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SECURITIES AND EXCHANGE COMMISSION
[Release No. 33-7413, File No. S7-15-97]
Securities Uniformity; Annual Conference on
Uniformity of Securities Laws
AGENCY: Securities and Exchange Commission.
ACTION: Publication of release announcing issues to be
considered at a conference on uniformity of securities laws and
requesting written comments.
SUMMARY: In conjunction with a conference to be held on April
28, 1997, the Commission and the North American Securities
Administrators Association, Inc. today announced a request for
comments on the proposed agenda for the conference. This meeting
is intended to carry out the policies and purposes of section
19(c) of the Securities Act of 1933, adopted as part of the Small
Business Investment Incentive Act of 1980, to increase uniformity
in matters concerning state and federal regulation of securities,
to maximize the effectiveness of securities regulation in
promoting investor protection, and to reduce burdens on capital
formation through increased cooperation between the Commission
and the state securities regulatory authorities.
DATES: The conference will be held on April 28, 1997. Written
comments must be received on or before April 23, 1997 in order to
be considered by the conference participants.
ADDRESSES: Written comments should be submitted in triplicate by
April 23, 1997 to Jonathan G. Katz, Secretary, Securities and
Exchange Commission, 450 5th Street, N.W., Washington, D.C.
20549. Comments also may be submitted electronically at the
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following E-mail address: rule-comments@sec.gov. Comments should
refer to File No. S7-15-97; this file number should be included
on the subject line if E-mail is used. Comment letters will be
available for public inspection at the Commission's Public
Reference Room, 450 5th Street, N.W., Washington, D.C. 20549.
Electronically submitted comment letters will be posted on the
Commission's internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: John D. Reynolds or Richard K.
Wulff, Office of Small Business Review, Division of Corporation
Finance, Securities and Exchange Commission, 450 5th Street,
N.W., Washington, D.C. 20549, (202) 942-2950.
SUPPLEMENTARY INFORMATION:
I. Discussion
A dual system of federal-state securities regulation has
existed since the adoption of the federal regulatory structure in
the Securities Act of 1933 (the "Securities Act"). -[1]-
Issuers attempting to raise capital through securities offerings,
as well as participants in the secondary trading markets, are
responsible for complying with the federal securities laws as
well as all applicable state laws and regulations. It has long
been recognized that there is a need to increase uniformity
between federal and state regulatory systems, and to improve
cooperation among those regulatory bodies so that capital
formation can be made easier while investor protections are
---------FOOTNOTES----------
-[1]- 15 U.S.C. 77a et seq.
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retained.
The importance of facilitating greater uniformity in
securities regulation was endorsed by Congress with the enactment
of section 19(c) of the Securities Act in the Small Business
Investment Incentive Act of 1980. -[2]- Section 19(c)
authorizes the Commission to cooperate with any association of
state securities regulators which can assist in carrying out the
declared policy and purpose of section 19(c). The policy of that
section is that there should be greater federal and state
cooperation in securities matters, including: (1) maximum
effectiveness of regulation; (2) maximum uniformity in federal
and state standards; (3) minimum interference with the business
of capital formation; and (4) a substantial reduction in costs
and paperwork to diminish the burdens of raising investment
capital, particularly by small business, and a reduction in the
costs of the administration of the government programs involved.
In order to establish methods to accomplish these goals, the
Commission is required to conduct an annual conference. The 1997
meeting will be the fourteenth such conference.
Recently, Congress has examined the system of dual federal
and state securities regulation and the effects of such dual
regulation on the nation's securities markets. During this
process, Congress considered the need for regulatory changes to
promote capital formation, eliminate duplicative regulation,
---------FOOTNOTES----------
-[2]- Pub. L. 96-477, 94 Stat. 2275 (October 21, 1980).
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decrease the cost of capital and encourage competition, while at
the same time promoting investor protection. These efforts
resulted in passage of The National Securities Markets
Improvement Act of 1996 -[3]- (the "1996 Act"), which was
signed by President Clinton on October 11, 1996. The 1996 Act
contains significant provisions that realign the regulatory
partnership between federal and state regulators. The
legislation reallocates responsibility for regulation of the
nation's securities markets between the federal government and
the states in order to eliminate duplicative costs and burdens
and improve efficiency, while preserving investor protections.
The 1996 Act addresses regulation applicable to securities
offerings, investment companies and advisers and broker-dealers.
