December 4, 1998
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Mail Stop 6-2
Washington, DC 20549
Re: File No. S7-26-98
Dear Mr. Katz:
MML Investors Services Inc. ("MMLISI") appreciates this opportunity to comment on the proposed amendments to the broker-dealer books and records rules (the "Proposal") contained in Release No. 34-40518 (the "Release").
We are very disappointed to see that the Securities and Exchange Commission ("Commission") has chosen to disregard the concerns vigorously expressed by a significant portion of the securities industry. In the Commission’s earlier request for comments, MMLISI and over 100 other commentors offered well-reasoned objections to, and suggestions for improving, the earlier version of the Proposal (the "First Proposal"). There is, however, virtually no substantive discussion of any of these comments in either the Proposal or the Release. We are puzzled and concerned about this apparent lack of attention to the industry’s concerns.
The industry’s previous comments vividly described the burdens, expenses and difficulties that would be created by the First Proposal. Instead of trying to address these concerns, the Proposal appears to give credence to the comments of only constituency: the North American Securities Administrators’ Association ("NASAA"). Nonetheless, since comments are now once again being solicited, we, like Sisyphus, push this "comment" rock uphill and repeat our strong objections to the Proposal.
SUMMARY
In the spirit of the SEC’s recent "Plain English" initiatives, we state simply that: the Proposal is misguided and unnecessary. The current books and records rules adequately protect the investing public and provide state regulators with adequate means of conducting local inspections. All necessary records are currently available to state regulators upon request. Firms that do not make their records available to state securities regulators should be sanctioned.
The Commission has seriously underestimated the costs of the Proposal. The Proposal imposes exorbitant costs on broker-dealers and in doing so, it threatens the financial viability of some broker-dealers. Moreover, the Proposal compromises the interests of the investing public, who may be asked to share in the costs of implementing the Proposal or, alternatively, risk investing with a financially weakened broker-dealer. The cost estimates contained in the Proposal bear no reasonable relation to how many broker-dealers conduct business.
The Commission’s "one-size-fits-all" approach to this regulation is not practical. Many fundamental concepts such as "account" and "office" do not apply uniformly to all broker-dealers. Regulations that govern such activities need to recognize the different ways in which firms operate. The Proposal regrettably does not do this.
Finally, several portions of the Proposal are baffling. The requirements do not make sense and will only serve to confuse regulators and broker-dealers alike.
ANALYSIS
I. THE AMENDMENTS ARE UNNECESSARY
We continue to believe quite strongly that none of the requirements outlined in the Proposal are necessary. Current SEC rules regarding record retention have worked exceedingly well for years. They require broker-dealers to maintain a variety of records pertaining to numerous aspects of their businesses and to make these records available to any regulator who requests them. If state regulators are having difficulties obtaining records from certain firms, then the proper course of action is for the regulators to take administrative action for rule violations against them. The SEC should not impose burdensome and expensive local record maintenance requirements on firms that have made, and continue to make, their records available to state regulatory authorities in a timely manner.
II. THE COST ESTIMATES ARE GREATLY UNDERSTATED
A. The "Updating" Requirement Would Be Unreasonably Expensive. Proposed rule 17a-3(16)(i)(B)(1) establishes extremely expensive and burdensome requirements regarding the updating of customer account records. Basically, this provision would force firms to provide their customers with copies of their account records at least once every 36 months. The rule would apply retroactively to all accounts existing on the date the rule was enacted.
Incredibly, the Commission estimates that it would take firms on average only 10 seconds to furnish the account record to each customer and 5 minutes to update each record. The Commission does not include any discussion of the reproduction or mailing costs associated with this requirement. The Commission also conveniently excludes any systems costs from its estimates. It then calculates an estimated cost burden to firms based solely on its unsubstantiated guesses. These estimates simply have no basis in reality.
