Pennsylvania Investment Observer

Repapering

by Daniel J. Nestlerode

Until the advent of September 11th, the Patriot Act and the rush of new regulations as a result of Elliott Spitzer and others, repapering was probably related to a "honey-do" list and the wall paper in the living room. But with all the changes in the regulation of the brokerage community, repapering has now become a regulatory term and relates to the requirement to complete new applications and forms for every brokerage client every three years. It doesn't matter if any of your data changed. Your broker must see that all your paperwork is renewed every three years. Now you know what we mean by the term repapering.

Part of the repapering process is a new form that requires clients to determine their investment objectives in order of importance - growth, speculation, income, preservation of capital or aggressive income. The government auditors will then audit each client's paperwork and determine if the investments in an account are consistent with the stated investment objectives for that account. This sounds wonderfully straight forward. However, in application it is fraught with problems. Clients, as a group, are not as consistent with their investment objectives as you might imagine. For instance, if you are retired and invested for income, you might be drawn to a story about a new drug coming from a relatively unknown pharmaceutical company that has great potential. It pays no income and is essentially a speculation. Still the potential for a nice gain seems possible so you call your broker and try and buy some shares. No matter that this new purchase is inconsistent with your investment objective, you just wanted to take a flier on the possibilities. This morning I talked such a client out of buying Vertex Pharmaceuticals and their hepatitis C drug as headlined on CNBC. Hopefully, the stock will not rise sharply and she will forget the conversation. On the downside, if the company surges higher, she will tell me that I cost her money, regardless of her investment objectives.

Someday the paperwork will catch up with the way that people really operate in the world. For now, it is a short handed representation of a give situation at a particular point in time. And it may be woefully inadequate to tell regulators, brokers or auditors what is really happening over time. Perhaps someone will recognize that client investment objectives change with the level of the stock market, the news headlines and the changing interpretation of what all this stuff means. Nevertheless, you will get to fill out all new paperwork every three years.

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