From: Tina Nofzinger [tnofzinger@oberlinonline.com] Sent: Monday, April 12, 2004 5:10 PM To: rule-comments@sec.gov Subject: File No. S7-06-04 April 12, 2004 Jonathan G. Katz, Secretary U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-0609 Re: Confirmation Requirements and Point of Sale Disclosure Requirements for Transactions in Certain Mutual Funds and Other Securities (File No. S7-06-04) Dear Mr. Katz: Oberlin Financial Corp ("OFC") appreciates the opportunity to comment on the proposed rules referenced above. OFC is an introducing broker-dealer clearing through three major clearing platforms. In addition, the firm's representatives do a substantial number of transactions directly with multiple product sponsors. While OFC is submitting this response in order to meet the April 12, 2004 deadline for comments, we respectfully request that, due to the complex nature of the proposal, the Commission consider extending the comment period to enable firms to provide more substantive comments. Proposed Point of Sale Disclosures (Rule 15c2-3) The point-of-sale disclosure element of the proposed rules would require broker-dealers to provide a new set of disclosures at or prior to the purchase of a "Covered Security". While OFC supports improved disclosure for investors, we believe that the cost of this proposal to both firms and investors will far outweigh the actual benefits of the extra disclosure. Currently, the prospectus serves as the primary disclosure document for Covered Securities. By placing emphasis on supplemental disclosure documents such as the proposed point-of-sale disclosure form, the Commission risks discounting the perceived value of the prospectus. The net effect of the new disclosure may be compared to "highlighting" a prospectus - a practice which is rightfully prohibited because it draws an investors' attention to one aspect of the product, such as cost, and potentially dilutes equally important issues such as risk factors, investment objectives, etc. In order to provide the required information for the proposed point-of-sale disclosure, broker-dealers such as OFC would need assistance from mutual fund companies and clearing firms. As proposed, the rules do not require these entities to provide the requisite information. If the Commission decides to move forward with this rule, responsibility for provision of necessary data should be extended to these additional parties, with more specific guidance regarding which entity is responsible for providing what data. Finally, the proposed rule provides that a purchase made prior to delivery of the point-of-sale disclosure will not be treated as a legally binding order until after the disclosure has been provided. At that time, the broker-dealer must also disclose to the customer that he or she has the right to cancel the order. This element of the proposed rule is particularly unsettling, as it does not place a time limitation on the customer's right of rescission. The implications of this "open-ended" cancellation provision could be significant, particularly in cases where the omission is not immediately discovered. Confirmation Disclosures - Rule 15c2-2 The confirmation disclosures proposed under Rule 15c2-2 are redundant with the proposed point-of-sale disclosures. OFC believes that these proposed requirements also fail to adequately consider the current system for confirmation delivery. Most broker-dealer firms rely on either a clearing firm or product sponsor to meet confirmation delivery requirements. By imposing confirmation disclosure requirements that are specific to each broker-dealer, and at the same time placing full responsibility for delivery of said disclosure on the broker-dealer, the Commission is essentially asking firms to internalize a complex process that they have heretofore relied on third parties to fulfill. Alternatively, since the proposed rules do not place specific obligations on clearing firms or product sponsors, these entities could voluntarily agree to update their systems to assist broker-dealers in meeting the proposed requirements. Either scenario involves significant initial and ongoing costs. The duplication of information between the point-of-sale disclosure and the confirmation disclosure also increases the potential for investor confusion. For example, in certain circumstances (e.g. transfer of assets), the point-of-sale disclosure may necessarily contain "estimated" values. In these instances, material differences between the point-of-sale disclosure and the confirmation will certainly confuse the investor, and may even result in allegations that they were misled at the point-of-sale. Add to this the requirement that firms provide "negative disclosure" when they have nothing to disclose, and you risk creating a disclosure document that has more potential to obscure than to enlighten. Cost of Proposal The Commission has estimated that implementation of Rules 15c2-2 and 15c2-3 would cost the industry at least $1.3 billion initially, or approximately $241,000 per broker-dealer firm. Annual recurring costs are estimated at around $3 billion, or approximately $540,000 per firm. These estimates focus on the cost of reporting the prescribed data in the point-of-sale and confirmation disclosures, but do not appear to incorporate the substantial costs that firms will incur to implement compliance and supervisory systems that will enable them to adequately monitor delivery of said disclosures. OFC believes the Commission has significantly underestimated the actual cost of this undertaking. OFC supports full disclosure to investors regarding the out-of-pocket costs they incur in purchasing a Covered Security. These costs are currently reflected in one of two places: the product prospectus or product performance. If the Commission believes that these sources are inadequate, it would be far more cost effective to expend resources to improve existing disclosure documents than to create new ones. Additionally, since product sponsors ultimately control what costs are incurred, it is only fair that they be required to bear a proportionate share of the disclosure burden. Summary In summary, OFC does not support the proposed rules in their present form. The rules as proposed would create substantial technical, financial and operational challenges for the industry, and do not appear to provide a corresponding level of additional benefit for investors. Once more, OFC urges the Commission to extend the comment period for at least ninety days to enable firms to more adequately respond to the issues raised. Again, thank you for the opportunity to comment on this important proposal. Sincerely, Tina M. Nofzinger Director of Compliance Oberlin Financial Corp.