Subject: File No. S7-15-10

October 20, 2010

To whom it may concern:

I respectfully disagree with NASD decision to eliminate the use of "C" shares. I feel this does a blatant disservice to the client. There is no single fund company that has a monopoly on the best fund managers for every sector. I am able to lower my clients Beta (the quantitative measure of the volatility of a given mutual fund relative to the overall market) and increase their Alpha (the coefficient measuring risk-adjusted performance, considering the risk due to the specific fund rather than the overall market) by using various managers (the top manager in their investment sectors) from individual fund companies. This in turn then affects their Sharpe Ratio (the risk-adjusted measure calculated by using standard deviation and excess return to determine excess return per unit of risk). It also helps lower the standard deviation (the statistical measure of the historic volatility of a mutual fund, usually computed by 36 monthly returns) of my clients portfolio. This ultimately lowers my clients' volatility and potentially increases their return thereby justifying my position as the trusted and respected advisor.

If you do not understand how this would adversely affect my clients' I will proceed to explain. If I were forced to use all funds from one particular fund family to create a clients' portfolio for my clients it will without doubt increase my clients Beta, or more simply put, their volatility. A portfolio with increased volatility will have returns that suffer. The following explanation is as simple as I can put it for those not as trained as I am in asset allocation and modern portfolio theory.

Let us assume we begin the portfolio with $1000 dollars. Let us assume we receive a 50% return the first year. The second year we receive a -50% return. If we then calculate the average return my clients' average return would be 0. This is determined by (+50 +-50)/20. This is correct if we are looking for an arithmetic average, unfortunately returns for investments are calculated as geometric returns. What's a geometric return? I will explain. Let's take that same $1000 and take those same returns of +50% and -50%. In year 1 the $1000 grew to $1500 with a 50% return, but in year 2, $1500 at -50% return the money shrunk to $750. The two year average, which is really the geometric average and the way investment returns are calculated, is -13.40% annual return. I have attached a spreadsheet showing you the ramifications of what you are trying to do in real life. If you need clarification or assistance in understanding the affects of volatility on a portfolio and this illustration is not sufficient please feel free to give me a call at 701 232 4779 and I will go over it in detail so there are no misconceptions.

By you not allowing us to diversify amongst fund companies and only amongst funds within a particular family I would request that you put this in writing and send it to my clients and explain to them why I am not allowed to assist them to the best of my ability.

I understand that you feel managed accounts are better for clients, but I respectfully disagree and I will proceed to explain to you why I disagree. Let's assume a client had $1,000,000 dollars to invest and the client is 55 years old. Let's assume the client invests it in a "C" share. I will use exact numbers for you from this particular fund as provided by Morningstar updated October31, 2005. We will a so assume this is a taxable account and that no distributions will be taken. We will assume a life expectancy of 30 years, which really is immaterial, due to the fact that the "C" share is cheaper from day 1. The fee structure on the "C" share for the Eaton Vance Tax Managed Growth fund 1.2 is 1.72%. This includes everything including trading costs. We will also assume a managed account with a fee of 1% using the same fund with and "A" share. The "A" share fee structure is .97%. If you add the .97% and the 1% for the management fee my client is now paying 1.97% in fees. Let's now calculate which is will yield the client the most money at the end of any given period. We will assume 10% gross return, which again is immaterial, but we will use it, and then we will then subtract all fees to determine net return.

"C" share "A" share with 1% management fee
Year 5 $1,488,474 $1,471,370
Year 10 $2,215,555 2,164,930
Year 15 $3,297,795 3,185412
Year 20 $4,908,682 4,686,920
Year 25 $7,306,446 6,896,193
Year 30 $10,875,454 10,146,851

Given this Calculation it is much more advantageous for the client to be in a "C" share rather than a fee based managed account. The net advantage to the client is $728,603 with the "C" share. I don't know how much more simple this can be than to see it in black and white.

Another consideration overlooked by most companies is the deduction of fees or if the fees really are deductible. The average individual in a managed account is not able to deduct the fees they pay for investment advice as they file short form, there fore the 1% management fee is not deductible on their income tax filing. The individual in the "C" share is treated better in this respect also. If the individual files short form their fee has already been deducted from their returns, there by giving them the deduction, even though it is a phantom deduction, it is none the less, a deduction.

The biggest concern in this whole scenario of managed accounts versus "C" share mutual funds is disclosure. Let us consider the disclosure issue. Is in fact, the client getting more disclosure or not? The client signs a Mutual Fund disclosure statement that clearly and legally states they understand the implications of the purchase of a "C" share. In addition to the disclosure the rep is required to give the client a prospectus to which the client should read. It again clearly states the fees associated with all classes of shares including the "C" share. In the managed account the client signs an authorization to withdraw the fee (1% or more in most cases). The rep does disclose the fee and the client can see it being taken out every quarter or what ever the agreement states, however if the managed account has mutual funds held in the account there is no disclosure requirement to inform the client about the additional fees the mutual fund charges and the only way the client will find out is if they were to read the prospectus, which is in essence the same disclosure as the "C" share. So the question remains is this really full disclosure to the client on all fees associated with this managed account.

The real consideration here, through all this banter is the yield to the client. As I explained earlier in this writing the yield to the client is the best with the "C" share.

I believe the real concerns with this matter that should be fully explored are threefold. These three concerns are yield to broker(YTB), yield to broker dealer(YTB/D), and yield to client(YTC). Let us now explore all three concerns. In both scenarios the yield to the broker will be the same, 1%. The yield to the broker-dealer with regard to "C" share is 10% of 1%. The yield to the broker-dealer with regard to the managed account will be 10% of 1%, plus the 25 basis point trail on the "A" share mutual fund held in the account, thereby giving the total yield to the broker-dealer of 35 basis points or .35%. As we are well aware with the managed account the yield is significantly reduced to the client due to the fact that the total fee being charged to the client is approximately 25 basis points higher than that of a "C" share. The only winner here is the broker-dealer. The only loser here is the client, due to the loss of performance, and ultimately the loss of account value.

I do not think this is what the NASD, nor the SEC had in mind when they were looking at the evaluation of the "C" shares versus managed accounts. To me, this looks like a way for the broker dealer to increase its yield at the expense of its clients. It is for this reason that it is my feeling that if the client is willing to sign off to no maximum amount of "C" shares because it is in their best interest, they should be allowed too do so. Currently, "C" shares are legal in any numeration. There has been no determination that they are illegal by the NASD or the SEC or any court of law. The real issue here is the client and in virtually all cases the client benefits more with a "C" share than they do with a managed account.

The true analysis is to look at a realtor that sells a property. He can sell the purchaser the best property with the best location and the highest occupancy rate, the best vale and the best return on equity. The seller of the property pays the realtor 6%-7% upfront. Does the buyer now expect the realtor to manage the property for free after the sale? If that buyer wants the seller to manage the property they will not do it for free. They charge an additional fee of anywhere from 8%-12% annual management fee. Why am I as an investment advisory rep with a series 65 not entitled an annual management fee to perform essentially the same service with a "C" share? Could you please explain that to me? The question is "am I an investment advisor or an investment sales person"? Perhaps that is the first question that needs to be answered.

If you would like to rebut any portion of this writing with me or have any comments with regard to it please feel free to call me at 701 491 2583.

Thank You

Steven Stremick

Steven Stremick
Owner
Select Financial Services, LTD