March 15, 2004
Submitted electronically to
Jonathan G. Katz
Re: 1st Global Advisors, Inc.'s comments on SEC proposed rule IA Code of Ethics
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.
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.
Stephen A. Batman