June 19, 2003
Via Electronic Mail
Jonathan G. Katz, Secretary
RE: Research Analyst Conflicts of Interest; Notice of Filing of Amendment
Dear Mr. Katz:
The Investment Counsel Association of America1 welcomes this opportunity to share our views with respect to one aspect of the proposed amendments filed by the National Association of Securities Dealers and the New York Stock Exchange to their rules addressing research analyst conflicts of interest.2
ICAA members collectively manage trillions of dollars in assets for institutional and individual investors. We strongly support measures to promote the integrity and transparency of information that is provided to the public regarding issuers. The ICAA applauds efforts to address documented abuses involving certain sell-side research analysts. We comment only to request that the NYSE and NASD conform their interpretations of "research report" to the guidance provided by the Securities and Exchange Commission in adopting Regulation AC.3
The proposed regulations are intended to address conflicts of interest that arise when a broker-dealer that is also an underwriter or market maker produces its own research. As we stated in our letters to the Commission regarding Regulation AC,4 we strongly submit that the regulations governing research analyst conflicts of interest should not apply to the activities of investment advisers or investment advisory personnel. We therefore applaud the NYSE and NASD for clarifying that the term "research analyst" would not include "investment advisers, including fund portfolio managers, who are not principally responsible for preparing the substance of a research report even if they are registered persons of members."5
We are concerned, however, that the pending proposed definition of a "research report" does not include the requirement that a research report include a "recommendation." The inclusion of a recommendation was a significant limiting factor with respect to investment advisers, who generally do not make investment recommendations to the general public. In response to concerns regarding this definition in the context of Regulation AC, the SEC included in the adopting release a list of communications that would generally not be considered "research reports." Of importance to advisers, the list included "periodic reports or other communications prepared for investment company shareholders or discretionary investment account clients discussing past performance or the basis for previously made discretionary investment decisions."6 This result is appropriate because these types of communications do not present the potential for conflicts of interest that the proposed rules are intended to address. In addition, we submit that it would assist both regulators and regulated entities to ensure consistency in the interpretation of these terms.
Accordingly, we respectfully request that the NASD and NYSE follow the interpretive guidance set forth by the SEC regarding the term "research report." We also support the comments submitted today on this issue by the Investment Company Institute. We welcome the opportunity to discuss this subject in greater detail with the Commission or its staff. Please do not hesitate to contact me if you have any questions regarding these issues.
Karen L. Barr