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News July 31, 2006 Issue

Groups Weigh in on Proposed IA-BD Study

A handful of groups have submitted comments on the SECís proposed solicitation for an independent contractor to perform the IA-BD study. But donít look for those comments on the SEC website. To date, the SEC does not appear to have made those letters publicly available. Some letters, however, were made available from commenters themselves.

The Investment Adviser Association urged the SEC to expand the study to address if and how brokers are complying with the fee-based brokerage rule, noting that "numerous news reports have indicated that the brokerage community has struggled to comply with requirements of the new rule." The IAA also said that the study should include a requirement to provide information about whether and how the SEC is enforcing the fee-based brokerage rule. "To our knowledge," said the group, "no credible study has been performed about whether and how brokers are complying with the rule and whether and how the Commission is enforcing the requirements of the rule. A factual report on both is necessary to determine if further policy adjustments are necessary and appropriate."

The Financial Planning Association and Fund Democracy also submitted letters on the draft solicitation.

The key question, of course, is who will be selected to perform the study. "Everybody wants somebody who is knowledgeable and neutral," said IAA executive director David Tittsworth. However, he added, there is a "tension" between those two concepts, as evidenced by the "huge number" of individuals and organizations that are disqualified from conducting the study. Under the proposed study criteria, explained Tittsworth, every investment adviser, every broker-dealer, every SRO, any person who is a party to the FPA v. SEC lawsuit, and any accounting firm registered with PCAOB is automatically disqualified from serving as the independent consultant. Moreover, he added, any person or group that has expressed a public position on the fee-based brokerage rule is disqualified. "Itís hard to argue against those broad exclusions, in a sense, but the problem is you donít want somebody who doesnít really understand the industry at all," he said. "If you donít have a working knowledge of investment advisers and broker-dealers," he said, "I donít think you are going to be able to conduct the study."

Tittsworth said that he has no idea who might be able to conduct the study. "I donít know," he said. Perhaps, he suggested, there may be a consulting group or an academic (or academic group) "out there" that meets the criteria.