Comments on Proposes New Regulations

General comments

No comments

Section I Comments - Use of Matching or Expert Networks

Received on June 21, 2011:

Comment from David Good, Chairman, Investorside Research Association (PDF)

Received on June 14, 2011:

Comment from Floyd S. Greenwood, Greenwood Research, LLC (PDF)

Received on May 23, 2011:

Comment from Tamara K. Salmon, Senior Associate Counsel, Investment Company Institute (PDF)

Section II Comments - Change in Registration Requirements

Received on July 1, 2011:

Hi Peter,

Per your request, I am sending you this email to express concerns that our Massachusetts-based investment adviser clients have in connection with the timing of the proposed changes to the Massachusetts institutional buyer exclusion (the "Proposed Changes"). Specifically, our clients are concerned that the Proposed Changes will be made effective before the newly adopted federal registration deadline of March 30, 2012.

As you are aware, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "DFA") repealed the "private adviser" exemption found in Section 203(b)(3) of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), applicable to investment advisers with fewer than 15 clients. On June 22, 2011, the Securities and Exchange Commission ("SEC") adopted new rules and rule amendments under the Advisers Act to implement provisions of the DFA. Among other things, these final rules extend the registration deadline for advisers currently relying on Section 203(b)(3) of the Advisers Act from July 21, 2011 to March 30, 2012. As such, these Massachusetts-based advisers have until March 30, 2012 to register with the SEC. The SEC extended this deadline to "assure an orderly transition to registration and . . . promote efficiency."

Of course, advisers currently exempted by Section 203(b)(3) must comply with applicable state registration requirements. Most Massachusetts-based private fund advisers relying on Section 203(b)(3) satisfy the institutional buyer exclusion from the Massachusetts investment adviser registration requirements. However, if the Proposed Changes in Massachusetts are adopted with a compliance date before March 30, 2012, these advisers would no longer satisfy the institutional buyer exclusion, and, because they are not yet federally registered, would have to register in Massachusetts for the short period between the compliance date of the Proposed Changes and March 30, 2012 (i.e., the date such advisers would register federally and, therefore, not be subject to the Massachusetts investment adviser registration requirements). That said, it is likely that most of these advisers would elect to register federally prior to the deadline established by the SEC, rather than register with Massachusetts for such a short time period. Consequently, contrary to the "orderly transition" envisaged by the SEC, these advisers would have a limited time period to prepare and file their registration documents, develop an Advisers Act compliance program and make numerous other changes to their business to ensure compliance with the Advisers Act. Coordinating the effective date of the Proposed Changes with the SEC rules (i.e. delaying the compliance date of the Proposed Changes until March 30, 2012) would provide Massachusetts-based advisers adequate time to take these necessary steps. I note that California issued an emergency order temporarily extending its private adviser exemption in recognition of this predicament, which can be found here.

Thank you for your consideration. Please feel free to contact me with any questions.

Respectfully Submitted,

Michael M. Jurasic

Received on June 24, 2011:

Comment from constituent of Will Brownsberger State Representative (PDF)

Received on May 24, 2011:

Comment from Matthew L. Schwartz, Esq., Government Affairs Counsel, Financial Services Institute, Inc. (PDF)

Section III Comments - Investment Adviser Discretion and Custody Requirements

Received on June 24, 2011:

Comment from Scott Brown, JD, MarketCounsel (PDF)

Received on June 24, 2011:

June 24, 2011

I believe that the proposed 950 CMR 12.205(5)(a) change (increasing the bond to $50,000) should be amended or eliminated, as it imposes an onerous and unfair burden on the independent RIA, while failing to achieve any measurable improvement for the Massachusetts client.

Abuses in the investment marketplace revolve principally around the marketing of special products. The products are either unlisted, or the advisor has (or has access to) a "special" proprietary method for generating one of the two grand illusions of the investment world: stable returns of around eight to fifteen percent, or home-run, double-digit returns that for some reason are easily repeatable.

The key to fraudulent practice is the portfolio statement. Since the proof of any strategy is in the pudding - the portfolio statement - a successful deception must control the statement in one way or another. There are principally three ways to fudge the valuation process.

The most direct method (as well as the most infamous) is to falsify the statements. When the advisor is also the custodian, valuations can be invented as necessary (Madoff, Ponzi, et al). Failing that, the advisor can try to substitute fake statements for true ones, such as the Manhattan Fund did.

