Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street NW, Mail Stop 6-9
Washington, D.C. 20549
RE: Securities Exchange Act Release No. 34-40518; File No. S7-26-98
Books and Records Requirements for Broker-Dealers Under the
Securities Exchange Act of 1934
Dear Mr. Katz:
We are responding to the Commissions requests for comments to its reproposed amendments to the broker-dealer books and records rules set forth in the Federal Register on October 9, 1998. M&T Securities, Inc. ("M&T Securities") is a registered broker-dealer under the Securities Exchange Act of 1934 and a member of the National Association of Securities Dealers, Inc. M&T Securities is a wholly-owned subsidiary of Manufacturers and Traders Trust Company ("M&T Bank"). M&T Securities conducts a retail securities business from locations in branches of M&T Bank. It also conducts a discount brokerage business at its headquarters office. M&T Securities takes great interest in the Commissions reproposed amendments.
M&T Securities opposes the proposed changes to broker-dealer books and records requirements. The proposal does not suggest that a problem currently exists that would require such extensive, burdensome requirements to be placed on broker-dealers. The proposal substantially underestimates the reporting and recordkeeping costs to be expected as a result of the rule.
Account Record Requirements
Our primary opposition to these amendments is the extensive costs that would be necessary to implement what appear to be remote benefits to state examiners, not investors. The proposal does not appear to address a need, either on the part of the Commission or state regulators, to obtain additional records. Neither does it appear to address the goal of investor protection. The proposal seems to acknowledge that broker-dealers currently keep many of these same records in the ordinary course of business, but perhaps not in the precise form and location desired by state regulators. Moreover, many of the requirements set forth in the proposal are already required by existing rules and regulations.
While we oppose the entire proposal as being costly, unnecessary, and unreasonably burdensome, our strongest objection is our objection to proposed Rule 17-a-3 (a)(16)(i). Existing "know your customer" and suitability practices and requirements in the brokerage industry already require broker-dealers to obtain information relevant to the opening of a customers account and relevant to recommended transactions that the broker makes on behalf of the customer. These existing requirements make the account record requirement of the proposal unnecessary.
Even more burdensome is the proposal that the broker-dealer furnish to each customer at least once every 36 months a copy of the customers account record or equivalent document. While we restate our objection to the account records as a concept, we particularly object to obtaining this information from existing customers. There is simply no benefit to going back to existing customers to obtain any additional information unless the customer is seeking to conduct a transaction. It is at such a time that a broker should, consistent with the current regulatory environment, obtain any information necessary to the transaction in question. Therefore, we believe that this proposed requirement should particularly not apply for existing customers.
In this regard, the Commission states that it wants to ensure that the required account records have enduring value as an indicator of customer choices as some sort of justification for requiring creation of the account records and that the investment objective be updated at least once every 36 months. This misses the point. Any information provided by a customer to a broker is only relevant if the customer is making a transaction that requires the broker to assess the customer information in relation to the customer transaction. It is only in the case of such a transaction by the customer that the factual information (i.e., objective ) obtained from the customer has any meaning.
We further object to the requirement that the customer be provided a copy of the account record or equivalent document any time the account record is updated to reflect a change in the name, address or investment objectives of the customer. For the same reasons set forth above, this requirement seems to be a burden without a benefit.
The proposal will require administrative time and expense to track customers accounts, including accounts of inactive customers, to ensure that each such account is updated no less frequently than every 36 months. In addition to the postage expense, the proposal will require administrative time and expense to create mailing lists, to draft and print customer notices requesting confirmation of account record information, to produce a copy of the account record for each account, and to mail the notice and account record for each account. Furthermore, it will be necessary to track responses. If the customer requests a change to the information in the account record, even if it is a change that is irrelevant in the absence of a transaction - and the customer is not making a transaction, the broker-dealer would have to repeat the process, creating the revised account record, preparing the mailing, mailing the further-revised account record, and tracking responses. Finally, the proposal requires that the broker-dealer provide a copy of the revised account record to the associated person who is responsible for the customers account. There would be no benefit to any of these requirements unless the customer intends to conduct a transaction, in which case, the account record could be updated at the time of the transaction.
In addition to the above costs, an analysis of the costs of the proposal should include the allocated cost of representative time, systems changes and maintenance, record storage and machinery. In our view, there has been no demonstrated regulatory concern sufficient to justify this enormous incremental cost to broker-dealers.
A less burdensome alternative would be to require the broker to create an account record at account opening and to update the account record as necessary in connection with subsequent transactions as required by existing suitability and "know your customer" requirements. The broker could be required to provide the customer with a copy of the new account record and updates of the account record at the time the record is created or updated.
We understand that the Investment Company Institute ("ICI") will submit a comment letter that will propose an exemption from the account records requirement for broker-dealers who serve as underwriters of mutual funds and who do not recommend securities. We concur that certain broker-dealers who do not recommend securities should be excluded from the rule.
Local Office Records
M&T Securities conducts business at over 200 M&T Bank branches. An M&T Securities registered representative may be assigned to more than one bank branch where he or she conducts a securities business according to a regular, but not daily, schedule. In addition to the full-time registered representative assigned to the branch, one or more bank branch employees are also registered representatives of M&T Securities and engage part-time in securities sales and referral activities. We strongly object to requirements of the proposal that would require M&T Securities to maintain the records delineated in 17a-3(a)(1), (a)(6), (a)(7), (a)(12), and (a)(16) through (a)(23) at each M&T Bank branch. The cost of maintaining such records both centrally and in each "local office" would be unreasonably burdensome without corresponding benefit.
In conclusion, we believe that the Commission should not adopt any part of this proposal due to the extensive incremental costs to broker-dealers with virtually no added protection for investors. Of most concern, are the proposed customer account record requirements and local office record requirements which would impose an unreasonable burden on broker-dealers. In the event, however, that the Commission believes the proposals have merit and chooses to adopt the proposals, we believe that at a minimum, the Commission should not adopt the requirements pertaining to the update of account records in the absence of a transaction.
Maureen W. Sullivan
Counsel to M&T Securities, Inc.