Any rational estimate of the costs associated with this aspect of the Proposal would start with a determination of the basic costs of retrieving, reproducing and mailing this information. Not all firms maintain records in the computerized format apparently assumed by the Commission. Nor are all broker-dealers, particularly introducing broker-dealers, required to make regular mailings to their clients. Accordingly, reproduction and mailing costs would be tremendous for many firms.
For example, our firm has approximately 2,000,000 customer "accounts". 1 Customer records are retained in a variety of formats: microfiche, paper, electronic imaging, etc. Retrieving and then reproducing these records is largely a manual effort. It takes a few minutes to find a customer’s record, print it, photocopy it and then insert it in an envelope. The envelope has to be mailed, with postage, and then handled upon return. More imaging, filing or microfiching would then be necessary.
We estimate that it would cost us approximately 35 cents per account simply for paper, envelope and postage. (Since we are not currently required to, and do not, make routine mailings to our customers, sending these account records would constitute a special mailing for us). Using the Commission’s estimate of an average hourly salary of $25 per hour and assuming that our extremely efficient employees could process 25 accounts per hour, the per piece labor costs would be $1.00. Thus, it would cost us $1.35 to send out each update request. Assuming we spread our 2 million accounts out over 3 years, we would incur an annual cost of $900,000 (666,667 accounts times $1.35) to comply with this requirement. If we then add the estimated systems costs, the cost of the new personnel we would have to hire to perform this function, 2 the costs to process the updates when they are returned by the customer, return postage costs, and the further costs to remail the "confirmed" copies back to the customers, we could easily expect our annual costs to increase another $500,000.
Thus, we would be forced to spend approximately $1.4 million per year to implement this requirement. Our estimates are on the conservative side, and could be much higher.
The Commission estimates that the costs of this requirement for the entire securities industry would be only $5,555,575. This estimate is ridiculous. Our firm alone would spend at least $1,400,000 and we have no reason to believe that other similarly-situated firms could satisfy this obligation more efficiently. This requirement would weaken the financial health of our firm. It could threaten the financial viability of other similarly-situated firms.
Annually soliciting about 650,000 customers to verify their investment objectives and other data would be a meaningless and expensive exercise, particularly when the Release notes that less than 10% of customers can be expected to change their investment objectives each year. When the exorbitant and potentially enterprise-threatening costs of this requirement are balanced by the rather insignificant benefits to be achieved, it is abundantly clear that this aspect of the Proposal cannot be justified.
We believe that whatever regulatory objective is desired to be achieved through this "updating" requirement can be accomplished with minimal costs and burdens to broker-dealers by implementing an alternative approach. The obligation for updating customer account records should be placed on the party that is in the best position to provide this information on a timely basis: the customer. Section 17a-(a)(16)(i)(B)(3) of the Proposal already provides that "the account record or alternate document … shall include or be accompanied by a prominent statement advising the customer that, if any information on the account record or alternate document is incorrect, the customer should mark any corrections and return the account record or alternate document to the member." Simply by modifying this statement to say "is or becomes incorrect", the Commission would place an affirmative obligation on customers to notify their broker-dealer when the information on the account card becomes outdated. This is where the burden should fall.
B. The "Local Office" Retention Requirement is Impractical and Too Expensive. The Commission naively asserts that "each broker-dealer would spend one business day each year to ensure … that the records are available at local offices and state record depositories." The Commission thus assumes that firms already have appropriate systems in place for making such records available in local offices and merely considers the costs of ensuring ongoing compliance. It totally ignores the effort that would be required to develop and implement systems and procedures to provide records at local offices. By omitting such costs from its analysis, the Commission fails to appreciate or acknowledge the significant burdens and costs associated with this aspect of the Proposal.
Section 17a-4(k) specifies that a long list of records must be kept in all "local offices" and all other offices that do not meet the definition of "local office." In an apparent attempt to "soften" the burdens that many firms will face in complying with this requirement, the Proposal provides an alternative. Section 17a-4(k)(1)(ii) specifies that "in lieu of maintaining records at the local office, a (firm) may comply with the local office record maintenance requirements … by having the capability of producing printed copies of the records at the local office during the same business day as the request for the records is made." This "solution", however, is not really practical and is very expensive. There are two major problems with this "solution".