II. 1997 Conference
The Commission and the North American Securities
Administrators Association, Inc. ("NASAA") -[4]- are
planning the 1997 Conference on Federal-State Securities
Regulation (the "Conference") to be held April 28, 1997 in
Washington, D.C. At the Conference, representatives from the
Commission and NASAA will form into working groups in the areas
of corporation finance, market regulation and oversight,
---------FOOTNOTES----------
-[3]- Pub. L. 104-290, 110 Stat. 3416 (October 11,
1996).
-[4]- NASAA is an association of securities
administrators from each of the 50 states, the
District of Columbia, Puerto Rico, Mexico and
twelve Canadian Provinces and Territories.
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investment management, and enforcement, to discuss methods of
enhancing cooperation in securities matters in order to improve
the efficiency and effectiveness of federal and state securities
regulation. Generally, attendance will be limited to
representatives of the Commission and NASAA in an effort to
promote frank discussion. However, each working group in its
discretion may invite certain self-regulatory organizations to
attend and participate in certain sessions.
Representatives of the Commission and NASAA currently are
formulating an agenda for the Conference. As part of that
process the public, securities associations, self-regulatory
organizations, agencies, and private organizations are invited to
participate through the submission of written comments on the
issues set forth below. In addition, comment is requested on
other appropriate subjects sought to be included in the
Conference agenda. All comments will be considered by the
Conference attendees.
III. Tentative Agenda and Request for Comments
The tentative agenda for the Conference consists of the
following topics in the areas of corporation finance, investment
management, market regulation and oversight, and enforcement.
(1) CORPORATION FINANCE ISSUES
A. Uniformity of Regulation
The 1996 Act amended Section 18 of the Securities Act
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-[5]- to preempt state blue-sky registration of securities
offerings of "covered securities" -[6]- and prohibit state
reviews of offerings of covered securities. -[7]- The
definition of covered securities does not include the following
which, therefore, remain subject to state registration
requirements:
- securities quoted on the Nasdaq SmallCap market;
- securities quoted on the Nasdaq over-the-counter
Electronic Bulletin Board;
- securities quoted on the over-the-counter "pink
sheets;"
- securities listed on national securities exchanges
other than the NYSE or AMEX (unless the Commission
determines by rule that the listing standards of such
exchanges are substantially similar to the listing
standards of the NYSE, AMEX, or Nasdaq/NMS);
- various investment grade securities, such as asset-
backed and mortgage-backed securities, since these
securities usually are not listed on a national
exchange or Nasdaq/NMS;
- private placements of securities under Section 4(2) of
the Securities Act that do not meet the requirements of
---------FOOTNOTES----------
-[5]- 15 U.S.C. 77r.
-[6]- 15 U.S.C. 77r(b). "Covered securities" are
defined in Section 18. The term generally
includes New York Stock Exchange, Inc. ("NYSE"),
American Stock Exchange, Inc. ("AMEX") and Nasdaq
National Market System ("Nasdaq/NMS") securities,
registered investment company securities and
specified exempt securities and offerings.
-[7]- 15 U.S.C. 77r(a).
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Rule 506 of Regulation D; -[8]- and
- securities offered in reliance upon Commission rules
adopted under Section 3(b) of the Securities Act, e.g.,
offerings that are exempt from registration with the
Commission under Regulation A -[9]- and Rules 504
and 505 of Regulation D.
In addition, with respect to offerings of covered securities
(other than listed securities), the states retain the authority
to require specified fee payments and/or notice filings. The
states' continuing authority to regulate certain offerings and to
require other filings and fees continues the need for uniformity
between the federal and state registration systems where
consistent with investor protection.
The 1996 Act requires the Commission to conduct a study as
to the extent to which uniformity of state regulatory
requirements for securities and securities transactions that are
not covered securities has been achieved. -[10]- The
Commission is instructed to consult with the states as well as
issuers, brokers and dealers in conducting this study. The
results of the study are to be reported to Congress within a year
following the enactment of the 1996 Act. The Commission and
NASAA will discuss the nature and extent of uniformity at present
and discuss steps to increase uniformity in light of the 1996
---------FOOTNOTES----------
-[8]- 17 CFR 230.501 through 230.508.
-[9]- 17 CFR 230.251 through 230.263.
-[10]- Section 102(b) of 1996 Act.
