[9698]
February 20, 1998
TO: INVESTMENT ADVISERS COMMITTEE No. 8-98
SEC RULES COMMITTEE No. 15-98
RE: PROPOSED AIMR SOFT DOLLAR STANDARDS
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As many of you are aware, a Blue Ribbon Task Force of the Association for Investment
Management and Research (AIMR) recently issued proposed voluntary Soft Dollar Standards. AIMR
has requested comments from its members on the Standards by February 28. Several ICI members
have expressed concern about them and suggested that we circulate AIMR’s proposal, and identify some
of the potential problems with the Standards. It is important that, to the extent the Standards present
problems, AIMR members submit comments identifying them. Therefore, please encourage employees
at your firms who are AIMR members to do so. We would appreciate receiving copies of letters
submitted to AIMR.
Set forth below is a summary of some of the potential problems that we have identified with the
AIMR Standards. This summary is not intended to be an exhaustive list.
1. Definition of “Research” - The AIMR Standards define “research” as “services and/or products
provided by a Broker, the primary content of which must, if used by the Investment Manager, directly
assist the Investment Manager in its Investment Decision-Making Process.” In contrast, the SEC
defines “research” as a service or product that “provides lawful and appropriate assistance to the money
manager in the performance of his investment decision-making responsibilities.” Although it is unclear
how AIMR’s definition will be interpreted and applied, it appears to be more restrictive than the SEC’s.
In any event, different definitions are likely to be confusing.
The AIMR Standards set forth the following four-step analysis for determining whether a service
or product is “research”:
a. Define the product or service - The investment manager must identify the service or product
it desires to purchase with client brokerage, including each component of the service or product (e.g., the
Bloomberg service and the Bloomberg terminal). This step may present a problem with respect to
proprietary research.
b. Determine the content - The investment manager must determine that the primary content of
the service or product will directly assist the manager in its investment decision-making process. All
component parts of the service or product must meet this standard. It is unclear what this requirement
means.
c. Determine usage - The investment manager must determine that the service or product directly
assists the manager in its investment decision-making process. This is a burdensome requirement. In
addition, in many instances it may not be possible to substantiate that determination since research often
indirectly assists the investment manager.
d. Mixed-use analysis - An investment manager can use client brokerage to pay only for that
portion of the service or product actually used in its investment decision-making process. Therefore, an
investment manager must determine what portion of the service or product is used to directly assist the
manager in its investment decision-making process. In many instances it is not practicable or even
possible to track actual use.
Under the Standards, an investment manager is required to document the basis for the
determination that a service or product is “research” that may be paid for with client brokerage.
Although it is unclear what type of documentation would be required, this requirement appears to be
overly burdensome. At the very least, this requirement should be clarified.
2. Recordkeeping Requirements - The proposed recordkeeping requirements are extensive and appear
to be quite burdensome, particularly the records required to be kept so that certain additional disclosure
can be made to clients upon request. For example, an investment manager must be able to provide
clients with a description of the research (including proprietary and third-party research) and its separate
components, and the producer of the research. Many advisers may not track this information with
respect to proprietary research.
Another concern with the recordkeeping requirements relates to the brokerage reports required
to be maintained. This requirement is problematic because “brokerage” includes both commissions on
agency trades and mark-ups on principal trades. Many brokers do not report the amount of the mark-up
on confirmation statements and even if they do, many advisers do not have the systems in place to
capture it.
3. Disclosure Requirements - The Standards require an investment manager to provide clients with
extensive disclosure, much of which is probably not of significant interest to clients. For example, in
addition to disclosing the types of third-party and proprietary research that an investment manager
receives, an investment manager is required to disclose whether the research is used and, if so, the extent
of such use and whether an affiliated broker is involved. Providing too much information to clients will
likely obscure material information that clients should be aware of.
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Amy B.R. Lancellotta
Associate Counsel
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