First, the Proposal requires that records be "producible" at virtually every location where two or more registered representatives conduct business. This vague and imprecise concept, i.e. "where business is conducted", could apply to a wide variety of locations. For MMLISI, this definition will encompass several hundred locations. These locations have different types of equipment. Some utilize computers; others use FAX machines. Many do not have printers.
Thus, to take advantage of this option, firms will be required to invest significant sums in hardware and other equipment to allow the locations to receive and/or print the required information. In addition, firms will incur substantial costs to develop the systems to sort the information and then make it available at each of these locations. Many firms probably cannot afford the capital investments needed to utilize this option. Paper records will be the only alternative.
Second, this alternative is explicitly premised on a firm's ability to produce printed copies of the records at the local office "during the same business day". This requirement totally ignores the issues regarding archiving of computer data. We are unaware of any large firm in the industry which has the electronic data storage capabilities to retain all of the records mandated by the Proposal in an on-line format for a 3 year period. Most large firms thus resort to archiving some portions of their data. Accessing archived data takes time. Many times archived data is not available "on line" and must be accessed manually by an operator with access to the archiving medium. Thus, even if firms could afford to buy the necessary hardware for all of their locations, they probably could not satisfy the timeliness requirements of this provision due to their need to archive certain data. We suggest that the timeliness requirement be modified to require "same day" availability only for the most recent 6 months records. All other records should have to be produced no later than 2 days after they are requested.
In summary, if broker-dealers desire to utilize the "alternative approach" they will in all likelihood be forced to invest significant sums in equipment. Our preliminary estimates are that our costs could be as high as $1 million. If we do not utilize this "alternative approach", we will be required to resort to an expensive process of shuffling off paper copies of records to several hundred locations across the country. Our costs would be staggering. We estimate that to establish a nationwide system of paper distribution to every "local office" would cost in excess of $1 million per year. In either event, however, we (and all similarly-situated firms) incur unnecessary and tremendous costs.
III. THE PROPOSAL HAS A DISPROPORTIONATE NEGATIVE IMPACT ON NON-TRADITIONALLY ORGANIZED BROKER-DEALERS
A. BACKGROUND
The Proposal is based on the premise that all broker-dealers conduct business like national (i.e. Wall Street) broker-dealers. In that part of the securities world, customers open and maintain accounts with a firm, deposit funds and securities with the firm, effect all of their securities transactions directly with the firm, receive regular account statements from the firm, and transact business at easily identifiable branch offices of the firm. These broker-dealers, meanwhile, hold customer funds and securities, carry customer accounts, and are required to regularly correspond with their customers. The requirements established by the Proposal are tailored to this model.
The reality, however, is that not all broker-dealers conduct business in this manner. 3 Many firms, such as MMLISI, do not carry customer accounts, do not hold customer funds and securities, do not send statements to customers, are not directly involved in effecting every customer transaction, and do not conduct business at traditional branch office locations. Accordingly, fundamental terms such as "account," "office," and "customer" do not have the same meaning for such firms as they do for Wall Street firms.
Our registered representatives primarily sell mutual funds and variable insurance products. They generally meet with clients at a location of the client’s choosing. They make their sales presentations there, have their paperwork preliminarily reviewed at a local office, and then send that paperwork to one of our Offices of Supervisory Jurisdiction ("OSJ"). Principals in the OSJ review and approve the transaction and forward the funds and applications to the issuer or its transfer agent for deposit and processing.
Virtually all transactions subsequent to the initial purchase occur directly between the client and the transfer agent without the involvement of MMLISI or its registered representatives. For example, a client desiring to purchase additional shares of a mutual fund or place subsequent deposits in a variable annuity simply detaches a coupon from the confirmation statement he/she received from the transfer agent and sends the money directly to the transfer agent. We are notified about the transaction, as the dealer of record, only after it has occurred.
