Rule Comments: S7-10-00

June 22, 2000

By Hand and Electronic Filing
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Mail Stop 6-9
Washington, D.C. 20549

Re: SEC File No. S7-10-00; Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV

Dear Mr. Katz:

These comments are submitted on behalf of Thomson Financial BankWatch Inc. (BankWatch), Thomson Financial Global Markets (TGM) and Thomson Proxy Services Inc. (TPS) (collectively, the "Thomson Advisers") in response to the above-referenced proposal by the Commission and the state securities regulators to establish an electronic filing system for investment advisers and to revise substantially Form ADV. While the Thomson Advisers support the development of an electronic investment adviser filing mechanism and the modernization of the investment adviser registration and disclosure form, we believe that a number of adjustments should be made to the current proposal before either of these measures is adopted.

The Thomson Advisers are divisions of Thomson Financial, which provides financial information, research, analysis and software to the global investment and corporate communities. With more than 7,000 employees in 65 offices around the world, Thomson Financial is part of the $6 billion Thomson Corporation. Each of the Thomson Advisers provides a specialized type of largely impersonal advisory services to a sophisticated global clientele. For example, BankWatch is a nationally recognized statistical rating organization (NRSRO) whose services consist primarily of credit ratings and reports on banks, thrifts and other credit institutions. Because BankWatch's services are designed mostly for corporate treasurers and money-market participants, they are credit-quality rather than equity-investment oriented.

TGM publishes various electronic and hard-copy technical market analyses and information products regarding securities, commodities and foreign currencies. TGM also affords subscribers to many of its services the opportunity to contact TGM's analysts to discuss published information. Almost all of TGM's subscribers are connected with major financial institutions or regulatory bodies, such as national and international broker-dealers and Federal Reserve Banks.

TPS' primary business consists of analyzing proxy proposals and producing reports thereon for major institutional investors, including pension plans. In addition to this analysis, TPS votes, records and generates proxy voting activity reports for many of its clients, and develops proxy policies and procedures for more than 30 markets worldwide. It also offers a social investment research service on a subscription basis.

Although none of the Thomson Advisers manages portfolios or directs investments for its clients, each of the Thomson Advisers is registered with the Commission: BankWatch by virtue of its status as an NRSRO, pursuant to rule 203A-2(a) under the Investment Advisers Act of 1940 (Advisers Act), TPS as a pension consultant pursuant to rule 203A-2(b) and TGM, pursuant to an exemptive order issued by the Commission.¹

The Investment Adviser Registration Depository

The Thomson Advisers believe that migrating from a paper-based investment adviser registration system to an electronic one is an excellent idea. If designed properly, an electronic system will enable registrants to meet their regulatory obligations more efficiently and will permit easier public access to important information about registered advisers. Unfortunately, as it is currently proposed, the Investment Adviser Registration Depository (IARD) contains certain flaws in design that will prevent the benefits of an electronic filing system from being fully realized. In this regard, the IARD seems to be only a slightly modified version of Web CRD, the electronic filing system which NASD Regulation, Inc. (NASDR) designed and operates for broker-dealers. We understand that this system has proven extremely cumbersome to use, and we respectfully suggest that the IARD not be implemented without assurances that the most troublesome aspects of Web CRD will not be imported into the investment adviser filing system. In particular, we note the following:

The Commission's release proposing the IARD and Form ADV modifications (Proposing Release)² explains that like Web CRD, the IARD will require that registration documents be drafted and edited on-line, and will permit only one draft of each form to be saved on the system for 60 days.³ This design will prevent advisers from accessing their drafts whenever the system is unavailable. Advisers will also run the risk of losing draft documents that are not filed within the 60-day window, which may occur for example, where the implementation of changes being reported is temporarily postponed.
To avoid these problems, the IARD should be designed so that advisers can complete the forms off-line. The forms should then be filed by uploading the finished product into the IARD.
We understand that Web CRD permits only a limited number of characters to be used in answering questions on Form BD, and that no provision is made for longer answers.

