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July 31, 2004

An SEC Rule on Research

By Gregory Bresiger

The Securities and Exchange Commission, which is concerned about soft-dollar abuses, may write a new rule defining research.

The potential measure comes as an SEC task force conducts an investigation into how money mangers use clients' commission dollars to purchase research. While the arrangement - known as soft dollars - is legal, many firms are apparently interpreting the word "research" a bit too liberally.

"There may be people pushing the [soft-dollar] envelope," according to Larry Bergmann, an associate director in the SEC's division of market regulation and co-chairman of the task force. "They are getting away from the words of the statute," he told an industry conference in New York.

The statue in question is Section 28(e) of the Securities Exchange Act of 1934. It is a "safe harbor" that permits money managers to use commissions to acquire research. "We are focusing on whether we need to give more guidance or reiterate the focus of the statute," Bergmann told the Security Industry Association's annual soft-dollars confab.

The current Section 28(e) definition of research includes advice, analysis and reports. Some firms have "abused" the safe harbor to acquire items such as carpeting and airline tickets, Bergmann said. On two previous occasions, in 1976 and 1986, the SEC has attempted to clarify the definition of research.

The SEC's latest sally into the complex world of soft dollars is an outgrowth of the scandals that have rocked the mutual fund industry. The soft-dollars task force was formed earlier this year and consists of representatives from five SEC divisions. Bergmann said that drafting a rule will be difficult. "What is research under 28(e)?" he asked rhetorically. "Research is something that has intellectual content. But writing a rule is really tough."