over the last few years, we and countless other American savers watched in shock and disbelief at some of the most horrific and shameful examples of personal and corporate misconduct in the history of American stock markets. Many steps taken by the SEC, specifically the leadership taken by the Office of Compliance Inspections and Examinations in restoring and rebuilding investor confidence in the public markets through more stringent regulatory compliance standards, are beginning to yield positive results. By any yardstick, any advisor’s most recent SEC field examination would no doubt dwarf any field examination done five years previously. This is good. Investors have reasons to become more confident. Capital markets benefit when investors are more confident. Everyone benefits.
However we do have serious concerns about Release Nos. 34-50980; IA-2340; File No. S7-25-99 dated January 11, 2005, Certain Broker-Dealers Deemed Not To Be Investment Advisors. We also have serious concerns about the perceptions of the U.S. investing public around regulation of fee-based Financial Advice[1].
For example, the twenty-five “Largest…Money Management Firms” shown in our area’s Book of Lists[2], (originally published March 12, 2004,) includes CPAs, Discount and Full Service Brokerage firms, Financial Planning firms, Insurance firms, and Investment Advisors Registered under the Investment Company Act of 1940, all on the same page. Fifteen of the twenty-five firms disclosed that “commissions” were a method of compensation. Check any phone book’s yellow pages, you’ll find the same thing. Clearly American investors do not fully understand the current differences between the regulation of investment advisers and that of brokerage firms, the importance of which the resulting unequal levels of investor protection for the same or equivalent investment advice services.
In our opinion, investors won't understand additional disclosure of differences in protections. Investors expect and deserve equal protections for the same services regardless whether the financial advice was rendered to the owner of a non-discretional brokerage account, “solely incidentally to the brokers-broker dealer services’, (and not an investment advisory account regulated under the Investment Advisors Act of 1940) or whether it was rendered by an advisor regulated under the Investment Advisors Act of 1940. Investors are baffled and their confidence in capital markets erodes when they don’t get these equal protections. We believe the broker-dealer exemption does not provide uniform protection and should be replaced with new regulation that will build investor trust and confidence from the inside out in all providers of financial advisory services. While many financial service firms are taking steps toward restoring investor confidence, release Nos. 34-50980; IA-2340; File No. S7-25-99 would, we believe, be a huge step backward.
Sincerely,
Jonathan. Smith
CEO/Partner
Jonathan Smith & Co., LLC
[1] See letter, and attachment: 2004 U.S. Investor Perception Study, dated February 7, 2005, from Timothy P. Pinnington, President and Chief Executive Officer, TD Waterhouse to Jonathan Katz, Secretary, U.S. Securities and Exchange Commission;http://sec.gov/rules/proposed/s72599/tdwaterhouse020705.pdf
[2] The Book of Lists is published by The Business Journal, a subsidiary of American City Business Journals, Charlotte, NC.