We applaud the SEC's efforts in connection (see editor's note)with this proposal, as well as steps it has taken since itsoriginal proposal, to improve price transparency and preventabusive sales practices in the fund industry. The Commission'sdecision to ban directed brokerage eliminates a form of salescompensation that simply is not susceptible to the marketdiscipline provided by full disclosure or the investor protectionprovided by regulatory oversight. While we believe the Commission'sre-proposal makes strides toward meaningful price transparency formutual funds, we continue to have significant concerns in severalareas. In particular, we are concerned that a number of the stepsthe Commission has proposed to simplify the disclosures haveundermined their ability to serve their intended purpose. Withcomparative information removed, the documents no longer giveinvestors any sense of the extent of the conflict of interest atwork or how the costs compare to those of other funds. Because12b-1 fees are grouped with annual operating expenses, thedisclosures even fail to make a clear distinction between what theinvestor pays for the services of the broker in selling the fundand the costs associated with operating the fund. Finally, byallowing quantitative information about revenue sharing payments tobe relegated to the Web site, the proposal risks encouragingincreased use of a compensation method that, like the now banneduse of directed brokerage, encourages brokers to recommend fundsthat are not in their customers' best interests. All of these keyshortcomings relate to two general problems with the Commission'sapproach to this issue. First, the Commission appears to assumethat disclosure requirements must be designed to conform toexisting compensation practices, even where those practices aredemonstrably harmful to investor interests. As a result, thequality of disclosure is undermined in order to avoid imposing"excessive" costs on brokers. Second, the Commission has approachedthis issue as a mutual fund issue when it is, in fact, primarily abroker-dealer concern involving issues with implications far beyondthe sale of mutual funds. As a result, investors will getinformation about only those conflicts of interest that bias abroker's recommendations of mutual funds (and related productscovered by the rule) and will not receive information about similarconflicts that may bias the recommendation of those products notcovered by the rule. The Commission's approach to compensationdisclosure seems to be based on a fundamental misunderstanding ofthe relationship between the way in which fees are disclosed andthe way in which broker compensation is set. Fee disclosure rulesand fee arrangements are not independent variables. Rather, theyare mutually dependent variables that continuously interact. Thecurrent complex compensation structure for brokers is, in thatsense, a direct result of the lack of effective disclosure. Hadbrokers been forced from the outset to disclose their compensation,they would likely have been considerably less inclined to adoptcompensation practices that were inherently costly to disclose. Wehope that the Commission will continue its efforts to protectinvestors from inferior investment products and abusive salespractices that have proliferated in this area. When brokers arguethat detailed, written disclosure of the mutual fund feearrangements would be too burdensome and costly because of thecomplexity of the compensation arrangements, they are in effectarguing that they, rather than market forces, should determine thestructure of compensation arrangements. Similarly, their argumentthat differential compensation disclosure would be too costly andburdensome is an implicit acknowledgment that current compensationschemes could not survive if required to operate in a trulymarket-driven (fully disclosed) environment. But fee arrangementsthat cannot survive transparency-by reason of cost, complexity, orother factors-should be relegated to this secondary position, whereit is significantly less likely to be reviewed by the investor.Thus, sound principles of disclosure should dictate that investors'attention is actively directed to the most critical information,while only requiring that less critical, albeit important,information be easily accessible. Although the problems that led tothe proposal of this rule arose in the context of mutual fund salesabuses, similar costs and conflicts apply to other productsrecommended by brokers. Because the Commission has approached thisas a mutual fund issue, rather than as the broker-dealer issue itreally is, the proposal creates a disclosure disadvantage formutual funds compared with these other products. The SecuritiesIndustry Association has reportedly argued that, if brokers aresubject to "burdensome" disclosure obligations with respect tomutual funds, they will simply recommend other products instead.Brokers have made similar threats in the past -arguing, forexample, that they would stop selling wrap accounts if thoseaccounts were regulated as advisory accounts -and failed to followthrough. However, the very fact that the brokers' trade associationopenly professes that brokers would abandon the sale of mutualfunds, regardless of their customers' best interests, rather thandisclose their costs and conflicts of interest is itself the bestargument for why these disclosure obligations should apply acrossthe board. Since the primary purpose of the rule proposal is toensure that investors get adequate information about sales-relatedcosts and conflicts of interest, and since these costs andconflicts are not unique to mutual funds, there is no logicalreason why the disclosures should apply to only a sub-set of theproducts brokers recommend. The solution, however, is not to waterdown the current proposal to the point of meaninglessness -byrelegating all but the most general information to the Web site andeliminating the requirement for affirmative disclosure - nor is itto put the current rule proposal on hold while its requirements canbe extended to other product areas. Instead, we urge the Commissionto make a commitment to proceed immediately with comprehensivereform of broker-dealer cost and conflict of interest disclosure.As part of that comprehensive reform, the Commission shouldconsider what information should be provided at the outset of therelationship, to help the investor make an appropriate selectionamong financial professionals, and what should be provided inrelation to a specific product recommendation. Notwithstanding ourcriticisms of the re-proposal, we appreciate that requiring brokersto provide their customers with basic information about funds atthe point of sale is by itself a watershed event in the history ofthe regulation of mutual funds. Our criticisms are driven, not by afailure to recognize and appreciate that progress, but by a desireto make the most of this possibly unique opportunity to improvethese critical disclosures.