December 11, 1998
Jonathan Katz, Secretary
Securities & Exchange Commission
450 Fifth Street N.W.
Mail Stop 6-9
Washington, DC 20549
Re: Securities & Exchange Commission Release No. 34-40518,
File Number S7-26-98, Books and Records Requirements for
Brokers and Dealers under the Securities Exchange Act of 1934
Dear Mr. Katz:
Thank you for the opportunity to provide comments to the reproposed amendments to Rules 17a-3 and 17a-4 of the Securities Exchange Act of 1934. Investment Management & Research, Inc. (IM&R) is a wholly owned subsidiary of Raymond James Financial. We are providing comments as to how the proposed rules effect IM&R rather than the other subsidiaries.
While the reproposed rules are a significant improvement over those originally proposed in October 1996, Exchange Act Release No. 37850, we are still of the opinion that the costs associated with implementing a number of the proposed amendments significantly outweigh any increase in investor protection.
The reproposals go beyond creating uniform requirements to the benefit of clients and broker/dealers, but instead create operational obstacles as well as impose significant financial burdens on broker/dealers and many others. The Securities & Exchange Commission and IM&R have already established extensive record keeping requirements that have satisfied the needs of regulatory bodies in providing comprehensive and detailed records to review activities of the firm and its brokers for years. We are already required to maintain complete and accurate records of all transactions in customer accounts. These records are subject to the inspection of the SEC, NASD and any state with such requirements. Further, state administrators currently have the ability to enforce their right to inspect these records. If unable to view such records, they are also able to seek appropriate relief and sanctions against non-complaints.
Certain portions of the reproposed rule would still create a substantial operational expense. Generally, the reproposed rules do not appear to address investor protection concerns beyond what is currently within the regulatory structure of the self-regulatory organizations and the SEC. Further, in some instances, the reproposed amendments do not reduce the burden of our broker/dealers nor are they necessarily designed in every instance to facilitate examinations and enforcement activities of the Commission, SROs or state securities regulators. I will address specific issues below.
A. Memorandum of Brokerage Orders and Dealer Transactions
There are two modifications to Rule 17a-3(a)(6) and 17a-3(a)(7). The first would require the identity of any person, other than the associated person, who entered or accepted an order on behalf of a customer. First, this wording is vague and ambiguous. In many firms, the associated person never "enters" the order. This function could be handled by an operations person or wire operator. Requiring that the order ticket reflect that person's identity would not serve the purpose which the rule seeks to accomplish. Further, even if the language was clarified, securities examiners would not accomplish their objective of determining whether unregistered persons or boiler room operations are engaging in sales practice violations. Someone who is unregistered and knowingly engaging in prohibited sales practices is certainly not going to include their identity in addition to the associated person on the order ticket.
Even with the proposed flexibility regarding how broker/dealers record the identity of this person, it would still be an undue burden. As the Commission noted, many brokerage firms (including our own) utilize an electronic system to generate order tickets, most of which do not have an additional field available to capture the identity of this additional person. While not requiring them to modify their system, the reproposed rule would still require that a separate record identifying the person be maintained. However, to maintain such a separate record would also require entering additional information such as the customer, the security, the trade date, etc. in order to match this record with the information on the electronic system. Having to do so defeats the purpose of maintaining an electronic system, and the cost to modify existing software to capture this information could easily exceed tens of thousands of dollars.
The Commission also seeks comment on how to apply this rule to customers utilizing e-mail, electronic trading system or a general telephone number or such other similar systems. Here again, the reproposed amendment does not accomplish its stated purpose by requiring this record be maintained in these situations where there is no associated person. By the same token, the rule, if it is not going to apply to firms who primarily execute unsolicited orders, the same exemption of unsolicited orders should apply to every firm, not just those firms who specialize in that type of business. However, allowing such an exemption would again permit unregistered people to easily defeat this rule requirement by having the orders reflected as unsolicited.
The reproposed amendments also require a broker/dealer record on the order ticket the time which the broker/dealer receives a customer order, even if the order is subsequently executed. This too results in an undue burden on broker/dealers. Essentially, to ensure compliance with this rule would require every associated person to maintain their own time clock. Thus, every broker/dealer would have to expend hundreds of dollars per associated person in order to comply with this rule. While the argument can be made that this information can be placed manually on the ticket, that does not serve any useful purpose in complying with the rule. This proposed amendment is also logistically impossible to comply with in very fast-moving markets when an associated person may be placing orders for numerous clients in a particular security, i.e. a bunched or block trade. Furthermore, how is an associated person to comply with this requirement if he is out of the office when he receives the client's order and is phoning in the order.
In our firm, financial advisors frequently meet with clients at their homes, offices, restaurants, etc. after hours. This makes the rule impractical. The formulators of this rule are only considering the old model of a brokerage firm in which business is conducted only in a branch office location.
We have seen no evidence that the current record requirements impede the examiners' ability to review issues relating to best execution or trading ahead. We note there have been numerous cases brought against broker/dealers relating to best execution violations over the past couple of years, and securities examiners have had no difficulty with proving their case in these actions under existing rules.
