1990 M STREET, N.W.
(202) 223-4418            (202) 331-3813

September 23, 2002

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

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

Dear Mr. Katz:

We submit these comments on behalf of Thomson Financial Inc. ("Thomson Financial") regarding the Commission's proposal to adopt Regulation Analyst Certification ("Regulation AC") under the Securities Act of 1933 ("Securities Act") and the Securities Exchange Act of 1934 ("Exchange Act").

Thomson Financial is a US$1.6 billion provider of data, analysis and information tools to the global investment community, and is a subsidiary of The Thomson Corporation, a $7.2 billion global provider of integrated information solutions for business and professional customers. Thomson Financial applauds the Commission's continuing efforts to bolster investor confidence by addressing perceived conflicts of interest involving sell-side research analysts. However, for the reasons explained herein, Thomson Financial submits that the scope of proposed Regulation AC is far broader than is necessary to accomplish its laudable goal and is inconsistent with law, rules and Commission policy in other areas of securities regulation. Thomson Financial further submits that compliance with Regulation AC would be substantially more burdensome than the Commission has hypothesized, and that the extra burden would not be offset by gains in investor confidence. As discussed more fully below, Thomson Financial respectfully suggests that the proposed regulation be redesigned so that it applies to only those research activities that entail the kinds of potential conflicts that the regulation is designed to address.

Description of Thomson Financial's Products and Services

With approximately 8,600 employees operating from more than 40 offices around the world, Thomson Financial offers a wide range of products and services that provide investment data and analysis, as well as the means to organize and seamlessly integrate that market information into customers' workflows. Thomson Financial's products and services also enable investmentprofessionals to automate securities transaction processes, thereby enhancing the efficiency of the capital markets.

The company's customers include institutional and retail money managers, banks, broker-dealers, mutual funds, pension plans, investment bankers, merger and acquisition professionals, venture capitalists, publicly traded companies and investor relations professionals. A sampling of the products and services in the Thomson Financial family includes the following:1

    AutEx - an electronic bulletin board of block trade indications and post-trade reports that enables securities traders to identify, access and track liquidity in global securities markets.

    Bond Buyer - a daily newspaper covering the public finance market.

    First Call - an electronic redistributor of commingled sell-side research. The information distributed by First Call originates from 800 contributing firms, corporate documents and public filings.

    IFR (International Financing Review) - a compilation of technical and fundamental market analysis and information generated by Thomson Financial analysts on a variety of topics including fixed-income securities, foreign exchange, capital markets and emerging markets.

    ILX - a securities information processor that provides real-time or delayed data feeds including quotations, monitors, news tickers and charting packages.

    IRChannel.com - an investor relations tool that helps IR professionals efficiently collect inbound market data and communicate with the investment community.

    Portia - a comprehensive portfolio management system that automates trading, analysis and operations of more than 400 money managers managing more than three trillion dollars in assets.

    Securities Information Center - operator of the lost and stolen securities program on behalf of the Commission pursuant to Section 17(f) of the Exchange Act and Rule 17f-1 thereunder.

    Omgeo - a joint venture between Thomson Financial and the Depository Trust Company that provides post-trade information processing and matching services.

    TradeRoute - an electronic order routing and execution reporting service that links investment managers directly to multiple broker-dealers and alternate sources of liquidity.

In the United States, the Thomson Financial family of companies includes one federally registered investment adviser, one state registered investment adviser and two small, limited- purpose broker-dealers. Neither of these broker-dealers has any involvement in the preparation of any investment research generated by Thomson Financial employees.

The Scope of the Proposed Regulation Is Overbroad

According to the Commission's release proposing Regulation AC,2 the new rules are designed to address concerns that investment banking relationships and certain compensation arrangements may adversely affect the objectivity of research analysts at full-service brokerage firms, thus impairing the integrity of the views those analysts express in research reports and public appearances. The rules seek to achieve this goal by requiring broker-dealers and persons associated with broker-dealers to include in any research reports they "publish, circulate or provide" certain certifications and disclosures by the research analysts who are principally responsible for the analyses contained in the reports.3 The rules also would require broker-dealers to create and maintain records of certifications and disclosures by such research analysts in connection with any public appearances the analysts make.

Regulation AC builds on the earlier efforts of the New York Stock Exchange ("NYSE") and the National Association of Securities Dealers ("NASD") to address research analyst conflicts of interest. On May 10 of this year, the Commission approved amended NYSE Rule 472 and new NASD Rule 2711 (the "SRO Analyst Rules"); among other things, these rules prohibit linking analyst compensation to specific investment banking transactions, prohibit the offering of favorable research to induce investment banking business, restrict analysts' personal trading activities, and require disclosure of a variety of conflicts of interest, as well as specific information about a firm's rating system.