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Act.
B. Sales to Qualified Purchasers under the 1996 Act
Section 18 of the Securities Act, as amended by the 1996
Act, excludes from state regulation and review securities
offerings to purchasers who are defined by Commission rules to be
"qualified purchasers." -[11]- A security sold to a
"qualified purchaser" is a "covered security" subject to the same
new regulatory approach as other covered securities as described
above. The Commission will be undertaking rulemaking to define
"qualified purchaser" for this purpose, and will discuss with
NASAA the appropriate criteria for this definition.
C. Commission Exemptive Authority
The 1996 Act added new Section 28 to the Securities Act
granting the Commission extensive general authority to craft
exemptions from the Securities Act to the extent that such
exemptions are necessary or appropriate in the public interest
and consistent with the protection of investors. -[12]-
This new authority permits the Commission to adopt rules which
exempt any person, security or transaction, or any classes
thereof, from one or more of the provisions of the Securities
Act. The Commission is authorized to adopt conditions for the
availability of such exemptions or, if deemed appropriate, adopt
unconditional exemptions. The Commission and NASAA will discuss
---------FOOTNOTES----------
-[11]- 15 U.S.C. 77r(b)(3).
-[12]- 15 U.S.C. 77z-3.
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the nature and extent of appropriate exemptions that may be
adopted under the Commission's new authority and the appropriate
criteria of and conditions to such exemptions. In this regard,
the definition of covered securities does not encompass
securities issued pursuant to exemptions under new Section 28.
Accordingly, securities or transactions determined to be exempt
under Commission rules adopted pursuant to new section 28 may be
subject to state regulation and review. The conferees will
discuss how offerings exempted under new Section 28 may be
regulated in a uniform manner under state securities laws to the
greatest possible extent, consistent with investor protection.
D. Small Business Initiatives
During 1996 the Commission adopted and revised rules to
provide additional assistance to small business. On May 1, 1996,
the Commission adopted Rule 1001, a new Securities Act Section
3(b) exemption from the registration requirements of the federal
securities laws. -[13]- Under the exemption, offers and
sales of securities, in amounts of up to $5 million, that satisfy
the conditions of a 1994 exemption from California state
qualification requirements (Section 25102(n) of the California
Corporations Code) are exempt from federal registration. Also on
May 1, 1996, the Commission adopted amendments to certain rules
---------FOOTNOTES----------
-[13]- Securities Act Release No. 7285 (May 1, 1996) [61
FR 21356].
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under the Securities Exchange Act of 1934 -[14]- ("Exchange
Act") that raised the asset threshold for when a company must
become a "public" reporting company from $5 million to $10
million. -[15]-
On February 20, 1997, the Commission adopted amendments to
the holding period requirements contained in Rule 144 under the
Securities Act. -[16]- Rule 144 provides a Securities Act
registration safe harbor for resales of securities by persons who
hold either "restricted" securities or securities of a company of
which they are affiliates. "Restricted" securities generally
include securities issued in offerings under certain exemptions
from federal registration. The amendments permit the resale of
limited amounts of restricted securities after a one-year, rather
than the previous two-year, holding period. In addition, the
amendments permit unlimited resales of restricted securities by
non-affiliates after a holding period of two years, rather than
the previous three-year period. The Commission believes that
these changes will reduce the cost of private capital formation
and especially benefit small businesses, without reducing
investor protections. In a companion release, the Commission
proposed certain changes to Rule 144 to simplify the rule's
---------FOOTNOTES----------
-[14]- 15 U.S.C. 78a et seq.
-[15]- Securities Exchange Act Release No. 37157 (May 1,
1996) [61 FR 21354].
-[16]- Securities Act Release No. 7390 (February 20,
1997) [62 FR 9242].
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operation and solicited comments on additional changes to Rule
144. -[17]-
Also on February 20, 1997, the Commission proposed
amendments to Rule 430A to permit certain smaller or less
seasoned reporting companies to price securities on a delayed
basis after effectiveness of a registration statement, if they
meet specified conditions. -[18]- The proposals are
intended to provide flexibility and efficiency to qualified
registrants, enabling them to time their offerings to
advantageous market conditions, consistent with investor
protection.
The participants will discuss the impact of the recent
Commission rule changes and the need for any additional exemptive
relief in the small business area. Conferees will consider the
recent proposals and discuss the effects of such proposals, if
adopted, on small business and public investors.