Because investment advisers have more extensive disclosure obligations than do broker-dealers, the IARD must ensure that the electronic version of Form ADV provides adequate room for complete answers to all questions.
We understand that the Form BD produced by Web CRD is visually cluttered, lacks uniform pagination and is difficult to read. Because Form ADV is both a registration document and a disclosure document that will be made available to the public, careful consideration should be given to the visual impact of the forms produced through the IARD.

The documents produced by the IARD (both as viewed on-line and as printed in hard copy) should be clear, easy-to-read, and sufficiently uniform to be useful to the public.

In addition to the foregoing design issues, we note that the IARD proposes to make data available for commercial use. Before this is done, we request that the Commission ensure that proprietary information contained in the advisory database will not be disclosed to commercial users. (We address the issue of disclosing proprietary information in greater detail below.)⁴ We further suggest that it is inappropriate to post personal information such as home addresses and social security numbers on the internet, and we request that such information be redacted from the forms that are publicly available through the IARD.

Proposed Revisions to Form ADV

The Thomson Advisers applaud the Commission's efforts to overhaul Form ADV, which has not been thoroughly revised in fifteen years. We believe that it is crucial for this registration and disclosure document to accurately reflect the diversity and character of investment advisory services being rendered today. That being said, it appears that the new form is far too long and complicated, and we believe that the Commission has seriously underestimated the amount of time and expense that will be required to prepare this document. We further believe that the significant new burdens that will be imposed on advisers under the proposal will not be offset by corresponding benefits toclients. Rather than providing the public with the most important information necessary for the informed selection and monitoring of advisers, the proposed new Form ADV will lead to a disclosure "overload" that may discourage clients from reading the form at all. The sophisticated institutional clientele that the Thomson Advisers serve neither needs nor wants the level of disclosure that the Commission proposes.

With regard to the specific aspects of the new Form ADV, the Thomson Advisers note the following:

Glossary of Terms

The term Advisory Affiliate should not be defined to include any person who solicits clients on an adviser's behalf. Because a solicitor who is also an employee of the adviser is already included within the definition of Advisory Affiliate, the separate identification of solicitors is relevant only to non-employees. However, even here, the inclusion of solicitors as Advisory Affiliates is of limited relevance. While the term Advisory Affiliate is used in gathering disciplinary information in Part 1A, Item 11, advisers are already prohibited, by virtue of the SEC's cash solicitation rule (rule 206(4)-3), from paying solicitation fees to individuals who have been the subject of certain disciplinary actions. There is no reason to impose new disclosure requirements relating to these individuals.

Part 1A

On the whole, the questions in this part of the form are clearly worded and the instructions are helpful. However, the layout of this part relies far too heavily on the use of Schedule D, whose structured format is likely to produce a document that is cumbersome to work with and difficult to read. Responding to several items of Part 1A could require completing both the body of the form and multiple copies of Schedule D.⁵

We suggest that Part 1A be restructured to permit the inclusion of more information in the body of the form, and that Schedule D be changed to a modified free-text format that permits a more organized presentation of supplemental answers. Complete answers to one item should be displayed before the next item begins.

Part 2A

While, in the abstract, a narrative disclosure brochure may provide clients with enhanced information about the advisers who serve them, the brochure that is currently proposed is too comprehensive to be of much practical use. In modeling the investment adviser brochure after a mutual fund prospectus, the proposal threatens to overwhelm clients with information and will ultimately be counterproductive. Furthermore, in view of the substantial effort that will be required to produce the narrative brochure, we believe that the amount of time that is proposed for advisers to transition to the new disclosure format is inadequate.

