Association for Investment Management and Research

VIA Electronic Transmission and Federal Express

September 30, 2002

Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20459

Re: Regulation Analyst Certification-File No. S7-30-02

Dear Mr. Katz:

The U.S. Advocacy Committee (USAC) of the Association for Investment Management and Research (AIMR)1 appreciates the opportunity to comment on the SEC's proposed rule to require research analysts to provide certain certifications in research reports disseminated by brokers or dealers. The USAC is a standing committee of AIMR charged with responding to new regulatory, legislative, and other developments in the United States affecting the investment profession, the practice of investment analysis and management, and the efficiency of financial markets.


The USAC strongly supports efforts by the SEC to foster measures in the industry that increase accountability by market participants, and that ultimately will help restore the confidence of investors. AIMR's Standards of Professional Conduct and proposed Research Objectivity Standards (AIMR-ROS) recognize the potential conflicts of interest facing research analysts and provide guidelines for managing and disclosing those conflicts. In keeping with these Standards and the AIMR-ROS, we agree with the underlying purpose of proposed Regulation Analyst Certification (Regulation AC).

We believe fervently in the ethical practice of our profession, which includes a strong commitment to maintaining important investor safeguards. Thus, it is with great appreciation of what Regulation AC seeks to accomplish that we offer our comments. We, too, recognize and regret the erosion of investor confidence over this past year as a result of actions that appear to place the interests of clients and the investing public second. The Standards applicable to all AIMR members, CFA charterholders and CFA candidates require that research reports reflect the opinion of the author, and that conflicts of interest be disclosed to the client, whose interests must always be put first. However, we recognize that not all analysts are currently required to subscribe to our Standards.

Given that we are committed to preserving the integrity of the investment management profession and safeguarding investor safeguards, we support the proposed regulation. We understand and appreciate the SEC's hope that investor confidence will be enhanced by requiring individuals to certify as to the contents of their research reports, and further assure the public in public appearances. It is against this backdrop that we offer our comments below.

AIMR Code of Ethics and Standards of Practice

AIMR's Code of Ethics and Standards of Professional Conduct (Code and Standards), to which all AIMR members, CFA charterholders, and candidates in the CFA program must adhere, require that the best interests of the investing client take precedence over the interests of investment professionals. While the AIMR Code and Standards address many areas of practice, all with the focus on maintaining the highest ethical standards in the investment management profession, three standards in particular speak to the analyst certification proposal.

Standard IV (B.1)-Fiduciary Duties expressly provides that "Members must act for the benefit of their clients and place their clients' interests before their own." As noted in the text accompanying this standard, "the duty required in fiduciary exceeds that which is acceptable in many other business relationships because the fiduciary is in a position of trust. Fiduciaries owe undivided loyalty to their clients and must place client interests before their own."

Standard IV (A.1)-Reasonable Basis and Representations requires members to

  • Exercise diligence and thoroughness in making investment recommendations or in taking investment actions;

  • Have a reasonable and adequate basis, supported by appropriate research and investigation, for such recommendations or actions;

  • Make reasonable and diligent efforts to avoid any material misrepresentation in any research report or investment recommendation; and

  • Maintain appropriate records to support the reasonableness of such recommendations or actions.

Standard IV (B.2)-Portfolio Investment Recommendations and Actions, among other things, requires members to

  • Consider the appropriateness and suitability of investment recommendations or actions for each portfolio or client. Members shall not make a recommendation unless they reasonably determine that the recommendation is suitable to the client's financial situation, investment experience, and investment objectives; and

  • Distinguish between facts and opinions in the presentation of investment recommendations.

We believe that these three standards go to the very heart of what Regulation AC hopes to accomplish. Without requiring an analyst to certify anything in writing, they do require a level of professional behavior that ensures ethical and fair treatment of the investing public. Taken together, these standards effectively mandate that (1) if compensation is received by an analyst, it does not unduly influence recommendations provided a client so as to place the analyst's interests before its client's; (2) that recommendations provided by analysts in any forum are thorough, reasonable, have an adequate basis, and are suitable for a particular client; and (3) that investors receive investment recommendations that distinguish fact from an opinion.