Alternatively, one may employ fake valuations rather than fake statements. The advantage to this approach is that a third-party custodian is used, thereby making the client's assets theoretically "safe" and skirting the more delicate issue of producing faked statements. Here the deception depends on unlisted instruments of various types, often resource and land partnerships. Other examples include proprietary notes with "guaranteed" returns or yields, such as Allen Stafford is alleged to have sold. Or it may simply involve penny-stock manipulation on the bulletin board system, where month-end pricing can be easily influenced. The common-thread in this approach is the broker-dealer: for the scam to work, either a captive or crooked broker-dealer is needed for trade execution.

The third method is to churn the account for mark-up and commission revenue, while trying to confuse the client about the meaning of the statement. This of course is the most common complaint in the broker-dealer world, and involves abuse of trust. The victim may be elderly or sick, and susceptible to confusion or fear, or too busy, or too intimidated, or even too trustworthy to read the statements in a timely way until it's too late. Some are placed in wildly unsuitable or dangerous investments (that pay large spreads), but are slow to confront a "reputable" agent, or more likely a well-known broker-dealer name, in the belief (often heavily pushed) that it's all "part of the game" (e.g., the marketing of CDOs to pension and endownment funds).

The common thread here again is the broker-dealer, since it functions as the conveyor of revenue to the perpetrating fraudster.

In brief, losses nearly always involve a) an unlisted product; b) a Ponzi scheme where the fraudmaster has custody of the assets, or c) an unscrupulous broker-dealer. In the latter case, even "name" organizations are susceptible when the branch manager is flawed.

The proposed change to Massachusetts regulations 950 CMR 12.205(5)(a) doesn't address the issue of statement abuse, the Ponzi scheme problem or the regulation of unlisted products (which are certainly not evil by definition, only more easily abused). Nor does it address one of the more common seeding grounds of bad practice, namely the financially desperate broker-dealer. Any registered broker-dealer is already sufficiently insured or bonded to meet the requirement for a $50,000 bond. Removing the bonding requirement for custody and shifting compliance to a federal standard may make prosecution easier after the money is gone, but this will be of limited help to the victim.

There is an additional way to fleece victims, namely theft. An advisor - or accountant, or attorney, or anyone with power of attorney - may simply take client funds out of their accounts. Presumably this is why the bonding requirement is raised for advisors with "discretionary" authority.

However, the change fails to make an important distinction that is elsewhere present in securities law. For example, the law distinguishes between types of security: U.S. Treasury securities are extremely liquid, presumed suitable for every investor and can be easily bought and sold without the intervention of licensed broker-dealers. At the other end, limited partnerships require high standards of financial worth and can be very difficult to trade.

The distinction missing here is the one between full discretion and "limited" discretion. The granting of full discretion over a third-party account allows an entity to move funds in and out, as well as execute trades, on behalf of the account owner. This is equivalent to power of attorney and is relatively tightly regulated. Limited discretion (commonly called "limited trading authority" by clearing houses) allows trade execution only on behalf of a client, without granting the ability to move funds in or out of the account. This provides a high level of safety.

I do not personally know any RIAs who have, or would like to have, full discretion over client accounts. There is rarely any good business reason to have one outside of a trust department, which is another line of business. The regulatory hurdles are high, the potential liability is higher, and the potential for client dissatisfaction is even higher. We are content with limited trading authority (including my own RIA, which expressly refuses full discretion accounts as a matter of company policy).

Most of the RIAs I have met in the last few years have been victims of the downturn in the financial services business. They are now independent advisors with relatively small practices that provide some financial planning and portfolio management. The latter is typically based upon asset allocation and the use of mutual funds, exchange-traded funds (ETFs) and unit trusts. It's a friends-and-family, fixed-fee business where the clients benefit from high degrees of individual attention.

One of the advantages of the small advisor is that the corporate managed-accounts business is invariably affiliated with a larger organization that includes a broker-dealer and an asset management company. There is an inherent conflict in such an arrangement: the client is guided towards funds and vehicles that have a commercial arrangement with the corporate entity. Asset allocation practices very often reflect the product needs of the corporation (or registered representative), rather than the needs of the client.

A common question I hear posed at seminars for RIAs organized by fund management companies is, "why do you (the fund manager") have so little cash in the fund?" The answer is always the same: cash allocations are the client's decision. The fund manager is paid to invest in securities, and that's what they do. Understandable, but after 28 years in this business, including stints with very large companies, I can tell you that it is very, very difficult for the representative of any sizable investment manager to hold large amounts of cash in a client account. Cash doesn't earn revenue.