B. Additional Records Concerning Associated Persons
The reproposed amendments to Rule 17a-3(a) (12), still create additional burdens on broker/dealers having to maintain copies of documentation in multiple locations. We believe that utilization of a single central depository for records, with securities examiners being provided the appropriate remedial authority in the event a broker/dealer does not promptly comply with requests for this documentation is more than sufficient. The reproposed amendments would require significant oversight to ensure that documentation that may be coming from several different areas within a broker/dealer all be maintained at each local branch. In particular, agreements between the associated person and the broker/dealer are, in the normal course, documentation the Human Resources Department or Registrations Department would most likely maintain, while customer complaint information is most likely retained in the Compliance Department.
The reproposed amendments' requirement that broker/dealers maintain lists of internal identification of CRD numbers assigned to associated persons, along with a list of associated persons working at or being supervised at or from each local office, is not an undue request, provided that information need only be maintained at the home office. If required to maintain this same data at each local office, this would be an undue burden having to continually update the information and forwarding it to each local branch.
C. Customer Accounts
The reproposed Rule 17a-3(a)(16) does not reflect all of the comments received regarding the proposed rule. The reproposed rule goes well beyond requiring simple disclosure of a client's investment objective. The reproposed amendment exceeds current requirements of the National Association of Securities Dealers with regard to the information required from a customer. In particular, it requires such things as marital status, number of dependents, and date of birth versus age. By this same token, requiring all of this information with regard to joint accounts would be unduly burdensome. We believe the rule would be more palatable if it mirrored the rules in place with regard to information necessary for opening an account and maintaining an account record, rather than imposing new and significantly more burdensome requirements regarding the information necessary from a client.
We believe the reproposed amendment to require a copy of the customer's account form be sent to the customer is appropriate, and a practice which IM&R adopted many years ago. However, requiring such document be provided to the client within 30 days of the first trade is unreasonable. In the case of the Raymond James broker/dealers and others, the client is required to sign the document and is not always returned within 30 days, much less sending a copy back to the client during that limited time frame. Therefore, we propose the rule be amended to require a copy be sent within 45 days of the first trade or upon receipt of the executed document from the client, whichever is greater.
The reproposed amendment relating to furnishing a copy of the document after any correction to the contents is also unreasonable. It would be an extreme hardship to have to resubmit the entire record to the client, just for merely changing the name or address. A significant portion of IM&R's business is customers who divide their time between Florida and a northern state. IM&R changes the address on a client's account, in many cases, at least twice a year. We propose that a copy of the account form only be required to be forwarded to the client for a significant correction to the content, such as the client's investment objective. It would be more appropriate to only require that the information which was modified be provided to the client, not the entire information on the account form. Further, at many firms, clients may change things such as the address or other information without having to complete an account form.
The reproposed amendment requirement that a broker/dealer provide the client a copy of the customer record at least once every 36 months or when the record is updated to reflect a change of the customer's name, address or investment objective would also result in an undue burden and significant cost to firms. As explained above, when there is a change in the customer's name, address or investment objective, broker/dealers should be given discretion to provide the entire account form or merely the information which was changed. This is a more logical approach in light of the above requirement that the client be provided with a copy of the account form at the time of opening. A more cost effective method of accomplishing securities examiners' objectives would be to require securities firms to specifically request clients provide any changes to the information previously provided to it. As clients will already have a copy of the account form and any significant changes thereto in their possession, there is no need for broker/dealers to incur the additional expense of providing another copy of information which they previously provided to the client.
We believe the Commission has grossly underestimated the cost of complying with this reproposed amendment. For many firms, the only method of complying with this requirement is to manually collate and copy the account form to mail to clients. Having to collate hundreds of thousands of account forms that are stored in individual files or microfilm would take months and require several hundred thousand dollars in additional equipment and personnel. Whereas, a simple request to customers requesting notification of any changes to the information previously provided would be much more cost effective and still accomplish securities examiners' objectives. Particularly, where the Commission has estimated that only 10% of those contacted will have a change.
Also, the requirement that the 36-month period run from whenever any change is made in a customer's account, would also result in a significant cost and an administrative burden on broker/dealers. Under this reproposed amendment, firms would be required to maintain and track this 36-month period from the time of any change in the customer's information relative to name, address and investment objectives. This would create a logistical nightmare, and simplifying the proposal to 36 months from opening date and at least every 36 months thereafter would be much more manageable.
D. Customer Complaints
The reproposed rule requiring maintaining records of each customer complaint in each local office does not pose an undue burden, nor would requiring broker/dealers to provide customers the address and telephone number of the department of the broker/dealer to which complaints can be directed. However, requiring a clearing firm to notify all of its introduced accounts of this information, would pose an undue burden and we believe would result in confusion as to whom customers should direct their complaints to. Clearing firms are already required to send information to clients disclosing the relationship between themselves and the introducing firm. It would be more appropriate to require introducing firms to provide the customer with the address and telephone of the department to which complaints may be directed. This would avoid customer confusion as to whom they should direct their complaints, as they are more appropriately directed to the introducing firm who is responsible for the sales practice function.