AIMR Proposed Research Objectivity Standards

AIMR's proposed Research Objectivity Standards (AIMR-ROS) provide additional guidance on managing the conflicts that face research analysts. They are intended to be specific, measurable standards for managing and disclosing conflicts of interest that may impede a research analyst's ability to conduct independent research and make objective recommendations. An overall goal of the Standards is to help instill confidence in investors that the research and recommendations being presented have a reasonable and adequate basis, clearly differentiate between fact and opinion, and fully convey the opinion of the author(s).

In addition, under the AIMR-ROS, buy-side, as well as sell-side, firms that permit research analysts to present and discuss their research and recommendations in public appearances must require them to disclose personal and firm conflicts of interest to the audience. Moreover, firms must require research reports and recommendations to have a basis that can be substantiated as reasonable and adequate.

Broker-Dealer Research Analyst

As drafted, the rule proposal initially states that the certification requirement pertains to reports disseminated by broker-dealers. Throughout the remainder of the proposal, however, reference generally is to "research analyst." Moreover, the definition in the proposed rule is only for "research analyst." We question why the proposal's reach does not extend to others who are associated with or employed by broker-dealers.

As noted above, AIMR's proposed ROS specifically address both analysts for the buy-side and sell-side, in recognition of the various conflicts that face both groups of analysts. However, if the SEC intends the requirement to apply only to analysts who provide research for sell-side firms, we suggest consistent use of a term, such as "broker-dealer research analyst," with an appropriate definition, so as to convey the group of analysts to which the regulation is intended to apply.

Disclosure of Analyst Compensation

The proposed regulation would require disclosures by research analysts as to whether or not the analyst received any compensation that was, is, or will be "directly or indirectly" related to the specific recommendation or views that are expressed in the research report or in any public appearance. We support measures that require that analyst compensation not be linked to investment banking or other corporate finance activities on which the analyst collaborates. We also believe that analysts should disclose in public appearances all information that allows the audience to make informed decisions about the objectivity of the research and any recommendations being provided. We believe that analyst compensation should be aligned with the quality of the research and the long-term performance of the analyst's recommendations.

In keeping with this approach, we urge the SEC to better define the term "indirectly" for purposes of this rule. If the rule is intended to require disclosure of compensation related to bonuses, awards, promotions, and other pools of compensation, we recommend that they be specifically referenced or clarified, to ensure consistent disclosure.


We appreciate and support the underlying objective of proposed Regulation AC. Investors need and deserve full disclosure of information that will allow them to make reasonable investment decisions and to regain confidence in the marketplace. We encourage certain clarifications in the final rule, as noted above, that we believe will provide more meaningful information.

If we can provide additional information, please do not hesitate to contact Deborah Lamb at 770.971.7010, or Linda Rittenhouse at 434.951.5333,


/s/ Deborah A. Lamb
Deborah A. Lamb
Chair, U.S. Advocacy Committee
/s/ Linda L. Rittenhouse
Linda L. Rittenhouse
Staff, AIMR Advocacy

cc: U.S. Advocacy Committee
Patricia D. Walters, Ph.D., CFA - Sr. Vice President, AIMR Professional Standards& Advocacy
Rebecca T. McEnally, Ph.D., CFA - Vice President, AIMR Professional Standards & Advocacy

G:\Advocacy\Committee\U S A C\Comment Letters\SEC--Reg AC - Electronic Version.doc
9/30/2002 1:08 PM by Linda Rittenhouse

1 With headquarters in Charlottesville, VA, and regional offices in Hong Kong and London, the Association for Investment Management and Research® is a non-profit professional organization of 59,000 financial analysts, portfolio managers, and other investment professionals in 111 countries of which 45,300 are holders of the Chartered Financial Analyst® (CFA®) designation. AIMR's membership also includes 117 affiliated societies and chapters in 37 countries. AIMR is internationally renowned for its rigorous CFA curriculum and examination program, which had more than 100,000 candidates from 143 nations enrolled for the June 2002 exam.