However, cash can provide the client with an excellent margin of safety during volatile or uncertain markets. Unfortunately, the client of the large investment corporation will almost never enjoy this advantage (excluding the elderly, who will usually have some minimum degree of cash equivalents, if not cash itself).

The proposed change imposes a much higher financial and regulatory burden upon our typical friends-and-family RIA. Insurance premiums will skyrocket, and the reinsurers of the bonding agencies will reflexively impose much higher standards of paperwork and liquid net worth upon the RIAs. It will unduly penalize them and drive many out of business.

The biggest result of the change will be to transfer a great deal of money to the reinsurers (who will demand higher premiums, yet pay out none of it) and the large investment companies making a push into the managed-account business. For the latter, this will represent a significant business advantage. The regulatory change does not touch them. Indeed, it almost appears as if the change was proposed by a very large local financial services business wishing to capture more client accounts.

How will the Massachusetts client benefit? The proposed changes do not address the principal types of fraud. They do not discourage or hinder unsuitable products, fraudulent statements or the crooked or desperate broker-dealer. Eliminating the bonding requirement for custody makes no sense at all. It fails as an exchange of regulatory burdens - raising the bonding requirement for discretion, eliminating it for custody - because custody is usually a third-party issue, except for the very large financial services corporation and the well-heeled crook (e.g., Stafford). The Staffords would even be freed from the imposition of bonding. If anything, this change facilitates fraud, particularly by organized crime.

The change will help deprive Massachusetts clients of investment advice more individually specialized to the client, and unbiased by corporate conflicts of interest. It will mean lower cash levels and greater portfolio losses during market downturns, which do no rate to end for some years to come.

Therefore I propose that the bonding requirement for custody be increased, in order to impose more private-sector scrutiny upon potential Madoffs and to present an obstacle to organized crime. I also propose that a distinction be made in bond requirements for full discretion accounts, which can easily be stolen from, and limited discretion accounts, so that the small-business Registered Investment Advisor is not needlessly financially penalized, or even driven out of business.

Thank you for your attention to my comments.

M. Kevin Flynn, CFA, RIA

Received on June 23, 2011:

To Whom It May Concern:

I would urge the Division to reconsider the proposed increase in the bonding requirement to $50,000 as it applies to small advisory firms, especially when no custody is involved. The increased costs, while seemingly small, do represent a burden for small firms.

It is in the public interest to keep the barriers to entry in this industry as low as possible. Small firms play an important role. Besides providing a livelihood for investment professionals who do not work well in large, bureaucratic settings, small firms often provide quality investment services to individuals of more limited means (there is a lot of wealth among a lot of people), who receive scant attention from the larger operators in the business. They can provide a vastly different experience, in terms of quality of service and, conceivably, results, for individuals looking for an alternative to the "cookie-cutter" approach found too often in large outfits.

Finally, to the best of my knowledge, the industry's problems, ethical and otherwise, have not emanated from small firms--"assets under management" is a poor criteria for judging quality and adherence to high standards of behavior.

Thank you.

Dennis Butler

Received on June 14, 2011:


There is a need for reform in the investment industry; I watch the discussions, and generally agree, with the small steps that are taken to move towards codifying common sense.

I am writing today to comment on the proposal to increase the bond coverage for advisers with discretionary accounts from $10,000 to $50,000.

My understanding of this bond is to protect investors from damages and to create an asset that can be used to cover those damages. I would be interested to know if these bonds are ever triggered or if anyone has ever successfully been covered by one. It does not make intuitive sense that $10,000 would go very far, but increasing the amount to $50,000 doesn't feel much better. Any rogue adviser worth his salt should be able to create a much bigger problem.

I just called my insurance agent. The increase in coverage would make my annual expense go from $150 to $750 a year. Ouch. I seem to recall being able to increase my auto insurance (coverage I might even use!) from $25,000 to $100,000 for something on the order of $25.

Thank you for your consideration.

Catherine Ryan, CFA
Cedar Rock Investment Advisors

Received on June 10, 2011:

I am currently working with a client regarding being self-insured versus the bonding requirement. If the regulations are modified, I do agree that there should not be a one shoe fits all. If the investment advisor has discretionary authority, $10K should be sufficient and those that have custodial authority should have more rigorous guidelines. The greater the risk, the greater the bond should be. I agree with others that state that it should be on a sliding scale based on the FMV that one manages.

