SCHROEDER WALTHALL NEVILLE L.L.P.
1111 North Loop West, Suite 1111
Houston, Texas 77008
T. Michael Neville
Walter A. Schroeder, P.C.
Leonidas F. Walthall, P.C.
Lawrence J. Morrison
Samuel E. Whitley
Telephone (713) 654-9100
Writer's e-mail: email@example.com
February 1, 2002
United States Securities and Exchange Commission
Attn.: Mr. Jonathan G. Katz, Secretary
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File No. S7-23-01
Dear Mr. Katz:
I am an attorney licensed in the State of Texas and write to give you my comments on the Securities and Exchange Commission's ("Commission") recent proposed rule on the definition of the term "qualified purchaser."1 My practice and that of this Firm involves frequent interaction with the federal securities laws, including the preparation of private placements, initial public offerings and periodic reports.
As a general matter, I agree with the Commission's approach in the Release and applaud the Commission for its concentration on achieving uniformity within the federal securities laws. I feel that this uniformity will lower the costs of accessing capital markets and reduce the uncertainty surrounding certain legal issues. Defining qualified purchaser by reference to the definition of accredited investor, as proposed in the Release, reduces the possibility of confusion, and in my opinion, most closely reflects the Congressional intent expressed in the National Securities Markets Improvement Act ("NSMIA").2
NSMIA sought to decrease the involvement of state securities regulators in the national securities markets by limiting the securities to which state laws would be applicable.3 NSMIA thus implemented exclusive federal regulation of certain securities and activities, thus preempting the states in certain spheres.4
In the Release, the Commission solicited comments on the alternative definitions of qualified purchaser which the Commission rejected in favor of that proposed in the Release.5 I agree with the Commission that the definition contained in the Release achieves the purposes of NSMIA and encourages uniformity in the federal securities laws better than the alternatives considered by the Commission.
In the Release, the Commission posed several questions to which it desired public response. The first of these was: "Should the definitions of accredited investor and qualified purchaser under the Securities Act be the same?"6
I feel wholeheartedly that these definitions should be the same because the two terms have the same purpose - a recognition that certain, sophisticated investors are "able to fend for themselves" and that the market for such investors' capital would most likely regulate itself in response to investor pressure.7 The accredited investor may not be entitled to the disclosure mandated for non-accredited investors under Regulation D, but as a realistic matter, if a disclosure document is already prepared, the accredited investor will typically request one from the issuer. I suspect that the same will occur with qualified purchasers; although no disclosure to them is required by law, they may well bring pressure to bear on issuers to provide whatever information the purchasers feel is necessary to evaluate their potential investment.
In addition, giving qualified purchaser and accredited investor the same definition avoids the incongruity that could result in a person being an accredited investor, but not a qualified purchaser and vice versa. The proposed definition certainly simplifies the law in this area.
The Commission also solicited comment on the proposed definition's potential impact on state law.8 While there can be no doubt that the proposed definition limits the states' authority to require registration of offerings involving qualified purchasers, this is no fault of the Commission. Instead, it was Congress that enacted such a limitation in NSMIA9 , and as a result, the Commission's proposal is well within the mandates of Executive Order 13,123.10
This preemption of state law is preferable due to the twentieth century development of the United States economy from a piecemeal arrangement of regional economies into a complex national production machine. This is especially true with respect to the securities markets. Uniform rules and a single regulator are easier to comply with than different rules and multiple regulators.
Although NSMIA does not prohibit state regulation of certain offers, in my opinion, the Commission should not, in the Release or subsequent rulemaking, hesitate to exercise the full preemptive power granted to it in the Securities Act. This is for two reasons.
First, as stated above, the promulgation of uniform rules promotes certainty in the law and reduces expenses for issuers accessing the capital markets.
Second, although state securities regulators provide a valuable enforcement function, it is not entirely clear that these agencies perform activities that the Commission could not. This is not to say that state securities laws do not protect investors, but in securities regulation, as in any legal regime, the costs of regulation must be compared to the benefits of the legislation. NSMIA was but one step by Congress toward removing some of the costs faced by issuers; the Commission should also adopt this philosophy, if not by deference to legislative action, then to economic realities.