The Thomson Advisers endorse the alternate transition schedule suggested in the comments filed by the Investment Counsel Association of America (ICAA).⁶

We also find the proposed requirement that advisers deliver all material brochure amendments to their clients to be ill-advised. As it stands today, less than one percent of our respective clients avail themselves of our annual offers of updated brochures. We see absolutely no evidence that our clients wish to be notified of every change we make to our Form ADV. Furthermore, if clients are interested in tracking all brochure amendments, they will be able to do so through the IARD.⁷

The proposal to require delivery of all Part 2A updates to existing clients should be eliminated.

In addition to these general issues, we also respectfully note the following specific problems with proposed Part 2A:

1. Proposed Part 2A does not appropriately provide for limited-purpose advisers.

Several of the topics covered by proposed Part 2A (such as brokerage practices, review of accounts, etc.) are not relevant to firms like the Thomson Advisers who provide specialized, mostly impersonal advisory services. Although the instructions to Part 2A indicate that each brochure "may omit information that does not apply to the advisory services and fees it describes," we are concerned that once this document becomes subject to electronic filing, the IARD's "completeness checks" might reject brochures that do not include all categories of information.

Part 2A should be modified to make it clear that all items may not be relevant to all advisers.
Proposed Item 4B requires advisers to describe the types of advisory services they offer. General purpose advisers would not be required to disclose the details of how they manage client assets. On the other hand, the Commission proposes to require an adviser that holds itself out as specializing in a particular service to explain its specialty "in detail."⁸ While it may be appropriate for special-purpose advisers to disclose that the nature of their services is limited, there is no valid reason for requiring such advisers to provide a level of detail beyond that which is required of all advisers generally.

This same discrepancy appears in Item 7B which requires advisers who "primarily use a particular method of analysis or strategy" to explain "the specific risks involved," while requiring advisers who offer a wide variety of advisory services simply to explain that investing in securities involves a risk of loss.⁹ Nothing in the Advisers Act supports the imposition of more stringent disclosure requirements on advisers offering a specialized type of service than those imposed on other advisers.

The proposed enhanced disclosure obligations for specialized advisory services should be eliminated.
The Proposing Release states the general proposition that advisers must refund prepaid unearned advisory fees to clients when the advisory relationship terminates.¹⁰ In accordance with this view, Item 5D would require advisers to explain how they calculate and refund prepaid fees in the event of contract termination. The Thomson Advisers respectfully note that the Commission has acknowledged that refunds may not required in the case of prepaid subscriptions to certain impersonal advisory services.¹¹
The instructions to Item 5D should be amended to reflect the different requirements for personalized and impersonal services.

2. Proposed Part 2A requires irrelevant and unnecessary information.

Item 5C would require disclosure of the amount or range of other fees and expenses a client will incur in connection with an adviser's services. It is not clear how an adviser who does not manage money would answer such a question. Moreover (as to all advisers) the amount or range of ancillary fees will vary based on a client's particular circumstances. An accurate answer to this question could produce a range of fees that is so broad as to be meaningless.

Advisers should not be required to disclose the amount or range of non-advisory fees.
Item 7A would require all advisers to explain that investing in securities involves a risk of loss that clients should be prepared to bear. The Thomson Advisers' clients do not need to be reminded of this self-evident fact.

This requirement should be eliminated altogether or restricted to only the most unsophisticated types of clients.
Item 17 would require disclosure relating to advertisements or reports of investment performance of securities recommendations or model portfolios. Divorced from an actual performance report, this disclosure is likely to be meaningless. The Commission and the staff have already constructed elaborate disclosure requirements for advisers' performance portrayals. Such point-of-advertisement disclosure is much more likely to be useful to clients than a disembodied discussion in the brochure.

Item 17 should be eliminated.

3. Proposed Part 2A would unwittingly require the disclosure of proprietary information.

Item 16 would require advisers who have or will accept authority to exercise voting power with respect to client securities, to disclose among other things, the policies, practices and procedures used to determine how to vote proxies. As noted above, one of the primary services provided by TPS is the development of proxy policies and procedures. These policies and procedures are proprietary to TPS. While it may be appropriate to disclose such information to TPS' clients, it is not appropriate to require TPS (or its clients) to divulge this information publicly. It would be particularly inappropriate to make this information available to commercial users who will have access to the IARD.