Marcy L. Fink, CPA
Marcy L. Fink, C.P.A., P.C.

Received on June 8, 2011:

As an adviser/manager with approximately $17,000,000 of assets managed with discretion and $3,000,000 managed without discretion, and who does not take custody of any client assets, the increased cost of a $50,000 bond instead of the current $10,000 bond would be a significant hardship. The cost would increase from $150 a year to $750 a year.

Without custody of client assets there is very little opportunity for malfeasance, and no motivation for same. Clients receive monthly statements from the custodian in addition to quarterly portfolio reports from my firm. They receive trade confirmations within 2 days of execution. Clients pay for asset management services based on a percentage of the assets managed. The motivation for the manager is to preserve, protect and grow the clients' assets, and hence the fees they generate.

Fees charged to clients are acknowledged on their custodial brokerage statements as well as by separate billings sent from my firm. Except for the payment of regular management fees, the custodian, Raymond James Financial Services, does not permit movement of any funds or securities without specific, direct authorization by the client for each event.

Raising the bonding requirement to $50,000 contributes little or nothing to the protection or benefit of the client and causes a significant hardship to smaller firms with good compliance records like mine. I pray that the Securities Division withdraws the proposal to raise the bonding requirement to $50,000.

Thank you for your consideration.

Dennis M. O'Connor, President
Brae Head, Inc.

Received on June 8, 2011:

Comment from Gordon R. Williams, Jr., President and owner, Guardian Trust, Inc.

Received on June 8, 2011:

To whom it may concern:

The proposed five-fold increase in the bonding requirement will impose a significant financial cost on the businesses of smaller, independent investment advisers. With $5 million under management, I do not have the advantage of spreading overhead costs among a large asset base.

For those advisers without full power of attorney over managed assets, who do not collect fees in advance but rather only after services are provided and whose clients' assets are securely held under the custody of a third-party brokerage, I fail to see the benefit that such an increase in the bonding requirement provides.

The required coverage as proposed would only be 1% on the asset base of even the smaller advisers. This means that the bond might become completely exhausted following the claim of even one client. For larger advisers, the fraction of covered assets would be even more minuscule.

I would suggest that the bond be proportionate to the assets or number of accounts under management. Rulemaking should also consider those advisers who have taken proactive steps to minimize potential risks.

As far as investment risks, in my case, I offer my clients formal, written reviews of performance and management on a quarterly or semiannual basis in addition to periodic in-person meetings and telephone conversations, together building portfolios that are in accordance with clients' goals. As a CFA charterholder, the level of care, expertise, reasonable judgment and appropriateness that this involves, as mandated under the CFA Institute's Code of Ethics and Professional Conduct, are primary standards that minimize investment risks for my clients' accounts.

The penalties for potential misconduct and misappropriation under the Commonwealth's enforcement and the CFA Institute's disciplinary processes are of course good incentives for advisers such as myself to stay on the straight and narrow. We have not only our livelihoods and professional dignities at stake, but also our personal reputations. Therefore, raising costs for smaller advisers would be a disincentive for those who are trying their very best to do the right thing.

Eric W. Bright, CFA

Received on June 7, 2011:

Regarding the change in bonding requirements:

  1. The bonding requirement is a "one size fits all" rule. There is a great difference between firms with large, affluent, client bases managing 8+ digit portfolios and small firms such as mine with a limited number of clients and a small portfolio. A $50,000 bond represents 10% of the total assets I manage. It represents an insignificant amount of the larger firm's portfolio. If the purpose of the new rule is to increase the protection for the investor, it does essentially nothing for clients of a large advisory firm. Moreover, the cost of the bond is trivial to a large firm, but represents a very significant expense to a small firm such as myself. This bonding requirement discriminates against the small adviser who is trying help the small investor. I suggest that any bonding requirement be made size sensitive. Either have it for $10,000 for up to $25,000,000 in assets under management and $50,000 beyond that or, even better; make it a bond for $10,000 or .2% of the assets under management - whichever is greater.

  2. I think it is more important to require the bond on custodial accounts, rather than discretionary accounts. In the case of malfeasance regarding a custodial account, the bond can be used to compensate the investor for the misappropriated assets. In the case of a discretionary account, there is no misappropriation of the client's assets. While the client may suffer from bad investment judgment, the bond is not an appropriate answer to that problem. Investment results are not guaranteed. I believe the bonding requirements should be on custody not discretion.