Given this manner of conducting business, firms such as MMLISI have different customer relationships than those contemplated by the Proposal. Thus, many aspects of the Proposal which are precise, unambiguous, and easy to satisfy when applied to a national brokerage house are extremely costly, burdensome and difficult to satisfy when applied to a firm such as MMLISI. Since firms like MMLISI probably constitute the overwhelming majority of the broker-dealers in the United States, the Proposal should be sensitive to the highly disproportionate impact that new requirements would have on these firms. Like the First Proposal, however, this new Proposal fails miserably on this point. The Proposal is teeming with such problems.
B. CUSTOMER ACCOUNTS
There are numerous difficulties and inequities presented by the Proposal’s use of the term "customer account".
1. "Customer Account" should be defined. The Proposal repeatedly refers to, but does not define, the term "customer account". This is a glaring omission. Many broker-dealers do not have traditional customer accounts or hold customer funds or securities. Yet, these firms have relationships with securities purchasers that in a broad sense may be deemed to be "accounts".
For example, if a person’s sole relationship with a firm is having purchased a mutual fund or variable annuity through the firm, and the firm has little, if any, subsequent contact with the purchaser, is such person a "customer" and does he have an "account"? If so, is this the type of "account" that should trigger the "account record" updating requirements? Similarly, if a broker-dealer simply introduces an account to another clearing firm, which broker-dealer possesses the account?
This fundamental issue vividly demonstrates the Commission's failure to fully consider the differences in the manner in which broker-dealers conduct business. We strongly recommend that the term "customer account" be defined in the final rule and include only those accounts that are actually "carried" by a broker-dealer.
2. "Customer Account" should not include variable insurance products. Under most state laws, variable annuity and variable life insurance contracts are classified as "insurance" not "securities". Thus, these products are regulated by state insurance departments, not the securities departments. As we understand it, the primary purpose of the Proposal is to satisfy state securities regulators’ interest in examining records for securities activities that occur in their jurisdictions. If, however, such regulators have no jurisdiction over variable insurance products, then why should such products be subjected to the requirements of the Proposal? There appears to be no good reason.
3. The "account record" requirement should not be applied retroactively. The requirement in proposed §17a-3(a)(16) to obtain and maintain certain information for customers appears to apply both to new and existing customer accounts. Although we have no objections to obtaining the required account information from new accounts (i.e. accounts established after the effective date of the Proposal), we strongly object to being forced to obtain such documents from existing customer accounts (i.e. accounts established before the effective date of the Proposal).
As noted above, requiring broker-dealers to obtain account information from all existing customers is prohibitively expensive. Moreover, the exorbitant costs which will be imposed on many broker-dealers by applying this requirement to existing accounts does not appear to be offset by any legitimate regulatory purpose. Many firms, such as ours, use and have on file customer account records which substantially comply with the proposed requirements. For example, our current customer account card contains most, but not all, of the information specified in sections 17a-3(a)(16)(i)(A) (e.g. name, address, employment, annual income, net worth, investment objectives, risk tolerance, etc.) Our records do not, however, contain all of the required information (e.g. all of this data for a co-owner of a joint account). Thus, if the Proposal is adopted and applied retroactively, we will be required to modify our form only in two or three relatively minor aspects. We fail to see how either customers or regulators are served by forcing firms to incur significant expenses to obtain isolated fragments of data when they are otherwise in substantial compliance with the rule.
4. The "updating requirement" should be dropped. Aside from its tremendous costs as described above, the "updating" requirement has two other deficiencies which require its demise. First, the Proposal will confuse many customers. Given the manner in which we conduct business, many of our customers have very little, if any, contact with us after they place their initial transaction with us. Our client’s receipt of an unexpected communication requesting the "updating" of personal financial data that was supplied years ago will likely be confusing. Confused customers are likely to become suspicious about the firm or about the proper handling of their money. Creating confused, suspicious customers is hardly sound public policy.
