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News August 7, 2006 Issue

SEC Opens IA-BD Study to Bidding

Following a quick round of comments, the SEC has issued its official "Request for Proposal" on the investment adviser/broker-dealer study. The RFP invites bids from prospective contractors interested in conducting the study. Proposals must be received no later than August 24, 2006.

The final RFP is virtually identical to the proposed RFP, describing the scope of work to be conducted by the independent contractor and setting out the criteria by which the contractor will be selected.

Scope of work. The contractor will interview trade groups, regulators, investor advocates, and others to collect their opinions about what should be covered by the IA-BD study. Then, after consulting with the SEC staff, the contractor will study current industry practices, such as:

  • How are financial products and services marketed?
  • What titles are used by investment professionals?
  • What types of disclosures are provided in connection with the offer of such products and services?
  • How are associated persons of broker-dealers and advisers trained? What are their qualifications?
  • What types of supervisory and compliance systems and management structures are present within brokerage and advisory firms?

Additionally, the contractor will survey current literature and will collect actual documents used in the delivery of financial services, such as sales materials, contracts, disclosure documents, and account statements. The contractor also will interview brokerage firm and advisory firm personnel.

While the final RFP closely tracks the proposed version issued June 30, there are a few twists. In a new item, the RFP states that the contractor will study how disclosures provided to customers "might be derived" from enforcement actions, litigations, and arbitrations. In fact, the contractor may be asked to collect court filings and final decisions and opinions, if the SEC staff agrees that doing so would be useful and feasible.

The contractor also will conduct focus group interviews of investors to evaluate their expectations of advisers and brokers. Focus group participants will be asked about the type of information that they find useful, as well as their understanding of marketing, fees and costs, disclosures, and other aspects of financial products and services they receive.

After preparing summaries of the interviews, and taking any other steps deemed necessary, the contractor will prepare a final report to the SEC.

Criteria by which the contractor will be selected.

To be eligible to conduct the study, the contractor must have a "track record of producing high-quality, unbiased, qualitative and quantitative research." Moreover, the contractor must be "knowledgeable in all relevant and necessary respects" about the financial products and services provided to individual investors by brokers and advisers. This knowledge can be gained either through "internal expertise" or through association with "leading academics" or other independent experts in the subject area.

The following categories of persons are disqualified from serving as contractor:

  • any participant in the Financial Planning Association v. SEC litigation;
  • any firm that is registered with PCAOB; and
  • any investment adviser, broker-dealer, or SRO, and their associated person.

Prior to the selection of the contractor, the SECís contracting officer must make a determination that the contractor has not "prejudged" the conclusions of the study nor how to most effectively regulate investment professionals. On this note, the contractor will be evaluated to determine whether any other circumstances raise questions about the contractorís impartiality, such as a material conflict of interest.

Possible candidates. Interestingly, the SEC distributed the RFP by e-mail to a list of 88 individuals associated with a range of organizations. Some slicing and dicing of that list reveals that roughly two dozen of the recipients are disqualified from serving as contractor, either because of their affiliation with broker-dealers or SROs or because they have expressed strong opinions about the SECís fee-based brokerage rule and the outcome of the FPA v. SEC litigation.

Of the remaining 64 or so names on the list, about half appeared to represent law school professors and other academics.

The remaining group was a mixed bag, primarily consulting firms. Some of the names will be familiar to those in the industry: Cerulli Associates, Charles River, Bearing Point, IBM, National Regulatory Services, Financial Research Corporation, Tiburon Strategic Advisors, and Capco.

Others firms, however, may not be familiar: The Brattle Group, Economists Incorporated, NERA Economic Consulting, Competition Policy Associates, Empirical Research Partners, Priority Appraisal Services, and Lexecon.