However, the scope of Regulation AC is far broader than that of the SRO Analyst Rules. In addition to covering debt as well as equity securities, Regulation AC seeks to control the research activities of a much larger population of investment professionals than the one covered by the current rules. For example, while the SRO Analyst Rules focus on the research activities of individualanalysts who are employed by or otherwise directly related to registered broker-dealers,4 Regulation AC defines a "research analyst" to mean any natural person who is principally responsible for the analysis of any security or issuer included in a research report.

Moreover, while the SRO Analyst Rules mandate disclosures in research reports produced by registered broker-dealers, Regulation AC would cover reports published, circulated or provided by any broker-dealer or any "person associated with a broker or dealer." Section 3(a)(18) of the Exchange Act defines a "person associated with a broker or dealer" to include not only a firm's officers, directors, partners and employees, but also "any person directly or indirectly controlling, controlled by, or under common control with such broker or dealer."

The practical effect of these definitional differences is that while the SRO Analyst Rules govern conduct directly related to broker-dealer research -- which is where the perceived conflicts of interest reside -- Regulation AC would extend to research producers (including investment advisers, banks, and publishers) whose only connection to a broker-dealer is the existence of ultimate common control. The Commission has not and, Thomson Financial respectfully suggests, cannot establish a need for such sweeping regulation.

The negative implications of the breadth of Regulation AC are well illustrated by a multifaceted, global company like Thomson Financial. Under the regulation as proposed, an analyst producing a research report for any Thomson Financial entity in or outside the United States (for example, Thomson Singapore PTE) would be subject to the certification and disclosure requirements solely by virtue of the fact that his employer is ultimately owned by the same entity which also ultimately owns two limited-purpose broker-dealers with whom the research analyst has no contact, and about which he probably has no knowledge. If that analyst subsequently makes a "public appearance" anywhere in the world, (including on the internet) at least one, and presumably both of Thomson Financial's registered broker-dealers would be obligated to create and maintain records containing the analyst's certifications and disclosures relating to those appearances.5 This would be the case even though the public appearances would have nothing to do with the limited securities activities of either broker-dealer.

In order to avoid the problems that would be caused by the broad scope of the current proposal, Thomson Financial respectfully suggests that Regulation AC be modified so that it applies to only those conflicts of interest the regulation is designed to address.

Regulation AC Is Inconsistent With Other Areas Of
Securities Regulation And Is Likely To Create Investor Confusion

Regulation AC would impose specific obligations under the Securities Act and the Exchange Act not only on registered broker-dealers, but also on registered investment advisers, banks and unregistered entities not normally subject to SEC regulation, if those advisers, banks and other entities have broker-dealer affiliates. In so doing, the proposed rules are inconsistent with other areas of securities regulation and is likely to create investor confusion.

For example, the activities of analysts who produce research reports under the auspices of registered investment advisers are already subject to extensive regulation under the Investment Advisers Act of 1940 ("Advisers Act") or analogous state law.6 Advisers' fiduciary duties toward their clients are well established by statute, case law and years of regulatory policy.7 Furthermore, registered advisers are already required to disclose all material conflicts of interest which could compromise the integrity of their investment advice.8 There is no evidence that the extensive regulatory regime for investment advisers is not working; indeed, it is not the conduct of investment adviser research analysts that has caused the crisis in investor confidence which Regulation AC is designed to address.

Another problem pertaining specifically to state registered advisers is that Regulation AC appears to violate at least the spirit if not also the letter of the National Securities Markets Improvement Act of 1996 (NSMIA).9 Designed to optimize the use of governmental resources and ease the burden of duplicative regulation, NSMIA divided investment advisers into two categories, making the large advisers subject to federal regulation and the small advisers subject to state law. In so doing, Congress expressed its intent that state-registered advisers should not be subject to substantive federal regulatory requirements.10 By imposing specific certification and disclosureobligations on state-registered advisers who are affiliated with broker-dealers, Regulation AC would be inconsistent with that intent.

The current proposal's inconsistency with other aspects of securities regulation is even more pronounced when it comes to unregistered entities. Section 202(a)(11) of the Advisers Act excludes from the definition of investment adviser -- and thus from the purview of SEC regulation -- "the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation." Seventeen years ago, the U.S. Supreme Court established the fact that in order to qualify for this exemption, a publication must, among other things, contain "disinterested commentary and analysis."11 Thus, research reports that qualify for the publisher's exemption are, by definition, free from the types of conflicts that create the need for Regulation AC's certifications and disclosures and should not be subject to the regulation.