Second, the requirement has very little applicability in the variable product and mutual fund environments. Purchasers of these products (who constitute the vast majority of our clients) are not engaged in active securities trading. Rather, these are long-term investors. Most of these clients have committed themselves to products which by their very nature are designed to address long-term objectives. Regulatory schemes should not be, as the Proposal is, designed with the assumption that every investor is an active trader whose needs and objectives need constant monitoring.
Accordingly, we adamantly oppose the updating requirement. Firms should not be forced to go through this elaborate, expensive, and meaningless exercise.
C. LOCAL OFFICES
As is the situation with the term "customer account", the Proposal’s use of the term "local office" presents many problems for non-traditionally organized firms.
1. Locations utilized by registered representatives of non-traditional firms should not always be classified as broker-dealer "offices". Proposed section 17a-3(g)(1) defines the term "local office" as "any location where two or more associated persons regularly conduct the business of handling funds or securities or effecting any transactions in, or inducing or attempting to induce the purchase or sale of any security, or otherwise soliciting transactions or accounts for a member, broker or dealer". Proposed § 17a-4(k)(2) also imposes certain recordkeeping obligations on all offices that do "not meet (this) definition of local office"; basically this would encompass all locations where only one registered representative conducted business. The combined impact of these two provisions will be to "sweep up" into the SEC’s jurisdiction and regulatory apparatus thousands of locations where no meaningful securities business is conducted.
Most salespersons registered with our firm (and many other insurance-affiliated broker-dealers) are primarily engaged in businesses other than the sale of securities. They possess NASD registrations and state securities licenses because federal and state law mandate that such registrations and licenses be obtained even if only an occasional, solitary securities sale is to be made. They possess these legal authorizations not because they earn their livelihoods from such activities, but rather because from time to time they may need to sell a securities product to a customer.
Most of the locations where these individuals work are not held out to the public as business locations of a broker-dealer. In most cases, their broker-dealer does not pay the rent for such locations or advertise that location as a business location of the firm. The only nexus such locations have to the securities world is the fact that a person with a securities license may occasionally effect a securities transaction there. Since the Proposal focuses on two extremely imprecise and nebulous concepts: (1) locations where registered representatives "regularly ... induce, attempt to induce, or solicit transactions," and (2) all other offices, all of these locations will be deemed to become "offices" of a securities firm.
This broad definition results in regulatory alchemy. It magically transforms the residences of registered representatives into broker-dealer offices; it transforms client offices into broker-dealer offices; and it transforms coffee shops, restaurants, and hotels into broker-dealer offices. Virtually no location where a securities product is solicited will be able to escape being treated as a broker-dealer’s office.
We fail to understand the Commission’s thinking in this area. Neither the Commission nor state regulators appear willing to distinguish between a location such as a full-fledged Wall Street firm branch office with several hundred employees and a registered representative’s house where a few variable annuities may be sold each year. Both the Commission and state regulators appear to believe that the full weight of the securities laws should attach to any location irrespective of the volume of business actually transacted at that location. This is a misuse of limited regulatory resources.
Moreover, no meaningful regulation will result from such broad classifications. It is highly unlikely that a "rogue broker" will maintain incriminating documents in neatly organized files just because a SEC rule mandates it. We strongly believe that the Commission should cease its fixation on geographical regulation, particularly when such a focus presents such serious difficulties for non-traditionally organized firms. Functional regulation is a goal on which both firms and the Commission should be able to agree. The primary regulatory focus should be on whether a firm, through whatever procedures it deems appropriate, is properly and effectively supervising its business and salespersons. Forcing firms to adopt Wall Street procedures wherever they happen to have a registered representative undermines and deters competition.
If, however, the Commission continues to focus on geography we respectfully suggest that it develop a de minimis standard to determine which locations need to be treated as an "office" of a broker-dealer. This standard should be based, not on the number of representatives conducting business at a location, but rather on the amount of business conducted there. The Commission should define a threshold level of annual securities business that must be conducted in a particular location before that location rises to the level of an "office." For example, under the SEC’s current proposal MMLISI would have to keep records for over 1,000 different "local offices" and other offices. By focusing on a relatively low level of production, for example, $30,000 in annual gross commissions generated at a location, we would reduce our offices to approximately 150.
