Sidoti, who is also a member of Investorside, says he is surprised that the regulators have not taken some simple steps that would help independents. "They could suggest to pension funds that they get a periodic evaluation of how the funds are invested," Sidoti says.

He also is surprised that the regulators haven‚t opposed those in the fund industry who want to curtail or eliminate the use of soft dollars. Supporters of a bill in Congress to ban soft dollars have argued that the use of soft dollars drives up execution costs and results in high fund expense fund ratios.

"If they ban soft dollars, that would really hurt many independent firms," Sidoti warns. Cleland also contends that unfair government regulation is retarding the growth of independents. He says that is because regulators don‚t understand the nature of how these firms function.

For example, Cleland says securities rules now require a broker-dealer to be licensed to offer investment banking if the firm is collecting research commissions from funds and investors. And that, he complains, discourages new independents because a broker-dealer licensing exam requires the knowledge of some 900 pages of investment banking rules.

"Those regulations are mostly irrelevant and unnecessary to the provision of pure research," Cleland contends. He runs his own Washington-based research business called The Precursor Group. Cleland‚s suggestion is that there should be research-only broker-dealers that would be exempted from many of the regs of other broker-dealers.

Regulators enforce such rules, he adds, because they usually don‚t understand the independent research firm. Even their definition of what constitutes independent research is slightly different from Investorside‚s.

The SEC, as part of the global settlement, defines independent research as simply "having no association with investment banking activities." Investorside‚s standard appears to be more stringent. It requires would-be members to stipulate that "they are not in the business of providing investment banking services; they are primarily paid by a client base of investors, not issuers of securities who are the subject of research; and they have no regulatory problems."

SEC officials said they had no comment on the complaints of Investorside members. The global settlement also requires that the independent advisor, seeking third-party research services, must take into consideration "whether and to what extent the independent research provider is engaged in activities or has a business that may conflict with the preparation and publication of the independent research."

Investorside generally agrees with that requirement, but also stipulates that independent research must be "primarily paid by a client base of investors, not by companies who are the subject of the applicant‚s research." Further, there is disagreement between the SEC and Investorside over the role of soft dollars.

The SEC generally has been trying to discourage the practice. It has hinted that it wants to narrow the safe harbor by which soft dollars are used. The soft dollar practice originates in the famous 1975 Section 28(e) of the securities code.

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