The geographic scope of the current proposal likewise is out of synch with other areas of U.S. securities regulation. With regard to foreign investment advisers, for example, the Commission traditionally has taken a "conduct and effects" approach which relieves foreign advisers of the duty to register in the U.S. under certain circumstances, and which may limit the application of the Advisers Act for those foreign advisers who do register here.12 The Commission has also restricted the extraterritorial effect of the securities laws on broker-dealers by virtue of Rule 15a-6 under the Exchange Act and related no-action positions.13 To the extent that Regulation AC covers research reports prepared by all foreign affiliates of U.S. registered broker-dealers, it cannot be reconciled with the Commission's established practices.

Finally, Thomson Financial notes that because the proposed rules will apply to only those domestic and foreign investment advisers, banks, and exempt publications that are affiliated with registered broker-dealers, there is a danger that the rules will confuse investors. The fact that certifications and disclosures will appear on some non-broker-dealer research reports but not others could lead investors to believe that the integrity of either the disclosing or nondisclosing group has been compromised. To the extent that this confusion leads investors to discriminate against one group or the other, the rules would impose a burden on competition that is not necessary or appropriate to further the purposes of the securities laws.

For all of these reasons, Thomson Financial respectfully submits that the scope of proposed Regulation AC should be narrowed as suggested below.

The Burden of Complying With Regulation AC Would Be
Substantially Greater Than The Commission Estimates And The
Extra Burden Would Not Be Offset By Gains In Investor Confidence.

The Commission's assessment of the compliance burdens that would be imposed by Regulation AC is limited to costs related to broker-dealer research. Absent from this assessment is any discussion of the substantial burdens that would be imposed on other entities which would be subject to the rules by virtue of their affiliation with a broker-dealer. For example, in calculating the cost of adding certifications and disclosures to research reports, the Commission factors in only certain reports produced by sell-side analysts.14 There is no analysis regarding reports by state and federally registered investment advisers, banks or unregistered entities such as publishers.

The same deficiency exists in the analysis relating to the proposed requirement that broker-dealers create and maintain records of research analyst certifications and disclosures in connection with public appearances. In this regard, the Commission's cost estimate is based on data pertaining only to U.S. sell-side analysts, which means that the estimate is but a fraction of the actual cost.15

The cost-benefit analysis in the Proposing Release also overlooks the practical difficulties that a broker-dealer (especially a limited-purpose broker-dealer) would encounter in trying to monitor every public appearance of every research analyst employed by every one of its affiliates.16 In a multifaceted, global service provider like Thomson Financial, a broker-dealer's compliance staff willnot know even the identity, let alone the activities of all employees of affiliated entities.17 Nor does the Proposing Release assess the burdens of complying with Regulation AC where a buy-side research analyst has more than one broker-dealer affiliate. Must each broker-dealer create and maintain records under Rule 502? If so, the compliance cost estimates must be adjusted accordingly.

Finally, the Commission's assertion that the additional costs incurred in complying with the proposal would be minimal because many of the same procedures necessary to ensure compliance with Regulation AC are already required under the SRO Analyst Rules overlooks the fact that Regulation AC applies to a much broader population than that covered by the existing rules. In particular, it overlooks the fact that entities other than broker-dealers will now have to comply with the certification and disclosure requirements. Moreover, while broker-dealers are already obligated to oversee the research activities of their own employees and other associated persons (as that term is defined under SRO rules),18 the new proposal would obligate them to monitor the research activities of their affiliates' employees as well.

As the foregoing discussion shows, an extension of the certification and disclosure requirements to all broker-dealer affiliates would entail substantial additional costs that have not been factored into the Commission's analysis. Moreover, these extra costs would not be offset by gains in investor confidence, since the conduct to which these costs pertain has nothing to do with perceived conflicts of interest in sell-side research. A thorough analysis of all the burdens imposed by Regulation AC shows that without a direct nexus between the broker-dealer and the research analyst, the proposal is too burdensome and simply unworkable.

Suggested Revision to Regulation AC

If the Commission wishes to address conflicts arising from the interplay of securities research and investment banking or compensation arrangements that compromise the integrity of research analysts, then the proposed rules should focus on those issues. In this regard, Thomson Financial suggests that Regulation AC be limited to the following types of activities: (a) research reports produced by analysts employed or compensated by broker-dealers who engage in investment banking activities; (b) research reports produced by broker-dealers whose analysts receive payments in connection with the reports from sources other than the broker-dealer, including issuers, underwriters and other dealers; (c) research reports produced by analysts employed by affiliates of broker-dealers who engage in investment banking activities, where the reports are prepared at the direction of suchbroker-dealers; and (d) public appearances by research analysts who produce reports covered by (a), (b) or (c) above.