We seriously question whether there should be any regulatory interest in locations where very little securities business is conducted. Particularly when there are onerous costs and obligations associated with officially recognizing a location as a firm’s "office", firms should not be forced to divert their limited compliance resources to locations where there is no meaningful business. Focusing on locations where meaningful amounts of securities business is transacted would represent the best use of everyone’s time.
In the alternative, local offices should be limited to only those locations which are actually "held out to the public" as a location where the firm conducts business. Such "holding out" should be evidenced by actions such as a listing of the firm name and address on signs, letterhead, business cards, etc. or in advertising materials. Focusing on locations which the public and/or a firm recognize as bona fide business locations of the firm would be more appropriate than trying to worry about vague, changing and non-specific locations at which "solicitations regularly occur".
Ideally, "local office" could be defined by reference to the NASD definition of a "branch office". The NASD has developed a body of law regarding when and if a location becomes an official branch office. Several states themselves have adopted the NASD definition. Utilization of the NASD definition and rules would facilitate compliance by member firms with these requirements and avoid inconsistent enforcement of this requirement.
D. CLIENT TRADING RECORDS
Proposed §§17a-3(a)(20) and 17a-4(k) would require firms to prepare and maintain, at a local office level, "a record as to each associated person listing chronologically all customer purchase or sale transactions for which the associated person entered the orders or was primarily responsible for the customer’s account." This is another example of how the Commission has not considered the operational differences among firms.
As we noted earlier, neither we nor our registered representatives effect all transactions for our "customers" even though we may be listed as broker-dealer of record for the transaction. Our "customers" almost always effect subsequent transactions in existing mutual fund and variable annuity accounts directly with the issuer or its transfer agent. They do not deal with our firm at either our headquarters or any of our local offices. Since, however, our registered representative is "primarily responsible for the customer’s account", we would be required to maintain these chronological records for that representative even though the representative had absolutely no involvement in the execution of the transaction. This unnecessarily attributes to the registered representative greater involvement in the transaction.
Accordingly, we believe that §17a-3(a)(20) should be modified to apply only to those transactions effected by the firm. If an investor places a trade directly with an issuer (i.e. without involving either the firm or a registered representative) then the broker-dealer should not be held responsible for obtaining records of the transaction or for transmitting that record to one of its local offices.
In addition, this provision appears to have retroactive effect. That is, it would require firms to obtain records for transactions that occurred prior to the effective date of the Proposal, even though such records were not mandated at the time of the transaction. This provision, like all other provisions in the Proposal, should be applied on a prospective basis only. To require firms to reconstruct trading records for all of their existing customers to satisfy this requirement would be virtually impossible, and immediately place a significant number of firms in violation of this provision.
E. COMPLAINT NOTICES
Proposed §17a-3(a)(17)(ii) requires a firm to maintain a record "indicating that each customer … has been provided with a notice containing the address and telephone number of the department … to which any complaints may be directed." Our concern with this provision is that apparently it, too, will be applied retroactively. Complying with this requirement on a retroactive basis would force firms like MMLISI to generate a special mailing. Again, we estimate our cost of conducting a special mailing to be in excess of $1 million. Since we have had relatively few customer complaints and there is no evidence that any of our clients have ever had a problem in finding us, we do not believe that this cost would be justified. If adopted, this provision should be applied prospectively only.
IV. SEVERAL PROVISIONS OF THE PROPOSAL SIMPLY DO NOT MAKE SENSE
There are several provisions of the Proposal which are utterly confusing, unworkable and appear to make no sense. Four such items are predominant in this respect.