Item 16 should be reworded to avoid the disclosure of proprietary information.

4. Proposed Part 2A contains certain unclear terminology.

Item 7B would require advisers who primarily use a particular method of analysis or strategy to discuss in detail any "significant" or "unusual" risks pertaining thereto.¹² Additional disclosure is required if the primary strategy involves "frequent" trading of securities. "Significant," "unusual" and "frequent" are all undefined terms which may be interpreted differently by different advisers.

For the reasons explained above, the Thomson Advisers believe that the enhanced level of disclosure for advisers offering specialized services should be eliminated from Item 7B altogether. However, if the Commission determines to maintain a two-tiered disclosure regime, these vague and subjective terms should be deleted or defined.
Item 9C would require a description of any material "relationship or arrangement" that an adviser or its management persons have with related financial industry participants. The addition of the word "relationship" in this item is confusing.¹³ An adviser presumably would have a material "relationship" with all of its related parties; however, only an "arrangement" between such parties is relevant to the services performed for clients.

The word "relationship" should be deleted from Item 9C.

* * * * *

In proposing to create an on-line filing system and completely revamp From ADV, the Commission has embarked on an ambitious and laudable course of reform. The Thomson Advisers commend the Commission's efforts in this regard. However, we also believe that much work is left to be done before these proposals are implemented.

The Thomson Advisers appreciate this opportunity to comment on these very important rule proposals.

Very truly yours,

/s/

__________________________________
Gregory A. Root, President
Thomson Financial BankWatch

/s/

___________________________________
Michael S. Ross, Managing Director
Thomson Financial Global Markets

/s/

______________________________________
Bruce Babcock, President
Thomson Proxy Services

cc: Paul F. Roye, Esq.
J. David Fielder, Esq.
Cynthia M. Fornelli, Esq.
Jeffrey O. Himstreet, Esq.
Robert E. Plaze, Esq.
Lori H. Price, Esq.

Footnotes

¹	IA Rel. 1691 (Jan. 6, 1998).
²	Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV, Release Nos. IA-1862, 34-42620 (April 5, 2000).
³	Proposing Release at 10.
⁴	See discussion of Part 2A, Item 16 at pages 7-8.
⁵	This could occur, for example, in responding to items: 1B (business names); 1K (locations of books and records); 1L (registration with foreign authorities); 5.I(2) (wrap fee programs); 7A (affiliated advisers); 7B (limited partnerships); and 10 (control persons). This layout, which is adopted from Web CRD, is largely responsible for the visual clutter of the electronic version of the current Form BD that is discussed above.
⁶	The ICAA suggests that if the Commission does not narrow the scope and extent of the brochure and brochure supplements, advisers will need at least 180 days to create the required documents and an additional 60 days to deliver the new materials to clients.
⁷	Proposing Release at note 122.
⁸	Id. at 43.
⁹	Id. at 46. Additional comments relating to Item 7 are set forth below.
¹⁰	Id. at notes 116 and 136.
¹¹	Wellington Financial Corp. (Jan. 17, 1983)("[I]n the case of impersonal advisory services, such as the publication of an advisory newsletter, where the publisher adequately and meaningfully discloses his refund policy before a subscription agreement has been signed, it has been our position that it would not be a breach of fiduciary duty for a publisher not to provide a prorated refund if: 1) the subscription agreement covered a reasonable period of time and 2) the publisher's refusal to provide a refund accorded with the terms of his refund policy as disclosed").
¹²	The terms "significant" and "unusual" also appear in Item 7C.
¹³	Furthermore, because the Proposing Release speaks only of "arrangements" between advisers and their related parties, it appears that the inclusion of the word "relationship" in the form might be an error. Proposing Release at 52.