Date: 12/30/96 7:42 PM This e-mail contains the comments of PrimeVest Financial Services, Inc. regarding the Proposed Amendments to SEC Rules 17a-3 and 17a-4, as published in the Federal Register on October 28, 1996. SUMMARY The proposed changes to SEC Rules 17a-3 and 4 are duplicative in part and contradictory in part of NASD and NYSE recording keeping requirements. The proposed changes do nothing to benefit individual customers. Even the SEC in the explaining the purpose of the proposed rules states only that the intent of the proposed rules is to "make and retain additional records that would be valuable to state regulators during examination and enforcement proceedings." Many of the proposed requirements are virtually impossible to comply with and as such will not benefit customers at all but certainly will be valuable to state regulators "during examinations and enforcement proceedings" in finding endless violations of an unworkable record keeping requirement. National Securities Market Improvement Act. In Section 103 of the National Securities Market Improvement Act Congress clearly preempted any state law or rule which establishes record keeping or financial or operational reporting requirements for brokers. This Congressional action is a clear indication of Congresses understanding that the modern and sophisticated financial markets which exist today are too large and complex to regulate piecemeal by each state. Consistent with this understanding is the reality that modern securities firms also must centralize certain function in order to ensure that those functions are performed properly and in accordance with applicable regulations and rules. The maintenance of proper records is a prime example of a function in a modern securities firm which can be accomplished on a massive scale very effectively if done centrally. Efforts to decentralize the maintenance of records, such as those discussed herein, jeopardize the ability of accurate responses to customer inquires and compromise the ability of a securities firm to ensure accurate and consistent information at all its branch locations. Centralized information can be summarized and relayed to a branch office for access by a state examiner in a matter of minutes via telephone and computer access. Decentralized information is far more prone to error and certainly more difficult to organize and provide to a regulator. Analysis Blotters and Memoranda - Rules 17a-3(a)(1) as proposed would require certain records be maintained at "each local office". "Local office" is defined at 17a-3a(f)(2) so broadly as to include virtually any location were a register representative talks to a customer. The NASD has a well recognized definition of "branch office". The attempt to create a new category of "office" adds nothing but confusion. In an effort to control the maintenance of records in a proper fashion the entire securities industry has focused on efficient and tightly controlled central recording keeping. By centralizing record keeping at a securities firm home office the quality, accuracy, currentness and responsibility for books and records is immediately available for inspection. Decentralizing record keeping functions only duplicates the process and creates a regulatory burden to the provider of the regulated service with no offsetting benefit to the consumer of the regulated service. Additional Records Concerning Associated Persons - The level of detail mandated by proposed rule 17a-3(a)(20) is extremely burdensome with no apparent advantage to anyone other than a plaintiffs attorney. For example, (20)(v) requires copies of "all written inquires" concerning the associate person. The plaintiffs bar and an aggressive examiner are given absolutely no limits on their creativety in this matter. A more ludicrous example is provided at (20)(i) which requires that all registration application forms be "manually executed". The definition of "executed" in Blacks Law Dictionary provides "completed" as the first definition. Therefore the proposed rule would arguably make the accurate and truthful completion of a U-4 by use of a typewriter a violation of federal law. Additionally the requirement in 17a-3(a)(21) that the member designate the local office where each associated person conducts "the greatest percentage of such associated person's business..." is nonsensical. Apparently a mathematical calculation must be completed for each associate based on their business at a local office. Is this total dollar volume, total commissions, number of shares, or number of hours or maybe number of customers seen or number of customer trades. What if the "greatest percentage" of business is done at a location that is not an NASD branch office or a branch office as defined by applicable state Blue Sky law. (This would not be an uncommon result for insurance representatives who also have a securities license) Account Forms - The commission has proposed in the amendments to 240.17a-3(a)(16)(ii) that the account form gather certain required customer information. Included within this information are "age, marital status, number of dependents, and educational level". I would submit that none of the aforementioned items are directly relevant to monitoring suitability (certainly the only possible legitimate use). The monitoring of suitability must focus on the financial wherewithal of the customer and the customer's appreciation of the risks inherent in any investment. A broker-dealer cannot discriminate against an individual based upon their marital status by denying the individual an account or access to a particular investment if that individual has the financial means and sufficient understanding of the investment and its associated risks. The same is true of age, number of dependents, and educational level. Information which is systematically collected, but can never be used by the broker dealer, is merely a lighting rod for litigation. The costs of frivolous litigation ultimately are born by the investing public. Thus in order to avoid the appearance of denying qualified individuals access to financial markets based upon the group they fall into (old, single, divorced, or parent) the requirements for documenting information addressing age, marital status, number of dependents, and educational level should be deleted from the proposes rules. The proposed rule 17a-3(a)(16) seeks to use the term "speculation" as a tool to measure suitability. The term and the very idea of "speculation" is like "obscenity" and "beauty". All