During the fall of 1996, the Commission began meeting with
small businesses in town hall meetings conducted throughout the
United States. These town hall meetings are intended to provide
basic information to small businesses about fundamental
requirements that must be addressed when they wish to raise
capital through the public sale of securities. In addition, the
---------FOOTNOTES----------
-[17]- Securities Act Release No. 7391 (February 20,
1997) [62 FR 9246].
-[18]- Securities Act Release No. 7393 (February 20,
1997) [62 FR 9276].
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Commission has learned and will continue to learn more about the
concerns and problems facing small businesses in raising capital
so that initiatives and programs can be designed to meet their
needs, consistent with the protection of investors. To date, the
Commission has held six town hall meetings attended by more than
1,000 small business persons. The Commission representatives
will share information and ideas obtained from these meetings
with conference participants.
E. Securities Act Concept Release
The Commission issued a concept release during 1996 to
solicit comment on the best means of improving the regulation of
the capital formation process while maintaining or enhancing
investor protection. -[19]- The Commission has been
engaged in a broad reexamination of the regulatory framework for
the offer and sale of securities under the Securities Act.
The concept release solicited comment on different
approaches, such as: the recommendation of the Advisory
Committee on the Capital Formation and Regulatory Processes that
a "company registration" approach be adopted; modifications to
the existing shelf registration system (many of which were
recommended by the Commission's Task Force on Disclosure
Simplification); reforms that would liberalize the treatment of
unregistered securities; and an approach that would involve
deregulation of offers. Comment also was requested with regard
---------FOOTNOTES----------
-[19]- Securities Act Release No. 7314 (July 25, 1996)
[61 FR 40044].
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to any other approaches that should be considered. The comment
period ended October 31, 1996. The participants will discuss the
conceptual issues raised by the release and the comments received
in response to such release and consider the changes that should
be made in the regulation of securities offerings.
F. Report of the Advisory Committee on the Capital
Formation and Regulatory Processes
On July 24, 1996, the Advisory Committee on the Capital
Formation and Regulatory Processes (the "Advisory Committee")
presented its report to the Commission recommending the adoption
of a company registration system. The Advisory Committee
recommended a fundamental conceptual change in the scheme of
regulation governing offerings by public companies. The Advisory
Committee advised the Commission to shift the focus of the
regulatory process for public offerings of securities by these
companies from a transactional registration system to a company
registration system, beginning with a pilot program. As a part
of this new approach, the Advisory Committee recommended
enhancements to the Exchange Act periodic reporting requirements.
The participants will consider the recommendations proposed by
the Advisory Committee, including the impact of such conceptual
changes on the coordination of federal and state securities
regulation.
G. Disclosure Simplification
On March 5, 1996, the Commission published the Report of the
Task Force on Disclosure Simplification (the "Task Force
Report"). The Task Force Report includes several recommendations
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intended to reduce the costs of raising capital by both smaller
and seasoned companies. In addition, the Task Force Report
includes a discussion of the ongoing debate regarding the need to
adapt existing Securities Act requirements and related concepts
to current market conditions. Since publication of the Task
Force Report, the Commission initiated implementation of certain
of the recommendations by eliminating 45 rules and four forms
that were viewed as redundant or otherwise no longer necessary
-[20]- and published proposals to implement additional
recommendations to eliminate unnecessary requirements and
streamline the disclosure process. -[21]-
The conference participants will discuss the findings and
recommendations of the Task Force Report and consider the
Commission's proposals that would implement certain
recommendations. Conferees will consider how the Commission's
proposals, if adopted, would impact the system of dual federal
and state regulation.
H. Plain English
One of major concerns of the Task Force on Disclosure
Simplification was the lack of readability of prospectuses and
other disclosure documents. The Task Force Report criticized
prospectuses for their dense writing, legal boilerplate and
---------FOOTNOTES----------
-[20]- Securities Act Release No. 7300 (May 31, 1996) [61
FR 30397].
-[21]- Securities Act Release No. 7301 (May 31, 1996) [61
FR 30405].
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repetitive disclosures and recommended using plain English
disclosure to improve the readability of prospectuses. The
Commission on January 14, 1997 proposed several rule amendments
that would be a first step in implementing the Task Force's
recommendation. -[22]- The proposals require the use of
plain English writing principles when drafting the front part of
prospectuses -- the cover page, summary and risk factors sections
of these documents. Concurrently with the issuance of the plain
English proposal, the Commission's Office of Investor Education
and Assistance issued a draft copy of a handbook to help issuers
write plain English documents.
