JIM IRVIN
COMMISSIONER-CHAIRMAN

RENZ D. JENNINGS
COMMISSIONER

CARL J. KUNASEK
COMMISSIONER
ARIZONA CORPORATION COMMISSION
JACK ROSE
EXECUTIVE SECRETARY

VICTOR RODARTE
ACTING DIRECTOR

SECURITIES DIVISION
1300 West Washington, Third Floor
Phoenix, Az 85007-2996
TELEPHONE: (602) 542-4242
FAX: (602) 594-7470

December 8, 1998

Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Mail Stop 6-9
Washington, D. C. 20549

RE:Books and Records Requirements for Brokers and Dealers
Under the Securities Exchange Act of 1934
Release No. 34-40518
File No. S7-26-98

Dear Secretary Katz:

On behalf of the Arizona Corporation Commission’s Securities Division (the "Division"), I wish to express my appreciation for the opportunity to comment on the re-proposed amendments to the Securities Exchange Act Rules 17a-3 and 17a-4. Our staff recognizes the importance of standardized books and records requirements that will, among other things: provide guidance to industry, allow regulators to efficiently and effectively examine registrants, and – most importantly – enhance investor protection. In general, we believe that the re-proposed amendments adequately address those concerns.

The Division has an active examination program that conducts both routine and "for cause" exams of broker-dealers registered in Arizona. Over the last three years, the Division has conducted a total of approximately 134 examinations of securities dealers. The exams are conducted at the main offices of broker-dealers who maintain a principal place of business in Arizona, as well as at local branch offices located throughout the state. Our exams of the local branch offices allow us to monitor the sales practices of resident broker-dealers, which in turn, enhances our ability to protect the investing public. These exams are particularly important in our jurisdiction, where there is a large retirement community consisting of individuals who rely on these local offices to manage their retirement savings. Without adequate safeguards, including an appropriate books and records requirements, those same individuals are more susceptible to the practices of unscrupulous, or even incompetent, broker-dealers.

The "Local Office" Definition

The Division generally is supportive of the re-proposed definition of "local office" under 17a-3(g). Many times, the Division’s examinations of these offices are frustrated by the lack of books and records. In fact, while we recognize the utility of compromise, we urge the SEC to reconsider its originally proposed definition of "local office," which includes offices with one or more associated persons. The number of associated persons is almost irrelevant to the underlying concern of investor protection. Obviously, a single individual can do more damage than two. As such, we believe that an office with only a single associated person should be held to the same standards – and, in this case, requirements – as offices with two or more persons.

Based on our experience, it seems unlikely that the re-proposed books and records requirements will cause a material increase in dealers’ operational costs. The vast majority of the required records already are kept by dealers in order to satisfy their supervisory responsibilities. Indeed, the re-proposed rules may create cost savings in some instances because exams of local offices ultimately would be conducted quicker and more efficiently. Similarly, the re-proposed rules should lessen any perceived regulatory burden on industry, which only would have to satisfy a single, uniform record keeping and retention requirement for all 50 states.

The Local Office Retention Requirements

 We do applaud the SEC for identifying areas where flexibility does not undercut the regulators’ objectives. An example of this balance is found in the record retention requirements in 17a-4(k)(1) and (2). The re-proposed retention requirements allowing the dealers to store records in electronic formats that are most appropriate and cost effective for their firms should also allow for the necessary flexibility in maintaining these records.

Customer Account Records

 Re-proposed Rule 17a-3(a)(16) is also noteworthy. This rule requires, among other things, that broker-dealers create and maintain records of each customer account and forward those account records to customers for verification after first opening the account, and then every 36 months or each time certain information is changed.

As a practical matter, most broker-dealers already gather the information that would be contained in the new account forms. A requirement to gather and maintain the information underscores a broker-dealer’s fundamental obligation to recommend only suitable investments. The Division’s collective experience is that many disputes between customers and broker-dealers could be avoided if customers were required to verify the information included in the customer account records. The verification is a safeguard for both the customer and the broker-dealer and would probably reduce the number of disputes regarding an investor’s financial background and specific investment objectives. Finally, the requirement to update account forms at least once every 36 months will ensure that the forms contain only relevant and current information and will further assist the broker-dealer and investor in pursuing the stated investment strategies.

Customer Complaints

 The Division is in agreement with re-proposed Rule 17a-3(a)(17), which contains new provisions that, as we understand them, would require broker-dealers to maintain a customer complaint file consisting of all correspondence, memoranda, and other documents regarding particular customer complaints. The broker-dealers would have to maintain for each local office a record of written complaints against each "associated person" that conducts business at the local office. The Division believes that this requirement will assist regulators in their efforts to identify patterns of sales practice abuse by particular dealers and salesmen, as well as abuses concerning specific securities.

In conclusion, the Division commends the SEC and NASAA for the promulgation of these re-proposed amendments to the books and records requirements. The Division supports the amendments and believes they address the concerns recognized, and in most cases shared, by industry, regulators, and the investing public.



Very truly yours,


VICTOR RODARTE
Acting Director of Securities

VR/eb