March 15, 2004

Submitted electronically to
rule-comments@sec.gov

Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.,
Washington, D.C. 20549-0609

Re: 1st Global Advisors, Inc.'s comments on SEC proposed rule IA Code of Ethics
File No. S7-04-04

Dear Mr. Katz:

1st Global Advisors, Inc. ("1st Global") is a federally registered investment adviser conducting business in all domestic jurisdictions, with over 760 Investment Adviser Representatives offering financial planning services through nearly 450 locations. Each such individual is also registered with an affiliated broker-dealer, 1st Global Capital Corp.

As the Chief Executive Officer of 1st Global, I appreciate the opportunity to submit comments on proposed rule 204A-1 under the Investment Advisers Act of 1940 and related rule amendments promulgated by the Securities and Exchange Commission ("Commission").

We are opposed to the rule proposal in its current form because it fails to account for business structures that do not fit the Commission's general notions about the typical business structure of a Registered Investment Adviser;1 specifically, we oppose the proposal because of the lack of flexibility within the portions of the proposal that address conflicts arising from personal trading by advisory personal. The proposal is over-inclusive because it affects advisory personnel beyond those who are in the limited class of being in possession of material nonpublic information, which can be exploited for personal benefit. The proposal requires the blanket reporting of personal securities transactions by virtually every person who is associated with a federally registered investment adviser without regard for the nature of the business of that registered investment adviser or the true nature of the information in the possession of such person.

The Investment Advisers Act of 1940 ("Advisers Act") and many of the rules and regulations promulgated under the Advisers Act possess a common structural weakness. They reflect a general failure to recognize a difference between Registered Investment Advisers who are "true money managers" (i.e., an investment company manager, a manager that conducts proprietary research, a manager that conducts block trades pursuant to a model, etc.) and those that are financial planners serving the retail market. Rule 17j-1 is an example where that failure did not occur. It exemplifies the correct differentiation needed with regard to rule making under the Advisers Act. It correctly focuses attention on the intended subjects of the rule, advisers to investment companies.

The proposal contains a representation to the effect that, the Commission has "drafted the rule broadly so that each adviser will be able to develop a code that takes into consideration the nature of its business." 1st Global feels that this could not be further from the truth in certain key respects. The proposal seeks to encompass all those registered under the Advisers Act. What about those whose business is of a nature that does not warrant application of certain elements of the proposal like the provisions that relate to personal trading by advisory personnel?

1st Global is structured like many independent contractor financial services firms. Our associated persons have a choice between offering services on a commission, fee or combination basis. Regardless of the mode of compensation, all share a holistic relationship-based service approach in comparison to a transaction-based approach.

The most relevant and striking point of differentiation between a "true money manager" and the financial planners associated with 1st Global would be that individual equities make up less than 5% of the assets of our advisory accounts. Our Investment Adviser Representatives focus mainly on utilization of a strategic asset allocation philosophy coupled with the use of mutual funds as the investment vehicle of choice. Their investment recommendations are based on the individual objectives and risk tolerance of each client and are not based on a 1st Global developed buy/sell list (although we try to ensure that they are educated about available mutual fund offerings, we do not have a buy/sell list). With only very limited exceptions, our Investment Adviser Representatives conduct all transactions on a solicited, fully client-authorized, non-discretionary basis. Additionally, those trades are executed client by client as opposed to a block trade type approach. This means that average trade size is relatively small. It also means that we are not engaging in activity whereby we allocate trades obtained via a block trading mechanism to individual clients. Furthermore, 1st Global does not engage in proprietary trading activities or proprietary research. We purchase our research from publicly available sources like S&P and Morningstar. Therefore, there is never a situation in which our advisory activities result in our obtaining material nonpublic information about equity issues.

With this organizational structure in mind, we offer the following specific comments on the proposal.

