March 27, 1997
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Brokers and Dealers Record Keeping Requirements
Securities Exchange Act of 1934/Release No. 34-37850/File No. S7-27-96
Dear Mr. Katz:
On behalf of the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts (the "Division"), thank you for the opportunity to comment on the proposed amendments to the Exchange Act Rules 17a-3 and 17a-4 as discussed in the above-referenced Release.
The Division wholeheartedly supports the Commission's efforts to provide additional investor protections by strengthening existing regulations, and supplementing them where necessary, in order to make examinations and investigations of brokers and dealers by the Commission, the state regulators and the self-regulatory organizations more efficient and productive. Because these amendments had their genesis in the work of a committee of the North American Securities Administrators Association ("NASAA"), the experience of many investigators, based upon many examinations and investigations, both large and small, is reflected in each of these proposed changes to the Rules. Far from being a theoretical exercise, these proposals come from the practical needs of those who are charged with this aspect of investor protection.
The ability of regulators to conduct on-site examinations and investigations in an efficient manner, and in a way which precludes untimely delays, should only serve to make the protections provided by both federal and state statutes and regulations a reality. The delays caused by not having certain records, and by not having pertinent records at the location where most of the agent/customer contact occurs, only serve to impede an examination or investigation as well as give those subject to it ample time to potentially provide the material on a selective basis. The intent of such statutes is to ensure that those who are licensed conduct their activities Jonathan G. Katz
March 27, 1997
in a manner which permits supervision by regulators. The requirement that the licensee make, maintain and produce certain books and records is intended to effectuate this statutory intent.
These requirements also create a level playing field for those firms which, as a matter of effective, organized business practices, maintain their records in a useable way, and those whose overriding objective is to make a sale at any cost. The requirements proposed only codify what a well run business would practice anyway. While certain firms may incur initial costs to become fully compliant, on average, such costs should be offset by reduced litigation or more effective defense of those complaints and arbitrations which inevitably occur.
Specifically, many customer complaints arise because of a misunderstanding regarding investment objectives and/or suitability. Proposed Rule 17a-3(a)(16) would require broker-dealers to send to their customers, annually, for confirmation, an account form containing basic customer identification and background information as well as investment objectives, including amounts, if any, the customer has indicated would be available for speculative investments. Such a requirement would help reduce misunderstandings and could provide the customer and/or the agent with additional evidence if and when litigation occurs.
Also, proposed Rule 17a-3(a)(1) would greatly assist state regulators by requiring that specific customer transaction records be maintained at the local office of the broker-dealer where the transaction occurred. Such readily accessible records would both serve to facilitate the investigation of customer complaints by the local police officer "on the beat" and would allow state regulators to make routine examinations more quickly and efficiently.
In conclusion, the Division supports the Commission's efforts in these regards, applauds the federal/state cooperation implicit in these proposals and echos the comments of NASAA's President, Mark J. Griffin, in his December 12, 1996 letter to you. Again, thank you for this opportunity to comment.
Barry C. Guthary
make currently required records available at the local branch office (Rule 17a-3(a)(1));
add name of associated person and whether the order was solicited on unsolicited (Rule 17a-3(a)(6));
additional information on associated persons, such as licenses, registrations, complaints, contracts, client trading records, etc. (Rule 17a-3(a)(20));
keep a list where an associated person does most of his/her business and maintain those records concerning that associated person at that location (Rule 17a-3(a)(21));
customer account forms, updated yearly, containing investment objectives and % speculative investments - a copy of this form, or an equivalent, will be sent to the customer (Rule 17a-3(a)(16));
records of customer complaints, written and, for fraud and theft, oral (Rule 17a-3(a)(17));