December 7, 1998
Johnathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N. W.
Washington, DC 20549
RE: File No S7-26-98
Dear Secretary Katz:
As proprietor of Pumphrey Securities, a 44-year-old broker- dealer firm, I appreciate the opportunity to comment on this proposal. I believe my concerns about this proposal would be typical of most smaller firms.
I. The approach to the question of "suitability" is being changed under the guise of "recordkeeping".
Securities firms currently operate under the concept of the "know your customer rule". To document that the broker knows his customer the firm maintains account forms containing the proposed information plus much more information. For example, bank reference, initial transaction, investor investment experience, and insider relationships are some of the typical additional categories of data on the new account forms.
NASAA's concept is that the information in the account record would be the basis for disciplinary action for unsuitability and would be primary evidence in arbitration proceedings where the investor is claiming unsuitability. In other words, the account record would become an important legal document in itself, rather than evidence of due diligence on the broker's part in trying to determine the financial circumstances of the investor.
II. Will the SEC or the securities firm define the content of the mandatory categories of required information on the account form?
Currently, Connecticut is the only jurisdiction (to the best of my knowledge) which has a defined account form which they call a "Customer Information Document". This is a form which a broker- dealer must keep in addition to the usual new account form, if you read Connecticut's regulations literally. The recordkeeping workload will be substantially increased if the broker-dealer must keep the proposed customer account record in addition to the new account forms required by SROs and the firm's own compliance department.
A. What is a "Customer Account Record"?
Is it information about each natural person who is a client? Or, is it information about the beneficial owner of each account registration?
In our case we have about 2,000 different people as clients, who in turn have about 4,000 account registrations. To illustrate with my own family account; I have the following accounts:
Preston Pumphrey & Barbara Pumphrey, jt ten.
IRA of Preston Pumphrey (contributory IRA)
Rollover IRA of Preston Pumphrey
11 Education IRA accounts of my 11 grandchildren.
Thus, would the proposed rule require us to maintain one customer account record for Preston & Barbara Pumphrey, or 17 customer account records?
B. Will the SEC, the client, or the securities firm define the required information in the categories on the account record?
What do these categories mean in the real world? The IRS has released thousands of pages of definitions of "income". Will the SEC define "income"? Or, is "income" whatever the client tells us his income is? What does "marital status" mean? These days those living together are called "domestic partners". They have been granted many of the legal rights of those who are married. Is the SEC going to rule on the question of whether gay domestic partners are "married"?
III. The total annual reporting and recordkeeping burden is grossly underestimated.
A. In a manual system it will take 10 to 20 minutes to furnish the account record to each customer. Would someone please put a piece of paper in a typewriter, fill out the proposed form, address the envelope, stuff and seal the envelope? How long does it take to do these tasks? The 10 second estimate is preposterous!
B. The broker-dealer will have to update 100% of the account records, not the 10% estimate. Rule 16(i)(c)(ii) requires that each account record be updated to show the lack of client response and the date. Thus, even if only 10% of the clients reply, 100% of the account records must be pulled and updated. The update function (by operation of the proposed rules) will take 10 times as long as the estimate in the Release.
Preston V. Pumphrey