September 23, 2002

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

Dear Mr. Katz:

      Re: Proposed Regulation AC
      File No. S7-30-02            

We are pleased to have this opportunity to comment on proposed Regulation AC, which would require certifications by research analysts with respect to their research reports and public appearances. The proposal appears in Release No. 34-46301 (the "Proposing Release"). We have three main comments.

Compensation Directly or Indirectly Related to Recommendations

Regulation AC would require a "research report" prepared by a "research analyst" to include a certification by the analyst containing two statements. The first, required by Rule 501(a), would be "[a] statement attesting that the views expressed in the research report accurately reflect the research analyst's personal views about any and all of the subject securities or issuers". The second, required by Rule 501(b)(1), would be "[a] statement attesting that no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in the research report". (For convenience, we refer to the latter statement as the "Compensation Statement.") If the research analyst is unable to make the Compensation Statement, then the certification must describe the compensation and disclose that it could influence the analyst's recommendations or views. A similar certification would be required by Rule 502 with respect to public appearances by research analysts.

For the reasons discussed below, we believe that the Compensation Statement, if read literally, will be difficult, if not impossible, for most research analysts to make. Moreover, in light of the disclosure requirements of the new SRO analyst rules, we do not think the proposed Compensation Statement will provide investors with any additional meaningful disclosure.

The phrase "compensation . . . directly or indirectly . . . related to the specific recommendations or views expressed by the research analyst" is so broad that research analysts are likely to have serious difficulty making the Compensation Statement, even when they are not receiving compensation for a specific recommendation or rating. As the Commission is aware, analysts are often compensated in part based on the performance of their firm's investment banking department and for their contribution to the department's success. As the Commission states in the Proposing Release:

The proposed regulation does not preclude an analyst from providing services to his or her firm's investment banking department within the requirements of governing SRO rules, and it does not prohibit analysts generally from receiving compensation for covering issuers or for preparing research reports. Rather, proposed Regulation AC focuses on disclosure where the analyst is compensated for making a specific recommendation or rating. [emphasis added]

We believe, and we think the quoted passage says, that an analyst should be able to make the Compensation Statement as long as he or she does not receive compensation directly related to a specific recommendation or rating - i.e., as long as the compensation he or she receives is not a quid pro quo for having issued a specific recommendation or rating. We read the Proposing Release to mean that, in the absence of such a quid pro quo, receipt of compensation related to investment banking business generally, or even investment banking business related to particular clients, should not preclude an analyst from making the statement.

In our view, however, the Compensation Statement is worded so broadly as to sweep far beyond the intended scope. We think an analyst that receives compensation based in part on the firm's investment banking business would be justifiably concerned at having to certify that his or her compensation is not "related", either "directly or indirectly", to a specific recommendation or view expressed by the analyst. If the analyst's compensation reflects, to any extent, his or her work with regard to a particular company that is an investment banking client of the firm, he or she is likely to have difficulty making the Compensation Statement in its proposed from. We do not believe that is appropriate, nor do we believe that is what is actually intended by the proposal.

The Compensation Statement presents a second problem. Research analysts, like other employees, often do not know precisely how their compensation is set. They may be aware of the general factors taken into account, but they probably are not aware of exactly how management determines compensation awards. That involves a decision process to which they generally are not privy. As a practical matter, therefore, an analyst generally will not be in a position to certify as to the basis of his or her compensation.

While the Compensation Statement could be narrowed so as to require certification that an analyst has not received compensation as a quid pro quo for a specific recommendation, we think that such a certification is unlikely to provide investors with much benefit. We suspect that the number of such quid pro quo arrangements is likely to be quite limited. From an investor's perspective, the more meaningful question is likely to be whether the analyst receives compensation related to the firm's investment banking business, and that issue is already addressed under the new analyst rules adopted by the NASD and the NYSE. NASD Rule 2711, for example, requires a member firm to disclose in a research report if "the research analyst principally responsible for preparation of the report received compensation that is based upon (among other factors) the member's investment banking revenues". The member firm also must disclose if it has received compensation for investment banking services from the subject company in the past 12 months or expects to do so in the next three. We think the new SRO rules already address the analyst compensation issue and do so in a way that appropriately puts the disclosure obligation on the firm, rather than the analyst. Moreover, while we do not believe that the certification as to personal belief is really necessary - this problem is already addressed by the antifraud provisions of the federal securities laws and, as the Commission notes in the Proposing Release, existing SRO rules - if it is to be required by the Commission, it ought to suffice without additional certification as to compensation.

Consequently, while we think the Compensation Statement should at least be narrowed as described above, we think it would be much better to eliminate the statement entirely.

Definition of Research Analyst

Rule 500 of Regulation AC would define research analyst as "any natural person who is principally responsible for the analysis of any security or issuer included in a research report". According to the Proposing Release, this definition is intended to cover specifically those persons employed by member firms whose duties primarily involve analyzing securities and issuers and preparing research reports. For example, footnote 16 states that the term would not include an investment adviser who is not principally responsible for preparing research reports, even if the investment adviser is a registered person of a member firm. Notwithstanding these statements in the Proposing Release, we are concerned that the definition of "research analyst" could be read to include a registered representative of a member firm who is also an investment adviser, if the individual analyzes securities and makes recommendations to his or her clients in writing. We believe, therefore, that the definition should specifically exclude investment advisers acting within the scope of their duties as such. For clarity, the definition of "research report" should be revised in a similar way, so as to exclude advice prepared by investment advisers acting within the scope of their duties.

Application to Banks

The Proposing Release asks whether Regulation AC should cover banks. We do not see the justification for doing so. To the extent that a bank engages in activities that, under the so-called push-out provisions of the Gramm-Leach-Bliley Act, would subject the bank to regulation as a broker-dealer, the registered entity would have to comply with Regulation AC as applicable. To the extent that a bank is not required to register as a broker-dealer, we see no basis on which to require that it comply with Regulation AC any more than it is required to comply with other rules governing registered broker-dealers.

* * *

We appreciate this opportunity to comment on the Commission's proposal, and we would be happy to discuss any questions the Commission or its staff may have with respect to this letter. Questions may be addressed to David B. Harms (212-558-3882) or Peter W. LaVigne (212-558-7402) in our New York Office.

                  Very truly yours,

                  SULLIVAN & CROMWELL