Herbert Shanzer
Shanzer Management
IARD #: 124452

Received on June 6, 2011:

Dear Massachusetts Securities Regulators,

The proposal to raise the bonding requirement from $10,000 to $50,000 adds additional costs to Registered Investment Advisors while seemingly adding precious little in any real tangible benefits to the public...

Small businesses, especially in this industry have so many regulations and compliance costs, and while many of them in isolation are small, together they are an ever increasing burden.

This serves to lessen competition (harder for small companies to start and compete) and pushes business owners to hire less staff and take on fewer clients.

As a business owner and a CFP professional, I am strongly slowing my rate of client acquisition, I plan to raise my minimum AUM requirement and I am revising plans so as not to have to hire staff mainly because of the ever mounting cost of compliance, something that I know many people in my profession are doing. This adds to our country's unemployment rate and while I am in a position to hire staff, I will not in the current regulatory environment.

I know that the bonding change in isolation is very small, but regulators should resist adding costs of compliance without a clear business case that this will have a positive impact for the public. The companies that issue the bonds will surely profit, but will the investing public of Massachusetts have a net positive result?

As a bigger picture item: I personally would be willing to pay higher taxes (State & Federal) for a greatly simplified tax code and for more simplified business compliance; Too many compliance regulations, while based on good intentions of the regulatory bodies, do far too little to protect consumers and add far too much in terms of business costs.

Thank you for considering my comments,

Jonathan Lachowitz
JJK Investment Management

Received on June 6, 2011:

Thank you for providing the opportunity to comment on the proposed regulation.

The increase in bonding from $10,000 to $50,000 will have a direct negative impact to the bottom line of a smaller RIA firm in Mass. It is understandable that with the new SEC requirement that RIA firms under $100MM will now be state registered, thus requiring MA to revamp some of the regulations. However, leaving the $10k bonding on firms under $25MM would be fair (if not broken, do not fix it). For those new firms that the state will now be required to oversee ($25MM to $100MM) a graded bonding schedule would be fair and equitable for everyone.

Joseph Grella, CFP

Received on June 3, 2011:

Commentary on Investment Adviser Discretion and Custody Requirements. I am concerned about raising a bonding requirement to $50,000. It is an added cost and it is not a real deterrent from wrong doing. As a small firm, the increasing costs with no real public benefit become burdensome.

I would also like to comment that this proposed change starts to infer that custody and discretionary powers are equals. I believe many firms are diligently trying to avoid custody. However, an unintended consequence of this change may make it more feasible to just take custody.

Best Wishes,
William Harris, CFP

Received on June 3, 2011:

This email is being sent in response to proposed regulations that would affect RIA's operating in MA which would include my firm, Vision Financial Planning, Inc.

The proposal to increase the bonding requirement for discretion to $50,000 would place an unnecessarily high financial burden on my small business. I also do not believe that clients are in any way better served as a result of this fee increase.

With my operational costs escalating and fee revenues under pressure, I am strongly opposed to this extreme increase in required bond coverage.

Most Sincerely,
Phillips (Flip) Ruben, CFP
Certified Financial Planner
Principal, Vision Financial Planning, Inc., a Registered Investment Advisor

Received on May 30, 2011:

Investment Adviser Discretion and Custody Requirements

Background: The Division proposes to modify the minimum financial requirement for investment advisers found at 950 CMR 12.205(5). Among other changes, the proposal would raise the bonding requirement for discretion from $10,000 to $50,000.

Comment: As a Massachusetts registered investment adviser, the proposed increase in the bonding requirement from $10,000 to $50,000 would apply to my company under subsection (b). It would impose a nearly five folder increase in the annual cost for the bonding premium and impose a disproportionately large financial burden on my company as a small Massachusetts registered investment advisor.

As now proposed, the change does not take into account the magnitude of assets under management by the Massachusetts registered investment advisor. As a small investment adviser with less than $10M under management, this change is onerous and disproportionate to the financial risk of clients sought to be protected by the financial requirement of 12.205(5). At the very least the financial requirement should be proportioned to the magnitude of assets under management and/or the amount of fees paid more than six months in advance by clients. To do otherwise is to penalize small advisors with a regulatory requirement disproportionate to the client exposure for misappropriation or misconduct by a Massachusetts registered investment advisor and to unfairly benefit larger advisors, whose activities may expose more clients to a larger risk given the magnitude of assets under management and of fees received in advance.