The Division of Corporation Finance is operating a pilot
program for companies that want to draft their documents in plain
English. The Division's staff works with volunteers on the
techniques for designing and writing plain English documents
filed under either the Securities Act or the Exchange Act. The
company participants can draft plain English documents and submit
them to the staff for suggestions and comments in a nonpublic
forum.
Conferees will discuss the Plain English initiative,
including federal and state coordination needed to facilitate
implementation of the initiative.
I. Electronic Delivery of Disclosure Documents
The Commission has issued interpretive releases and rules
---------FOOTNOTES----------
-[22]- Securities Act Release No. 7380 (January 14, 1997)
[62 FR 3152].
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addressing the use of electronic media to deliver or transmit
information under the federal securities laws. -[23]-
These initiatives reflect the Commission's continuing recognition
of the benefits that electronic technology provides to the
financial markets. These releases are premised on the belief
that the use of electronic media should be at least an equal
alternative to the use of paper delivery.
The participants will discuss the impact of electronic
technology on the capital formation process and consider the
nature and extent of regulatory changes to accommodate the use of
such technology in securities offerings. In particular,
conferees will consider the various approaches that have been
taken by states and the Commission relative to securities
offerings on the Internet.
J. Internationalization of the Securities Markets
1. Foreign Issuers in the U.S. Market
Foreign companies raising funds from the public or having
their securities traded on a national exchange or the Nasdaq
Stock Market are generally subject to the registration
requirements of the Securities Act and the registration and
reporting requirements of the Exchange Act. The Commission has
provided a separate integrated disclosure system for foreign
private issuers that provides a number of accommodations to
---------FOOTNOTES----------
-[23]- Securities Act Release No. 7233 (October 6, 1995)
[60 FR 53458], Securities Act Release No. 7289
(May 9, 1996) [61 FR 24652].
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foreign practices and policies. Foreign companies conducting
securities offerings in the U.S. continue to be subject to state
regulation and review unless the securities being offered are
"covered securities" within the meaning of the 1996 Act. The
participants will discuss steps to increase coordination of
federal and state treatment of multinational offerings.
2. Regulation S
In 1990, the Commission adopted Regulation S -[24]- to
clarify the extraterritorial application of the registration
requirements of the Securities Act. The Commission intended for
Regulation S to make clear that registration of an offering of
securities under the Securities Act would not be required where
the offering takes place outside the United States and the
securities offered come to rest offshore. Following the adoption
of Regulation S, the Commission became aware of certain abusive
practices under the regulation. The Commission issued a release
on February 20, 1997 proposing revisions to Regulation S to
prevent those abusive practices. -[25]- The proposals
include lengthening the restricted period during which persons
relying on the Regulation S safe harbor may not sell equity
securities into the United States from 40 days to two years
(absent registration or a valid exemption) and classifying equity
---------FOOTNOTES----------
-[24]- 17 CFR 230.901 through 230.904 and Preliminary
Notes.
-[25]- Securities Act Release No. 7392 (February 20,
1997) [62 FR 9258].
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securities placed offshore pursuant to Regulation S as
"restricted securities" under Rule 144. The proposals would
apply to offshore sales of equity securities of domestic issuers
and of foreign issuers where the principal market for those
securities is the United States.
Conferees will discuss the proposed changes to Regulation S,
share their experiences with Regulation S offerings and discuss
steps to increase coordination of federal and state regulation of
such offerings.
(2) MARKET REGULATION ISSUES
A. National Securities Markets Improvement Act of 1996
1. State Licensing Requirements
The 1996 Act directed the Commission to conduct a study of
the impact of disparate state licensing requirements on
associated persons of registered broker-dealers and the methods
for states to attain uniform licensing requirements for such
persons. The Commission is required to consult with the self-
regulatory organizations ("SROs") and the states, and to prepare
and submit a report to Congress by October 11, 1997. To this
end, Commission staff have been consulting with the SROs, NASAA,
and members of the securities industry. The initial goal is to
determine the extent to which state licensing requirements differ
and the effect of different state requirements and procedures
upon associated persons and broker-dealers. The next phase of
the study will be to analyze the need for and feasibility of
requiring uniform state requirements (through legislation or
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other means). The participants will discuss the status of the
study at the conference.