The Release also contained a proposal to remove the state accredited investor exemption in Rule 50411 and solicited comment on two approaches to preserving the ability of issuers to offer and sell to accredited investors.12 The first approach allows more state control over public Rule 504 offerings to accredited investors by looking to state law for the accredited investor exemption of the relevant state(s).13 The second approach, however, creates an exemption from Securities Act registration for sales to accredited investors based on federal law, as opposed to the current Rule 504 method of looking to state law for the relevant accredited investor exemption.14
The first approach proposed by the Commission does not promote uniformity in the law. As the Commission noted, "[S]tate registration of these offerings would not be preempted for purposes of Rule 504 and Rule 504 offering could continue to be made in reliance on the state accredited investor exemptions."15 This, in part, eviscerates the purpose and effect of NSMIA to further the preemption of state securities laws. Although this preemption is by no means complete, NSMIA clearly reveals Congress' intent to move toward a unitary federal system of securities regulation. Therefore, I urge the Commission to adopt an exemption for public sales to accredited investors based on federal law rather than create an exemption that depends on state accredited investor exemptions. However, I express no opinion on the conditions that the federal exemption should contain.
The Commission hinted in the Release that the definition of qualified purchaser would apply to "trusts or other special purpose vehicles that offer asset-backed, mortgage-backed or other structured securities "16 Presumably, the investment vehicles to which the Commission referred include real estate mortgage investment conduits (REMICs) and financial asset securitization investment trusts (FASITs). The investors that invest in these entities are prime examples of qualified purchasers due to their expertise and sophistication in the securities markets; state registration of REMIC and FASIT securities would provide their investors with no additional protection and the registration fees applicable to REMICs and FASITs would only serve to increase capital costs.17
The Commission asked later in the Release: "Should certain types of securities registered with the Commission, such as asset-backed ones, and offered and sold pursuant to effective registration statements be deemed to be "covered securities" under the qualified purchaser rubric?"18 While securities registered with the Commission already provide a great deal of protection to investors, thus obviating any need for state registration, I believe that the nature of the investor, rather than the investment, should be the guiding factor in deciding whether a person is a qualified purchaser. I therefore agree with the ultimate approach adopted by the Commission in the Release.
In sum, I agree with the definition of qualified purchaser chosen by the Commission and proposed in the Release. I also believe that this definition is superior to the other alternatives the Commission considered.
I hope that the Commission continues its push toward federal preemption of state securities laws in order to create uniformity, promote certainty in the law and reduce costs for issuers.
I hope that my comments are useful and will assist you in deciding on the final text of Rule 146.
Very truly yours,
SCHROEDER WALTHALL NEVILLE L.L.P.
Samuel E. Whitley
|1||Defining the Term "Qualified Purchaser" Under the Securities Act of 1933, Release No. 33-8041, 66 Fed. Reg. 66839 (proposed December 27, 2001) (the "Release").|
|2||National Securities Markets Improvement Act of 1996, Pub.L. 104-290, 110 Stat. 3416 (codified in scattered sections of 15 U.S.C.). More accurately, the Release was promulgated pursuant to the Capital Markets Efficiency Act of 1996, which was the short title given to Title I of NSMIA, where the preemption provisions are found. See NSMIA § 101 (codified as note to 15 U.S.C. § 78a (2001)).|
|3||See NSMIA § 102, codified at 15 U.S.C. § 77r.|
|4||See generally id.|
|5||Release at 66,841-42.|
|6||Id. at 66,843.|
|7||Id. at 66,840 & n.20.|
|8||See id. at 66843.|
|9||See generally NSMIA § 102.|
|10||Exec. Order No. 13,123, 64 Fed.Reg. 43,255 (1999) (directing federal agencies to consider federalism concerns when promulgating regulations or proposing legislation to Congress).|
|11||17 C.F.R. § 230.504 (2001).|
|12||See Release at 66,844.|
|16||Id. at 66,845, n.68.|
|17||Section 2(b) of the Securities Act of 1933 requires the Commission to consider "whether the action will promote efficiency, competition, and capital formation." See Securities Act of 1933 § 2(b), 15 U.S.C. § 77b(b).|
|18||Release at 66,845.|