[15275]
October 18, 2002
TO: SEC RULES MEMBERS No. 90-02
INVESTMENT ADVISER MEMBERS No. 43-02
COMPLIANCE ADVISORY COMMITTEE No. 90-02
RE: INSTITUTE COMMENT LETTER ON PROPOSED AIMR RESEARCH OBJECTIVITY
STANDARDS
The Association for Investment Management and Research (“AIMR”) recently published
for comment proposed Research Objectivity Standards (“Standards”). The proposed Standards
are intended to be specific, measurable standards for managing and disclosing conflicts of
interest that may impede a research analyst’s ability to make objective recommendations. The
Institute has filed a comment letter on the proposed Standards. The most significant aspects of
the comment letter (a copy of which is attached) are summarized below.
In general, the letter states that the Institute strongly opposes the application of the
proposed Standards to investment management firms. The letter notes that investment
management firms are subject to comprehensive rules and regulations under the Investment
Advisers Act and the Investment Company Act and already have stringent internal procedures
in place to address conflicts of interest. In addition, the letter notes that investment advisers
owe their clients fiduciary duties that would preclude conflicts of interests from arising and
whatever potential conflicts of interest may exist relating to investment management firms and
research are greatly attenuated as compared to those presented by sellside firms. Finally, the
letter notes that we are not aware of any reported cases of abuse in this area involving
investment management firms and that the proposed Standards would create significant
compliance burdens for such firms.
The letter also contains specific comments on the proposed Standards. As a preliminary
matter, the letter states that many of the definitions contained in the proposed Standards are
ambiguous and/or overly broad. For example, the letter states that the definitions of “research
analyst” and “research report” may unnecessarily sweep in personnel at investment
management firms with little or no association to the “research report.” The letter therefore
recommends that AIMR revise these terms to appropriately narrow their scope.
The letter also expresses several concerns regarding the Standards’ proposed
requirements and recommended procedures to implement those requirements. For example,
the Standards would require firms to implement policies and procedures addressing the
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working relationships that covered employees have with research analysts at sellside firms.
One of these procedures recommends that firms monitor brokerage to verify that it is not
inappropriately shifted from firms when research analysts change ratings or recommendations
on corporate issuers in which the firm is invested or with which the firm has an investment
advisory relationship. The letter states that this recommendation would create unnecessary
burdens for investment management firms as such firms would have to constantly monitor not
only when a rating or recommendation is changed on a security the fund holds, but also
whether brokerage has been shifted from that analyst’s firm and the reasons for that shift. The
letter therefore recommends that this recommendation be eliminated from the Standards.
The letter also states that, given existing federal securities law requirements, as well as
the stringent internal policies and procedures that investment management firms have in place
relating to the personal investment and trading activities of investment management personnel,
the Standard containing several requirements relating to a covered employee’s personal
investments and trading activities is unnecessary. Specifically, the letter notes that registered
funds must adhere to Rule 17j-1 under the Investment Company Act. The letter also notes that
substantially all funds groups have adopted the recommendations in the Institute’s Report of the
Advisory Group on Personal Investing addressing the personal investment and trading activities of
investment personnel. The letter therefore states that AIMR should revise the Standard and
follow an approach similar to that used in Rule 17j-1 to determine the scope of the Standard.
The Standards also would require firms to provide full and fair disclosure of all conflicts
of interest to which the firm or its covered employees are subject. The letter states that the
Standard’s recommended disclosures are unnecessary inasmuch as registered investment
advisers are already subject to similar, and in some cases more extensive, disclosure
requirements under the Investment Advisers Act. The letter also notes that the recommended
disclosures are vague and may raise confidentiality concerns for investment management firms.
The letter therefore states that the better approach would be for the Standards to make a strong
affirmation of a firm’s obligations to adhere to all applicable disclosure requirements of the SEC
and other regulatory bodies. At a minimum, the letter recommends that AIMR not require the
disclosure of the specific conflicts of interest to which the firm or its covered employees are
subject, but instead only require a general statement about the conflicts.
Finally, the Standards recommend that firms disseminate a list of potential violations of
their policy and associated disciplinary sanctions to all covered employees, clients and
prospective clients. The letter states that such a list could take away a firm’s discretion to tailor
and modify disciplinary sanctions based on the specific facts and circumstances of a violation
and may result in firms drafting the list very generally to allow for flexibility. The letter
therefore recommends that AIMR eliminate this recommendation.
Ari Burstein
Associate Counsel
Attachment (in .pdf format)
Note: Not all recipients receive the attachment. To obtain a copy of the attachment, please visit our members website
(http://members.ici.org) and search for memo 15275, or call the ICI Library at (202) 326-8304 and request the
attachment for memo 15275.