Submitted: May 30, 2011 by Peter P. Twining, President

Hilltop Financial Consulting LLC

Received on May 16, 2011:

To Whom It May Concern:

I am writing regarding the correspondence from the Securities Division dated April 27, 2011 regarding proposed changes to regulations. Specifically, I am writing regarding the proposed to changes to Investment Adviser Discretion & Custody Requirements (excerpt from April 27th correspondence pasted below).

An increase in the bonding requirement for discretion generally makes sense, however in my opinion I think that investment advisers with less than $10,000,000 in assets under discretion should be exempted from the increase in the existing $10,000 bonding requirement. In my practice, in particular, I attempt to provide comprehensive wealth management services to individuals and families who are generally precluded from these services due to high minimum assets requirements. I can do this because I am able to keep my costs low, and thus can pass these savings along to my clients.

However, the increase in the bonding fee would add yet another cost to my business - a cost that does not directly improve services for my clients. The higher the costs are for businesses like mine to operate, the more those business will, at best, look more like the larger, more discriminating firms that I am trying to compete with and, at worst, be priced out of the market.

If that latter happens, middle class families will not have access to comprehensive wealth management services - or will have access to fewer and fewer options. On the other hand, the more "small" investment firms there are that tailor their services to families that are typically priced out of the market, the better the pricing can and will be for those middle class families who so benefit from the services.

I appreciate your office taking into consideration my recommendation to maintain the $10,000 bonding requirement for Investment Advisers with less than $10,000,000 in assets under discretion. I am willing to discuss my practice and the types of families I serve in more detail at any time. I can be reached at this email address, or by phone at 508-577-1037.

Brian C. Foley
BCF Law Group, LLC

Received on May 13, 2011:

In my view, this proposal would eviscerate any liability accorded by certain forms of business organization; require a substantial increase in the net worth of any existing and prospective investment adviser, and fail to differentiate by risk, most notably the size of investment firms. Keeping the segregated account option should be restored.

In researching surety bonds and the process of getting one, it became clear that almost all surety bonds issued to investment advisers require personal indemnification. Companies issuing these bonds require not only corporate statements, but also credit reports and personal financial statements of the net worth of the individual signing the surety bond application. And, many require spousal indemnification. Types of corporate structure, ie. Sub S, LLC, LLP and the like, simply do not matter because the bond is being issued on the strength of the individual's personal finances. The most glaring problems are the forced disclosure of personal financial information and the total lack of a corporate liability shield.

The general underwriting standards for surety bonds require that an individual have ten times the face amount of the bond in liquid assets and twenty times the face amount in net worth. Liquid assets do not include retirement plan assets of any kind. Only assets in the name of the person are counted; having assets in revocable trusts only complicates the matter mainly because these may not be easy for the insurance company to reach. Based on the current $10,000 requirement, this would mean that an applicant would need $100,000 in directly owned liquid assets and a net worth of $200,000.

If the proposed $50,000 standard were to be adopted, every investment adviser would be generally be compelled to have $500,000 in a liquid account and a net worth of $1.0 million. At this level, the size of the liquid account requirement might be reduced somewhat, but the point stands. These are very large figures and could possibly pose a large hurdle to many existing and prospective registrants.

Rather than picking one size of a bond for all registered investment advisers, a scale based on the size and loss experience makes much more sense. While it would be worth it to look at actual past losses relative to the size of assets managed, my sense is that a formula, probably rounded to the nearest one hundred thousand, would make sense. For example, consider using a formula that requires the current size surety bond, $10,000, for assets up to $1.0 million and then scale it up by 0.01 for every $10.0 million in assets. More thought and work needs to be done here, but it would be better to stand on a philosophy that the more assets a firm has under management the higher the surety bond should be.

Another important point would be the recommendation that the segregated account option should be retained as a choice. The size of this account should also be scaled to this size of the firm. By retaining this option, investment advisers would have the option of standing behind the liability shield in a corporate or partnership structure as many accountants, attorneys and other service providers presently do. Furthermore, no personal financial information would have to be disclosed nor a guarantee of personal indemnification be given. Advisers would be freed form the underwriting ratios of liquid and net worth.