A. Section 17a-3(a)(6). This provision would require firms to prepare memoranda of each order. Firms would have to include in the memorandum not only the identity of the associated person responsible for the account, but also "any other person who entered or accepted the order on behalf of the customer." In our firm (and in many other similarly-situated firms), our registered representatives transmit orders to a central "back office" where an order desk clerk actually enters the order into an order transmission system. These individuals are purely clerical employees who are not involved in any way in the sales process. Generally, they are located hundreds or thousands of miles from the registered representative and the sale. We are at a complete loss to understand the regulatory interest in these individuals.
There is no correlation between these persons who are performing a ministerial duty -- entering an order -- and the actual sale. Thus, we have a very difficult time in seeing, as stated in the Release, how "this requirement would allow securities examiners to determine whether particular persons, including unregistered persons, are engaged in sales practice violations". This provision should be deleted.
B. Section 17a-3(a)(16)(i)(C)(ii). This provision would require firms to prepare "a record, which need not be separate from the account record, for each account opened or updated … indicating compliance with any applicable regulations of a securities regulatory authority that require certain information about a customer be obtained when opening or updating a customer account." Since firms are already required under a variety of SEC and NASD rules to obtain essential information about their customers, this additional requirement is redundant. Firms either will have the required information or they will not. Forcing them to prepare and maintain another record stating that they have complied with the applicable requirements will serve no useful purpose other than giving regulators another ground to cite a non-complying firm. This provision should be deleted.
C. Section 17a-3(a)(18). This provision would require firms to maintain a record, for each associated person, listing "all purchases and sales of securities for which the associated person was compensated, the amount of compensation (whether monetary or nonmonetary) and the specific security involved." To the extent that this provision is meant to apply to the payment of trail commissions, it is utterly unworkable. It is virtually impossible to attribute a portion of the trail commission to a specific security. Moreover, to the extent that the "nonmonetary" component of this provision supercedes or conflicts with the NASD’s recently adopted non-cash compensation rules, it is confusing.
This provision should be clarified to make it clear that trail commissions do not have to be tied to a particular security and that compliance with the NASD’s non-cash compensation rules satisfies the recordkeeping component pertaining to nonmonetary compensation.
D. Section 17a-3(a)(12)(iii). This provision would require us to maintain a record "containing a summary of each associated person’s compensation arrangement". Given the extremely broad definition of associated person, compliance with this requirement will be very difficult for non-traditionally organized firms. Associated persons include secretaries and other clerical personnel who are working at every "local office". We question the regulatory interest in such persons and the compensation arrangements they may have with a salesperson.
CONCLUSION
For the above reasons, MMLISI vigorously objects to the Proposal. We strongly disagree with the Commission in its Initial Regulatory Flexibility Analysis that "the requirements of these proposed amendments were designed to minimize additional burdens" and no "less burdensome alternatives are available to accomplish the objectives of the proposed amendments". We have highlighted several significant burdens and costs associated with the Proposal. Moreover, we have submitted, for the second time, several less burdensome alternatives.
Furthermore, we strongly disagree with the Commission's calculations under the Paperwork Reduction Act of 1995. We believe that the Commission has severely underestimated the burden of the proposed collection of information. The Proposal will significantly increase the paperwork burdens for many firms.
We disagree with the Commission’s assessment of the need for these amendments, and believe that the burdens imposed on many broker-dealers will be staggering. In addition, the costs of compliance may cause irreparable damage to such firms’ financial integrity. Since there is no demonstrated need for these rules, the Proposal should be permanently withdrawn.
Thank you for considering our views.
Sincerely,
Michael L. Kerley
Vice President and Chief Legal Officer
c: Office of Management and Budget
Attn. Desk Officer for the Securities and Exchange Commission
Office of Information and Regulatory Affairs
Washington, DC 20503
-[1]- Our difficulties with the term "account" are discussed infra at pp. 6-8.
-[2]- We estimate we would have to increase our staff by a minimum of 14 employees to perform these tasks. Our firm currently has only 120 employees.
-[3]- Unlike the Proposal, the SEC's net capital rule recognizes that broker-dealers conduct business in many different ways. The net capital rule thus establishes different net capital requirements for firms based on categories of business activities and the risks associated with those activities.