E. Other Required Records
We appreciate the Commission's efforts to revise the proposed rules relating to retaining individual compensation records. The same holds true with regard to merely requiring broker/dealers to retain reports utilized to monitor customers' accounts. We believe that a 3-year retention period is more than sufficient with regard to this particular information, which is consistent with other records which must be retained for supervisory purposes.
F. Local Office
While we appreciate the Commission's efforts to redefine and expand the definition of a local office, we believe it still falls short of that which is necessary to avoid the undue burden on broker/dealers. We recommend, as we did in the initial proposal, that the Commission adopt the definitions of the primary SROs for branch offices and offices of supervisory jurisdiction ("OSJ"). The rule would be consistent with most firm's practices of maintaining records at the OSJ. This would permit securities examiners to review all of the records relating to a particular location at the office of supervisory jurisdiction where the primary supervisory activities occur. Formulating a rule which is different from that used in the normal course to define branch offices would create more confusion among firms and result in additional expense and administrative burden in complying with multiple definitions of branches.
The reproposed amendments relating to maintaining local office records including blotters, broker/dealer order tickets, customer account records, customer complaints and evidence of compliance with securities regulatory authority rules, would not be an undue burden. However, having to maintain the list of all the names of persons capable of explaining the records and the names of all principals responsible for establishing policy and procedures, sales records relating to associated person's compensation along with chronological sales records in the local office would pose an undue burden. These are all matters which are generally maintained at the home office and can be made readily available to securities regulators. Much of this information includes items they could request from the home office before ever visiting the branch or at the time of arrival.
We agree that the requirement that local office records be maintained for a period of one year is not unreasonable. The Commission also sought comment on whether state securities regulators should have authority to waive the requirement that a broker/dealer keep the required records of local offices within their respective states. We have no objective to providing state examiners this discretion. However, the rule should state that broker/dealers can request exemptive relief based upon appropriate representations to state securities regulators in order to waive this requirement. However, from a pragmatic point, how can state examiners waive the requirements of a rule that is enforced by all securities examiners?
We are also pleased to see the Commission's proposal for alternative means for satisfying the local office record keeping requirements. With regard to the definition of the term "promptly," we suggest the rule be modified to require that the documentation be produced within 24 or 48 hours of the request, in lieu of that day. It would be unreasonable and an undue burden in certain instances to make a request at say 4:00 p.m. and expect documents to be provided by the end of business that same day.
G. State Record Depository not Meeting the Local Office Definition
We continue to strenuously object to the proposal, with regard to one-person offices, that those records be stored in a state record depository. Such a requirement creates an inordinate burden on broker/dealers, where many of the offices are one-person offices. As previously stated, each state has more than ample legal recourse in the event that an office does not provide the records necessary or requested. Our recommendation that current NASD definitions for supervisory branches provide a much more reasonable alternative. With today's ability to quickly travel anywhere in the United States, there is no reason why a state regulator cannot go to the OSJ office of the broker/dealer to obtain the records it needs or have the broker/dealer transmit the records to the state. In the event the Commission proceeds with this rule, we would strongly urge that the states be granted the opportunity to permit broker/dealers to waive the state record depository requirements where they believe that they have received sufficient representations that the records will be promptly made available to them upon request.
H. Records Regarding Approval of Communications
Here again, we do not believe we would sustain any undue burden in meeting the requirements relating to records regarding approval of communications. However, we do not believe the Commission's proposal requiring listing each principal of the broker/dealer who is responsible for establishing policies and procedures would be appropriate. In many instances, the policies and procedures to ensure compliance are not established by any one principal, but in many cases are the result of a compilation of efforts by numerous individuals and/or committees. Thus, this requirement would not prove easily manageable and would result in a significant burden. Further, there is no basis that such a requirement would in any way allow for easier examination of sales practice issues.
I. Examination Reports
We have no objection to the requirement as reproposed that broker/dealers keep for three years all reports requested or required by a securities regulatory authority and any securities regulatory examination reports. In that regard, we believe the Commission should go further to indicate that to the extent those reports exist and, if are provided to other securities examiners, the security examiner would not re-examine any of the matters raised in the report. However, it should be at the discretion of the broker/dealer to decide whether to share the particular report given the issues of confidentiality which the Commission seeks comment on. Many states have "sunshine laws" which require all information provided to them be publicly available. For this reason, it should still be at the discretion of the broker/dealer as to whether these reports will be provided to other examining authorities
J. Technical Amendments
We have no objection to the technical amendments to allow SROs access to broker/dealer records regardless of the method by which they are stored.
Should you have any questions, please do not hesitate to contact me.
Michael J. Di Girolamo
Investment Management & Research, Inc.
cc: M. Anthony Greene