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Technology Propels Regulatory Reviews

NEW YORK - The changes the Internet and legislation are producing in the financial services industry are in turn compelling the SEC to revise regulations to accommodate the change, according to an SEC official.

Paul F. Roye, director of the SEC's division of investment management, spoke at a seminar here last week sponsored by Glasser Legal Works of New York.

The Internet is creating much of the need for the proposed rule changes, Roye said. It has had the greatest impact on the evolution of the financial services industry and has blurred who is covered under the Investment Company Act of 1940, he said.

"We need to modernize a lot of those rules and regulations," he said.

Form ADV, for example, the form that discloses key information about fund adviser's business practices, would be radically changed if an SEC rule proposal is adopted, he said. The proposal calls for a "plain English" version of the form that would be filed and made available electronically. Filing form ADV electronically would enable firms to file one form to meet both state and federal filing requirements, he said. It would also allow joint filings between broker-dealers and associated asset management firms, he said. Currently, they must file separately.

The most significant format change would be a requirement that firms fill out a descriptive narrative of how they conduct their businesses. Currently, firms respond to fill-in-the blank, multiple choice questions to describe their business practices, Roye said. The new format would provide greater disclosure about firms' operations as well as about firms' soft-dollar practices and other areas that potentially pose conflicts of interest, he said.

The proposed changes to form ADV are not, however, an attempt to tighten regulation, but to provide a more flexible method of accurately describing firms' practices, Roye said.

"We wanted to provide greater flexibility and to get away from boilerplate disclosure," he said. "Currently, you can't meaningfully explain how you manage the money. We aren't trying to regulate through the form."

Another shift in the industry that is driving change in SEC regulations is the fact that broker/dealers are increasingly providing advice. Currently, broker-dealers are exempt from rules investment advisors must follow. The SEC is currently reviewing whether that exemption should continue, Roye said.

The SEC is also considering whether an exemption for financial information and data publishers might need to be reconsidered as a result of the vast number of e-newsletters and websites that have cropped up on the Internet and which provide advice, Roye said.

"To what extent do they cross the line and become investment advisors?" he said. The commission is planning to issue guidelines on the matter, he said.

The Gramm-Leach-Bliley Act, meanwhile, may require the SEC to expand its regulations so that they also apply to banks, he said. The lines between banks and asset management firms were muddied by the passage of the act and perhaps an expansion of regulations to cover banks is needed, Roye said.

Roye also said the SEC is considering developing a legal bulletin that would allow firms to look up previous no-action letters as they relate to funds' performance reporting.The bulletin would be available on the SEC's website and would allow firms to derive guidance on what is and is not acceptable in this one area. A legal bulletin approach would be helpful in other potential regulatory gray areas like firm's soft-dollar practices, he said. If the advertising bulletin is a success, the concept may be extended to other areas, Roye said.

The SEC also is moving away from blanket prohibition of certain advertising practices like using testimonials and will instead consider each case individually, he said.

"I think we should have greater flexibility," Roye said.