Subject: File Number SR-NYSE-2004-13
I am very concerned about the intent of File No SR-NYSE-2004-13 vs. the interpretation of the this file (Rule 405A Non Managed Fee Based Accounts)
First,I would like to explain that I am a Senior Vice President at Smith Barney, and I have been for the past 37 years.
I have several NMFB accounts (Non Managed Fee Based Accounts)
I have read from cover to cover Rule 405A, dated June 22, 2005, and I feel Smith Barney's Compliance Department has interpreted this rule so far on the side of compliance that they have missed the most important part of the rule, and that is the retail customer.
Smith Barney's NMFB has a generic name of AssetOne. In the AssetOne pamphlet it states "behind every investment decision you make, you'll have the resources, research, and guidance of your Smith Barney Consultant. It goes on to talk about the other included free services, such as check writing, credit card, automatic funds transfer, on line web trading, free IRA, performance reports, etc, and concludes with, " your most valuable resource is your Financial Consultant who is always there to offer guidance and direction."
In reading Rule 405A I see references made to the following:
(1) The determination of appropriateness would take into consideration not only the cost incurred, but also program services, customer investment objectives, and customer preferences. 11 (C)
(2) 405A is intended to protect the interest of the retail customers. 11 (E)
(3) Use due diligence to learn the essential facts relative to every customer.11 (F)
(4) The proposed rule "undervalues the attention given by a broker to his customer and the advice of the broker."111
(5) To protect investors and the public interest. V
(6) The rule does not require that the NYSE members generate "automatic exception reports"
A few weeks ago, 8 of my clients received one of these " automatic exception reports " that stated in bold faced underlined letters, " You are strongly urged to consider removal from AssetOne." The letter was signed by my manager, but when I showed her a copy of it, she was aghast at the wording and tone of the letter. Obviously it was computer generated to the accounts that the computer deemed to have "under traded" in the past 12 months. It should be noted that these 8 clients had outperformed both the S & P 500 and the Dow Jones for the last 12 months and since the inception of their NMFB accounts. I don’t mean to sound like the next Warren Buffet, but their performance was entirely due to my guidance and advice. What went wrong that caused these clients to be sent this letter to remove their accounts from AssetOne?
In a nut shell, it was Smith Barney’s Compliance Department that took all of the harsh language from Rule 405A and neglected all the “protect the retail client” language. I can send a copy of Smith Barney’s Compliance Departments Highlights of Rule 405A, and you will see no reference to 6 items mentioned above.
I understand and support the intent of 405A, and I agree that NMFB accounts were abused by being under traded and under performing, but there are numerous accounts that may appear to have under traded, but have out preformed. Unfortunately, they are being all lumped together, and being penalized due to the short sightedness of Smith Barney’s Compliance.
When I questioned AssetOne on why Compliance took this myopic view, the explanation was that “making this (405A) an across the board enforcement, it would keep Smith Barney from paying regulatory fines and out of the newspaper headlines.” I think due diligence and protecting the retail client got throw out the window with that line of thinking.
I have performance figures, documents, and phone conversations to back up everything I have mentioned. I would also like to point out the top performing mutual funds for 5, 10, or 20 years, have one thing in common: low turn over. Buying good stocks and holding them is a good way for retail clients to make money, and using professional guidance is an asset, not a violation.
Nathan N. Withington