My recommendation is that the Securities Division rethink this proposal. Any new proposal should afford investment advisers some liability protection and be sized according to perceived risk.

Thank you for the opportunity to comment.

Bill Holder

Received on May 6, 2011:

Good morning,

Regarding the bonding requirement. I would like to propose keeping it as is or on a sliding scale.

My reasoning: costs have been increasing for smaller advisors like me, who have had to follow the same regulatory requirements as larger firms with much more spendable money. And since some of my client-base are flat-fee retainer clients, I can not offset my cost increases with out raising my prices. My bonding costs would increase from $150/yr-$750/yr under this scenario (1.5% of bonded amt).

Some background: in the past 2 years, I have made some of my services more affordable for regular, middle-income people as both part of my mission to serve more in my city of Medford and also to make my services approachable. For example, I have some flat annual retainer programs which I have lowered the fee on. So my revenue expectations are lower.

Consequences: I have to decide whether I should raise my fees and just pass along these increases to clients or stop working with middle-income people and just serve the more affluent.

Suggestion: keep it at $10,000 for advisers under 15 or 20M of discretionary assets then slide scale it up.

Thanks for listening.


Chris Grande

Received on May 5, 2011:

If I might, I would like to comment on the prospective new regulation that would require a $50,000 bond for firms with discretionary accounts. First, I think there is a huge difference between having discretion over trading and discretion over check writing. If I were guilty of churning and lost money for the account, the bond is not going to cover my poor judgment. Presumably, the bond is only going to cover if I were to somehow abscond with the funds. I can understand the need for a bond, if I am a trustee on the account and have check-writing capability. But unless the bond will compensate for bad trades, I do not understand the need for covering trading authority.

Second, being a very small money manager, I am sensitive to costs. Heretofore, I have absorbed all of the costs myself, but at some point I have to pass them along to clients. Neither I nor they would be happy with this development. Maybe I am particularly sensitive at the moment but before you came yesterday, I just paid $425 for my annual CFA dues. I receive no benefit today from being a CFA, but in some small way I think I am helping the profession and just maybe helping educate some new people. But a bond is just subsidizing the bad guys. I appreciate that to the big guys paying $425 for CFA dues and $500 or so for a bond and $xyz for ABC is not a big deal, but for the small guy these fees are a big deal.

Peace be with you,

Skip Wells

Received on May 4, 2011:

Increasing the bonding requirement 5 times the previous level seems a bit harsh. The cost of a $10,000 bond averages $150 per year. Increasing to $50,000 will now cost between $600 and $1,000…depending on the surety company. Any of us that have been state regulated have a relatively small amount of assets under management and this extra cost will have to be spread over that small client base i.e. the cost will be disproportionately high for our clients compared with Advisors that had been federally regulated.

I would suggest a $25,000 bond at a maximum.

Jerry Siver, CPCU

Received on April 28, 2011:

My only response is that this proposed increase in bonding poses a 5 fold increase in cost for this requirement. That's a pretty dramatic jump. You might consider at least phasing it in to effect.

Thanks for the opportunity to comment.


Received on April 27, 2011:

We understand the need to increase the surety bonding requirement in order to accommodate the state's oversight of larger firms. However, an increase from $10,000 to $50,000 for ALL SIZE FIRMS is not fair or reasonable and creates a burden especially for smaller firms. We have learned from our insurance agent that such a change would increase our premium 5 fold! Further, why should a small firm (AUM $25 million or less) have to increase their bond when the $10,000 requirement has worked to date for those size firms? The state should adopt an appropriate level of bond dependent upon the size of the firm. Firms with assets greater than $25 million should have a larger bond requirement and certainly those with $100 million AUM should have an even larger bond requirement. Without such a scaling, the $50,000 bond = .20% of AUM for a $25 million firm versus only .05% for a firm with $100 million AUM. One asks how such a small bond can protect investors whose advisor has $100 million in assets?
We ask that the Securities Division reconsider this proposal and adopt a surety bond value which scales to the AUM of the firm.

Diane E Wood CFA

Section IV Comments - Updated References from NASD to FINRA

No comments

Section V Comments - Update References to Forms U-4 and U-5 and to Sections of Form U-4

No comments

Section VI Comments - Update Fees to Match Sec. 178 of c.184 of Acts of 2002

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Section VII Comments - Stock Exchanges

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Section VIII Comments - Technical Correction to Fee Charts

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Section IX Comments - Performance Based Fees

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