THE ALLIANCE IN SUPPORT OF INDEPENDENT RESEARCH

c/o Pickard and Djinis LLP
1990 M Street, N.W.
Washington, D.C. 20036
Telephone: (202) 223-4418
Telecopier: (202) 331-3813

May 1, 2002

Mr. Jonathan G. Katz, Secretary
Mail Stop 6-9
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: Commission File Nos. SR-NASD-2002-21
and SR-NYSE-2002-09

Dear Mr. Katz:

The Alliance in Support of Independent Research is pleased to have this opportunity to comment on the above-referenced proposals which the National Association of Securities Dealers Inc. (the "NASD") through its wholly owned subsidiary, NASD Regulation, Inc. and the New York Stock Exchange Inc. ("NYSE") have made to address research analyst conflicts of interest.

The leading members of the Alliance in Support of Independent Research ("Alliance") include the following broker-dealers:

Boston Institutional Services, Inc.
John W. Gomez, President

Capital Institutional Services, Inc.
Don C. Potts, Chief Executive Officer

Fidelity Investments, Institutional Brokerage Group
Richard W. Collett, Vice President

The Interstate Group,
A Division of Morgan Keegan & Company, Inc.
Grady G. Thomas, Jr., President

Westminster Research Associates, Inc.
John D. Meserve, President

We believe our members are involved in a significant portion of the arrangements under which fiduciaries such as mutual fund managers, investment advisers, banks and other fiduciaries are provided with independent research services and products for the benefit of their managed accounts.

Members of the Alliance share a common interest in fostering a favorable regulatory environment in which research services and products may be furnished to the money management community, and in preserving the umbrella of protection Section 28(e) of the Securities Exchange Act of 1934 provides to fiduciaries who receive all forms of investment research. A primary goal of the Alliance is to promote observance of proper standards under the securities laws for disseminating research.

As providers of independent research to the institutional investment community, we focus our comments on that aspect of the proposals which arguably imposes requirements and disclosure obligations on broker-dealers which distribute research reports to fiduciaries and other institutional accounts but are not the authors or originators of such research reports.

Introduction

We support the efforts of the NASD and the NYSE to eliminate research analyst conflicts of interest to the extent possible and to require meaningful disclosure of all conflicts that remain. However, for the reasons noted below, the Alliance members submit that the scope of the definition of "research report" being proposed may have theunintended effect of requiring broker-dealers which provide independent or third party research under Section 28(e) of the Securities Exchange Act of 1934 and similar type research arrangements to meet the disclosure and conflict rules which are designed to address conflicts and concerns relevant to the authors or originators of such research. In turn, this will have the collateral effect of substantially inhibiting the distribution of disinterested research to the institutional money management community, which would be contrary to the overall intent of these proposals.

Provision Of Independent Or Third Party Research Under Section 28(e)

Fiduciaries such as investment advisers and portfolio managers commit a portion of their portfolio executions to broker-dealers who are able to offer research that assists in the investment decision-making process. A significant portion of this research provided by broker-dealers to institutional money managers consists of independent and disinterested research (sometimes referred to as "third party research") which is produced or authored by research boutiques and other research originators, who, in turn, are independent of and unaffiliated with the broker-dealer providing the research. Third-party research is typically provided either by registered investment advisers or parties who qualify for the "publishers exemption" to investment adviser registration. Registered advisers are already subject to a full panoply of fiduciary and conflict disclosure requirements under the Investment Advisers Act of 1940 ("Advisers Act"), or parallel state laws. In order to qualify for the publishers exemption, the advice rendered must be, amongother things "disinterested," which means free of the very types of conflicts the proposed rules are designed to address.1/

Arrangements for the provision of independent or third-party research for portfolio compensation are frequently referred to as soft dollar arrangements. The foundation for the provision of this research is Section 28(e) which furnishes a safe harbor for the payment of compensation from managed accounts as consideration for the receipt of independent research services by the institutional money manager.

Section 28(e) provides a safe harbor for the provision of independent research to fiduciaries so long as the broker-dealer providing the research and not the fiduciary is obligated for payment to the independent research producers for the research being provided. In almost all instances, the independent research is selected and approved by the institutional money manager, and the money manager almost always receives the research directly from the third-party vendor. Indeed, in order to have the coverage of Section 28(e) a money manager is required to make a good faith determination that the commissions or other forms of compensation paid on portfolio executions are reasonable in relation to the services being rendered by the broker (i.e., the execution and research services). In order to make that determination, the money manager must have knowledgeof the research being provided and its value to the investment decision-making process. On the other hand, the providing broker-dealer of independent research under a Section 28(e) arrangement is not in a position to judge the efficacy of the research upon the investment decision-making process undertaken by the institutional money manager. Nor is the providing broker-dealer in a position to ascertain or address the conflicts of interest of the author of the research or the attendant disclosures which might be imposed on the author or the party producing the research. Finally, even if a broker-dealer providing third-party research for commissions on portfolio transactions were to conduct investment banking activities, it could not possibly influence the content of the research coming from a third-party vendor.

While it may be appropriate to place restrictions on the relationship between the investment banking department and research analysts (e.g., restrictions on personal trading, enhanced disclosure of analysts' conflicts and performance, etc.), particularly given recent events, it would be over inclusive to extend such measures to a distributing broker-dealer unaffiliated with the research analysts or author of the research report, and, in most instances, it would be impossible for a providing broker-dealer to comply with these restrictions. Ironically, the result would be a diminution of independent ordisinterested research services being provided to institutional money managers by broker-dealers.2/

Modification To NASD's Definition Of Research Report

In proposing the new analyst conflict rule, NASDR asks for comment as to whether the definition of "research report" properly excludes those communications that do not present the type of concerns that the proposed rule change is designed to address. We submit that the NASD's definition of "research report" should be modified to mean a research report that the broker-dealer has "authored, prepared or over which he has editorial control," rather than one that the "member has distributed."3/ This modification would focus the rule on those broker-dealers which have potential conflicts of interest as opposed to those broker-dealers which "distribute" independent research and otherwise have no involvement in the authorship or preparation of the research. This modification would also more closely align the NASD's proposal with that of the NYSE.

* * * * *

We hope these comments assist the Commission and the NYSE and NASD in formulating a modification to the definition of research report which address the concerns noted in this letter. Please call Lee A. Pickard or Mari-Anne Pisarri at 202-223-4418 if you have any questions.

Sincerely,

The Alliance In Support Of Independent Research

__________________________
By: Lee A. Pickard, Esq.
Pickard and Djinis LLP
Counsel to The Alliance
In Support Of Independent Research

cc: Hon. Harvey Pitt
Hon. Isaac C. Hunt, Jr.
Hon. Cynthia A. Glassman
Annette L. Nazareth
Thomas Eidt
Alan L. Beller
Mary L. Schapiro
Edward A. Kwalwasser

____________________________
1 Advisers Act, Section 202(a)(11); Lowe v. Securities and Exchange Commission, 472 U.S. 181 (1985).
2 Broker-dealers now provide literally hundreds of independent research services to money managers to assist in the investment decision-making process. These services include not only investment information but fundamental databases, portfolio modeling, and strategy software.
3 The NASD's proposed definition of "Research report" reads as follows:
"Research report" means a written or electronic communication that the member has distributed with reasonable regularity to its customers or the general public, which presents an opinion or a recommendation concerning an equity security.