(The news featured below is a selection from the news covered in the Federal Securities Law Reporter.)

Glassman Says Better Communication Would Reduce Customer Complaints 

SEC Commissioner Cynthia Glassman was asked at a recent broker-dealer conference hosted by the Financial Services Institute to address how to create a good relationship with the SEC. The real issue, she said, is maintaining a good relationship with one's customers. Commissioner Glassman emphasized the importance of ethics and honesty, as well as disclosing any conflicts of interest. Clear and understandable communication with customers is a key to success, she said, and a commitment to meeting not only the letter, but also the spirit of the securities laws.

Ms. Glassman reviewed the fiscal 2005 enforcement actions in preparation for her remarks and reported that 15 percent of the 629 actions were against broker-dealers. The violations varied, but certain conduct was recurring. While some of the practices constituted outright fraud, Ms. Glassman said that other cases involved conduct that would was not illegal, but the broker violated the securities laws by failing to disclose pertinent information to its customers.

One example was the failure to disclose the receipt of revenue sharing payments from a select group of mutual funds that a firm recommended to its customers. The failure to disclose this conflict of interest violated the securities laws, Ms. Glassman explained, because investors were denied material information about the full extent of the conflict that could affect the transactions recommended to them by the firm.

Another example, from a settlement in 2004, was the failure to deliver mutual fund breakpoint discounts to customers. The SEC recognized the operational challenges to ensuring that customers received the applicable discounts given the large number of mutual funds offering different discounts based on different criteria, but Ms. Glassman said the broker-dealers were responsible for exercising due care in providing the breakpoint discounts based on information that was reasonably ascertainable. If the broker-dealers had clearly disclosed the relevant information, Ms. Glassman said they would definitely have a better relationship with the SEC.

For the fiscal year that ended September 30, 2005, she said the most complaints involved broker-dealers, which is consistent with earlier years. The largest category of complaints related to transfer of account problems. Ms. Glassman said if brokers would take the time up-front to analyze any difficulties that may arise in transferring accounts, inform the customer of any anticipated problems and the options for dealing with them, they could manage their customer's expectations. Clear communication could reduce or avoid this otherwise predictable complaint, according to Ms. Glassman.

The next largest category of complaints related to unauthorized transactions. Ms. Glassman said the real issue may be that a broker is acting within its authority to sell securities to cover a margin call, but the customer does not understand how the margin account functions. If a broker takes the time to inform the customer of the rights and obligations between the two, it may resolve this area of complaints, in her view.

Another category of complaints involved redemptions or liquidations. Ms. Glassman said this is a growing complaint that defies ready explanation. She surmised that it may be due to back-end fees or large surrender charges that a customer incurs without understanding his or her liability for them. She once again suggested that many of these complaints could be avoided with clear up-front communications.

Problems involving account errors may be based on a customer's inability to understand the information in their statements, according to the commissioner. Complaints involving unsuitable recommendations largely reflect market performance, she said. Except for those situations where a broker has actually made an unsuitable recommendation, she said the best defense against unfounded complaints is to maintain accurate records consistent with the broker's compliance obligations.

In reviewing the most frequent complaints over the past year, Commissioner Glassman said it seemed clear that many enforcement actions or complaints could be reduced if brokers had taken the time to inform their customers and to keep them informed through clear disclosure and communications. If brokers do what is right for the customer and provide the information that the customer needs to make an informed decision, that would help to create a good relationship with the SEC, she said.