  1. 1st Global believes that there are certain advisers that the Commission should exempt from certain provisions of the rule that relate to personal securities transaction reporting or pre-approval; namely, advisory staff and Investment Advisory Representatives who are also Registered Representatives of a broker-dealer subject to NASD Conduct Rules 2110 and 3050. In this context sections 204A-1(a)(4), 204A-1(b), 204A-1(c) and 204-2(a)(13) of the proposal are duplicative regulation and unwarranted.
     
  2. The definition of access person is far too broad. Virtually every person affiliated with 1st Global is either involved in making securities recommendations to individual clients or has access to nonpublic information regarding client securities recommendations, trading and holdings. The reason is that our investment adviser representatives are the individuals in our system who provide the individualized recommendations to their clients and all our staff have access to our back office systems as a function of their administrative function. The question is, what is the relevance or materiality of knowledge about a recommendation by one of our Investment Adviser Representatives to purchase 200 shares of IBM? We believe that such activity has nothing to do with the conduct for which the Commission is promulgating the rule proposal. Unfortunately, due to the lack of definitional structure around the term "access person," participation in the above transaction and knowledge of it, results in the finding that one is an access person. 1st Global is of the opinion that the definition of access person should be redrafted with the specific problematic conduct that the Commission has in mind. The Commission should consider crafting provisions like those found in NASD IM-2110-2, IM-2110-3 and IM-2110-4 since these interpretations clearly spell out the problematic trading activity they are designed to prevent. In summary, the definition of access person should incorporate a framework that would not result in a finding that a person who recommended or knew about a purchase of 200 shares of IBM was an access person.
     
  3. Proposed Rule 204A-1(b) should contain a provision allowing for the use of brokerage statements from the executing member in lieu of a record created just for compliance with the holding report provision of this proposal. Additionally, the provision requiring the production of a holding report no later than 10 days after the person becomes an access person should be eliminated for firms using brokerage statements to comply with this provision. For such a firm, the requirement should be for the next available calendar quarter ending statement following the change in status. Lastly, in this context there should be no requirement for the record to contain the date of submission of the report. In summary, there should be an exception from the holding reports requirement that tracks the exception for transaction reports found in Proposed Rule 204A-1(b)(3)(iii).
     
  4. The provision within Proposed Rule 204A-1(b)(2)(ii) that requires a transaction report to be submitted even if the access person had no securities transactions during the period should be eliminated. Instead, 1st Global recommends an annual certification that the access person understands his/her disclosure obligation and will disclose all transactions involving reportable securities. Many firms already obtain annual certifications for a variety of purposes. Therefore, the burden (especially for large, national firms with hundreds of locations) of obtaining an annual certification as opposed to quarterly certifications will be less onerous. On the other hand, any possible violation will be no less difficult to document so the regulatory goal should be maintained.
     
  5. There should be a "small transaction" exemption incorporated into the definition of reportable security for issuers that have large market capitalization.
     
  6. The requirement to maintain records in electronic format should be eliminated. Firms should have the discretion based upon the nature of their business to use non-electronic means to comply with the proposed rule. Additionally, the representations in the proposal about the expectation that advisers would not be required to acquire new software to implement the approach are incorrect as it pertains to firms like 1st Global. If this proposal goes forward as is, 1st Global will have to purchase trade analysis software at a substantial initial and ongoing cost. We estimate that cost to be $75,000 initial and $30,000 ongoing.

In summary, given the structure and nature of our organization, we view the requirement to obtain, review and maintain personal trading records for each of our 760 Investment Adviser Representatives as a monumental waste of financial and human resources. We believe that a more tailored definition of access person that looks to whether that individual actually possesses information that can truly be exploited for the benefit of the access person would be a pre-requisite to making this a more viable rule.

Again, we thank the Commission for the opportunity to comment on these important issues.

Sincerely,

/s/

Stephen A. Batman
CEO


Endnotes

1 The proposal indicates that most SEC registered investment advisers have few employees (67% have less than 10 employees) and the larger SEC registered advisers are already subject to Rule 17j-1. This ignores a key segment of the SEC adviser market like 1st Global that have large numbers of investment adviser representatives and which are not subject to Rule 17j-1.