three are truly in the eye of the beholder. ALL investments are at some level "speculative" in that the investment is made in the hope - guess - reasoned belief that the value of the investment will increase. Regardless of the sophistication of the investor or the sophistication of the tools used to determine a "proper" investment, absent inside information, all investments are speculative in nature. Just as ALL investments carry some measure of risk. A definition of speculation promulgated by the SEC does nothing to improve the appreciation or understanding of risk by the customer. A customer whose "wee gee" board or state of the art trading software told them to buy Netscape Communications Corporation (NSCP) at $171.50 on December 6, 1995 may have honestly believed that the transaction was a "sound investment" and therefore not "speculative". Furthermore, the requirement of recording on the account form a percentage of investment capital to be invested in "speculative" trades does nothing to protect a customer but does create a nice trap for the unwary. A customer who originally indicates 50 % as speculative can change that percentage any time they want should they wish to place a higher percentage of their capital in what they believe is speculative. However, should they succeed in placing the trade without updating the account form they have a very nice law suit waiting as a hedge against their possible trading loss. Historically the duty to update customer information has resided with the party that best understood the customer information - the customer. However, 17a-3(a)(16)(i) and (ii)(C) shift that burden to the broker-dealer. The cost of contacting every securities customer in the world at least annually, in writing, to solicit updates to customer information and then to provide a revised account form to every customer who indicates a change (which if answered objectively and candidly will probably be a majority of security customers) is staggering, and will be passed on directly to all customers through higher fees. A less burdensome means to ensure that customer information is current is to place the duty to update customer information with the person who knows it best - the customer. A statement on the account form that the customer should update the broker-dealer allows the customer to ensure that the information is up to date (not merely annually). Complaints - Proposed rule 17a-3(a)(17) which adds a requirement to maintain files of written materials relating to customer complaints is duplicative of NASD Rule 3110. An SEC rule that duplicates an NASD rule does two things, 1) Wastes taxpayer dollars, 2) Creates confusion. If the SEC rule is a good idea then the NASD rule should be deleted concurrent with the effective date of the SEC rule. Proposed rule 17a-3(a)(17) would require that written memoranda of oral customer complaints be maintained. "Oral complaints" are normally not well thought out and usually express more emotion over a trading loss than concern over actual malfeasance or misfeasance. This requirement extends to any oral complaint that alledges misrepresentation. Virtually all oral complaints allege some sort of misrepresentation. Thus all oral complaints must now be recorded. The exceptions to this requirement at (17)(ii) are useless in that they are subjective ((A) refers to "clearly" the result of a "misunderstanding", (B) refers to "fully explained" to the customer) Any broker who receives an oral complaint will be forced to record it because there is no way to prove "clearly" or "fully explained". The requirement of proposed rule 17a-3(a)(17) that the broker provide routine notification in account statements that customer should set their complaints in writing is actually a more effective way to ensure that customer complaints are properly raised. The NASAA fear appears to be that brokers are talking customers out of filing written complaints. If a broker dealer who has an unhappy customer can talk them out of submitting a written complaint, as NASAA alleges, then surely that same broker dealer can smooth talk the customer out of an oral complaint - what oral complaint? Reminding the customer via a notice in account statements to submit complaints in writing gives the customer the CONTROL over the handling of the complaint rather that the broker dealer who, according to NASAA, will try to cover it up. Other Required Records - Proposed rule 17a-3(a)(19) in a manner similar to other sections of the proposed rules uses inarticulate, subjective terms to create a legal requirement. This section requires reports to identify "frequent" trading or "unusually" high commissions. Proposed rule 17a-4(b)(10) would require that a broker save for 3 years all paper or electronic records use to "offer or sell" any security , including documents intended exclusively for internal use. In that the very nature of a broker's business is to "offer" securities you can be assured that the plaintiffs bar, definately, and possibly aggressive examiners will claim that all written material including notes to operational files, emails, etc, without limit must be maintained for three years. This requirement is so broad as to make the deletion of any email, regardless of its topic, illegal. It is impossible for any broker-dealer, regardless of the extent of their desire, to comply with proposed rule 17a-4(b)(10). Record Form And Access - While PrimeVest, and I am confident no other reputable broker, would deny legitimate access to appropriate books and records to a state securities examiner, the idea of allowing each state to create its own access rules would appear to contradict Congressional intent evident in passage of Section 103 of the National Securities Markets Improvement Act of 1996. Local Office Access: Designation of Principal - Proposed rule 17a-4(k) requires that each broker-dealer designated a principal for purposes of books and records. Yet the proposed rules also require certain records to be maintained at each "local office". I would submit that in a broker-dealer of even modest size it will be impossible to find an individual honestly willing to be singularly responsible for books and records which are required to be maintained at all "local offices". I hope the foregoing comments are of assistance to you. Thank you for your consideration. Kevin P. Maas Assistant General Counsel PrimeVest Financial Services Inc. 400 First Street South St. Cloud, Minnesota 56301-3600 800-245-0467 fax - 320-656-4002 E-mail kmaas @ primevest.com