For the reasons explained herein, Thomson Financial respectfully requests that the Commission not approve Regulation AC until the proposal is modified so that it applies to only that conduct that has been linked to a decline in investor confidence. Thomson Financial appreciates this opportunity to comment on this very important proposal. If you need any further information on the matters raised in this letter, we would be happy to discuss these issues with you and your staff.

            Very truly yours,

            Mari-Anne Pisarri

cc: (By Hand)

    Hon. Harvey Pitt
    Hon. Paul S. Atkins
    Hon. Roel C. Campos
    Hon. Cynthia A. Glassman
    Hon. Harvey J. Goldschmid
    Annette Nazareth
    Paul Roye
    James Brigagliano
    Thomas Eidt
    Racquel Russell

1 Additional information about the company's products and services is available at www. thomsonfinancial.com.
2 SEC Release No. 33-8119; 34-46301 (August 2, 2002) (the "Proposing Release").
3 Analysts would be obliged to certify that the views expressed in the research reports are their own, and would have to disclose whether they have received or will receive compensation directly or indirectly related to the specific recommendation or views contained in those reports.
4 NASD Rule 2711(a) and Art. I, Sec. (dd) of the NASD Bylaws. Although NYSE Rule 472 uses the term "associated person" in place of "research analyst," the NYSE's concept of associated person is much more narrow than that contemplated under the Exchange Act; like the NASD, the NYSE rule also requires a direct connection between the individual whose behavior is controlled under the analyst rules and a registered broker-dealer. See NYSE Rule 472.40.
5 Proposing Release, note 14.
6 Of course, banks, too, have their own system of regulation.
7 See e.g., Advisers Act, 206; SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963); Robert Cashmore Associates, ['83-'84 Transfer Binder] Fed. Sec. L. Rep (CCH) 77,546 (1983)("An investment adviser has a fiduciary relationship with its clients which requires fair dealing, in general, and disinterested advice, in particular").
8 Unlike broker-dealers, advisers are obligated to provide their clients with disclosure brochures covering a variety of topics. In addition to these brochures (typically, Part II of the adviser's Form ADV), information regarding an adviser's potential conflicts of interest is also publicly available through the SEC's Investment Adviser Public Disclosure database.
9 Pub. L. No. 104-290, 110 Stat. 3416 (1996).
10 In recognition of this fact, the Commission subsequently amended several of its rules under the Advisers Act to limit the applicability of those rules to federally registered advisers. SEC Release No. IA-1633 (December 20, 1996).
11 Lowe v. SEC, 472 U.S. 181 (1985).
12 See, e.g. Royal Bank of Canada, 1998 SEC No-Act. LEXIS 620 (June 3, 1998); Murray Johnstone Holdings Ltd., 1994 SEC No-Act. LEXIS 734 (October 7, 1994).
13 Pursuant to this rule, foreign broker-dealers may supply research reports to U.S. investors under certain circumstances without having to submit to SEC registration.
14 Thomson Financial notes that even as it pertains to broker-dealer research, the Commission's cost estimate is too low. Citing data from Thomson Financial First Call, the Commission estimates that broker-dealers publish 657,000 research reports per year. While this estimate may accurately reflect equity research on U.S. securities transmitted via First Call Notes,TM it does not capture fixed-income research, research on non-U.S. equities or full-text reports transmitted through First Call Research Direct.® When these additional sell-side reports are accounted for, the total exceeds 2 million reports a year. Using the Commission's equation, it appears that the potential cost of compliance -- for sell-side firms alone -- could run as high as $4,116,784.50 [1 minute x 2,033,000 reports / 60 minutes x 121.50 per hour.]
15 The Commission assumes that approximately 519 public appearances by research analysts occur per quarter, based on the fact that 5,186 analysts are listed in a database maintained by Nelson Information, another Thomson Financial company. That number, however, includes neither buy-side analysts nor analysts employed by foreign broker-dealers.
16 Regulation AC requires that if an affiliate of a broker-dealer publishes a research report, the broker-dealer must make and keep the required records relating to any subsequent public appearances by that analyst. Proposing Release at n. 14. There is no authority in the securities laws or precedent in Commission practice for requiring a broker-dealer to monitor the behavior of all of its corporate affiliates and their employees, whether or not that behavior has any connection to the broker-dealer's securities or investment banking business.
17 As noted above, Thomson Financial has approximately 8,600 employees spread across 40 offices worldwide.
18 See note 4, supra.