January 14, 2000
Via E-Mail To: "rule-comments@sec.gov"
Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0690
Re: Release No. IA-1845; File No. S7-25-99
Dear Mr. Katz:
Salomon Smith Barney Inc. ("Salomon Smith Barney") appreciates the opportunity to comment on proposed Rule 202(a)(11)-1 under the Investment Advisers Act of 1940, as amended (the "Advisers Act"). Salomon Smith Barney is registered with the Securities Exchange Commission (the "SEC") as a broker-dealer under the Securities Exchange Act of 1934, as amended, and as an investment adviser under the Advisers Act.
Salomon Smith Barney supports the SEC's intention, reflected in proposed Rule 202(a)(11)-1, to provide federally registered broker-dealers with greater certainty as to the inapplicability of the Advisers Act to certain types of brokerage accounts. As described in more detail below, we also support the comments being submitted on proposed Rule 202(a)(11)-1 by the Securities Industry Association (the "SIA").
A. SPECIAL COMPENSATION
Salomon Smith Barney does not believe that proposed Rule 202(a)(11) would be regarded as creating a presumption that non-transaction based compensation for brokerage services is "special compensation" under Section 2(a)(11)(C) of the Advisers Act. However, we share the SIA's belief that this could be made more clear, either:
(i) by substituting the words "compensation other than transaction-based compensation" for the words "special compensation" throughout paragraph (a) of the proposed Rule, as the SIA suggests; or
(ii) by adding an introductory note to the Rule stating that the Rule is not intended to create any presumption about federally registered broker-dealers that receive compensation other than transaction-based compensation for brokerage services.1
B. DISCLOSURE
We support the SIA's view that subsection (a)(3) of the proposed Rule should be revised to more effectively further the policy of informing clients and other members of the public that non-traditionally priced brokerage accounts are not investment advisory accounts. We believe that this can be accomplished by revising subsection (a)(3) of the proposed Rule to read as follows:
(3) Advertisements for, and contracts or agreements governing, accounts for which the broker or dealer receives special compensation clearly disclose that the accounts are not investment advisory accounts.
We believe that the Rule should not require such accounts to be positively identified as "brokerage accounts" because, in our experience and as discussed in the SIA's comment letter, this terminology does not convey meaningful information to the average investor. Also, we share the SIA's belief that requiring the disclosure specified in subsection (a)(3) of the proposed Rule to be "prominent[ly]" stated may unduly restrict brokers' ability to effectively communicate the required disclosure. We believe that the alternative "clearly disclose" language provides brokers with appropriate flexibility, while at the same time adequately serving the disclosure policy underlying subsection (a)(3).
In the release proposing Rule 202(a)(11)-1, the SEC asked for comment on whether, instead of the proposed disclosure requirement contained in subsection (a)(3), broker-dealers should be precluded from relying on the Rule if they market brokerage accounts in such a way as to suggest that they are investment advisory accounts. We believe that broker-dealers should be able to reflect in advertising and contracts for brokerage accounts what is often a relevant fact for many brokerage customers: that investment advice is a component (albeit no more than incidental) of the services provided in connection with brokerage accounts. Where broker-dealers are in compliance with the proposed rule's applicable disclosure and other requirements, we do not believe that the rule's relief should be denied or made unavailable because investment advice is described in advertisements as one of the services available in connection with brokerage accounts. We believe that a broker-dealer's compliance with the "clear" disclosure requirement contained in subsection (a)(3) of the proposed Rule, revised as recommended herein, will provide adequate assurance that investors do not perceive an advertised brokerage account as an investment advisory account.
C. DISCRETIONARY ACCOUNTS
In the release proposing Rule 202(a)(11)-1, the Securities and Exchange Commission requested public comment on whether all discretionary accounts of broker-dealers, including both traditionally-priced and fee-based brokerage accounts, should be made subject to the requirements of the Advisers Act. We share the SIA's belief that the SEC should not take any action to treat commission-based brokerage accounts as investment advisory accounts subject to the Advisers Act solely because clients have decided to grant their registered representatives investment discretion over such brokerage accounts. We believe that investors do not perceive these accounts to be advisory programs or accounts.
A client who chooses to authorize a registered representative of a broker-dealer to legally act in his or her place with respect to the client's brokerage account usually does so as a matter of convenience. Clients who grant discretion in this manner are often difficult to contact due to their own schedules or travels and they therefore seek the convenience of having transactions executed in their brokerage accounts without prior approval. These clients are continually kept apprised of transactions for their account by written confirmations in accordance with Rule 10b-10 under the Securities Exchange Act of 1934. In addition, self-regulatory organizations recognize these special arrangements and impose special supervisory requirements which have proven effective at preventing and, where necessary, remedying abuses (see e.g., NASD Conduct Rule 2510, NYSE Board of Directors Rule 408). Imposing the Advisers Act on these longstanding brokerage arrangements could confuse investors as to the nature of the services they would be receiving, particularly where (as is often the case) a client granted his or her registered representative discretionary authority for a limited period of time (e.g., when traveling), thereby causing the brokerage account to slip in and out of Advisers Act regulation.
* * * * * *
We join the SIA in applauding the SEC for its commendable effort in this important area, and we appreciate the SEC's consideration of the comments set forth in this letter. Please do not hesitate to contact the undersigned at the respective telephone numbers set forth below if you have any questions or if you would like to discuss any of the comments contained in this letter.
Respectfully submitted,
SALOMON SMITH BARNEY INC.
By: /s/ Michael Rosenbaum
Michael Rosenbaum
General Counsel, Asset Management
(tel: 212-783-7418)
By: /s/ Dov Schechter
Dov Schechter
General Counsel, Retail Sales
(tel: 212-816-7069)
1 For an effective example of this type of note, see last sentence of introductory note to Rule 3a-4 under the Investment Company Act of 1940.