2. State Requirements for
Exchange-Listed Securities
As noted above, the 1996 Act amended Section 18 of the
Securities Act to provide an exemption from state blue sky laws
and regulations for securities that are listed on the NYSE, the
AMEX, and the Nasdaq/NMS. The amendments to Section 18 also
allow the Commission by rule to designate securities listed on
other national securities exchanges as exempt from state blue sky
laws and regulations if the applicable listing standards are
substantially similar to those of the NYSE, AMEX, or Nasdaq/NMS.
Section 18 allows the Commission to adopt such a rule on its own
initiative or in response to a rulemaking petition. The
Commission has received rulemaking petitions from the Pacific
Stock Exchange, Inc., the Chicago Board Options Exchange, Inc.,
and the Chicago Stock Exchange, Inc. The participants will
discuss these proposals and their potential impact on NASAA
members.
3. Broker-Dealer Books and Records
Section 103 of the 1996 Act prohibits any state from
imposing broker-dealer books and records requirements that are
different from or in addition to the Commission's requirements.
In addition, the same section directs the Commission to consult
periodically with state securities authorities concerning the
adequacy of the Commission's requirements. The Commission's
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current proposal to amend Rules 17a-3 and 17a-4 -[26]-
originated in discussions between NASAA representatives and the
Commission about the adequacy of the existing broker-dealer books
and records requirements. -[27]- The proposed amendments
clarify, modify, and expand the Commission's record-keeping
requirements with respect to purchase and sale documents,
customer records, associated person records, customer complaints,
and certain other matters. In addition, the proposed amendments
specify certain types of books and records that broker-dealers
must make available in their local offices. In consideration of
the substantial number of organizations that have expressed
interest in commenting on the proposed amendments, the Commission
extended the comment period until March 31, 1997. The
participants at the Conference will discuss the proposed
amendments and the comments received.
B. Central Registration Depository ("CRD") Redesign
The CRD system is a computer system operated by the National
Association of Securities Dealers, Inc. ("NASD") that is used by
the Commission, the states and the SROs primarily as a means to
facilitate registration of broker-dealers and their associated
persons. The NASD is in the process of implementing a
comprehensive plan to redesign the CRD and to expand its use by
---------FOOTNOTES----------
-[26]- 17 CFR 240.17a-3 and 17a-4.
-[27]- Securities Exchange Act Release No. 37850 (October
22, 1996) [61 FR 55593].
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federal and state securities regulators as a tool for broker-
dealer regulation. As a result of the NASD's efforts, the
redesigned CRD system ultimately is expected to provide the
Commission, SROs, and state securities regulators with: (i)
streamlined capture and display of data; (ii) better access to
registration and disciplinary information through the use of
standardized and specialized computer searches; and (iii)
electronic filing of uniform registration and licensing forms,
including Forms U-4, U-5, BD and BDW.
The NASD has been testing the pilot version of the
redesigned CRD since mid-1996, and this version is now in use on
a trial basis at approximately 800 broker-dealers nationwide.
Among other things, the participants will discuss the status of
the CRD implementation process, and issues relating to the
conversion of existing registration information to the redesigned
CRD and electronic filing of uniform forms.
C. Broker-Dealer Examinations
In December 1995, regulators responsible for examining
broker-dealers (NASAA on behalf of state regulators, the AMEX,
the CBOE, the NYSE, the NASD and the Commission) signed a
Memorandum of Understanding ("MOU") in which they committed to
undertake their regulatory responsibilities in the most efficient
and effective manner possible by sharing information,
coordinating examinations and identifying regulatory priorities.
As part of the MOU, NASAA, the SROs and the Commission agreed to
meet yearly for a national planning summit and each state
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securities regulator, NASD district office and Commission
regional office agreed to meet at least annually for a regional
planning summit, to discuss examination schedules and priorities,
review broker-dealers' examination histories, and discuss other
areas of related interest, with the goal of encouraging
information-sharing to avoid unnecessary duplication of
examinations. Common regulatory findings and the status of this
coordination and of the implementation of the MOU will be
discussed.
In March 1996, the Commission, NASAA, the NASD and the NYSE
released a report on the findings of a joint regulatory effort -
"The Joint Regulatory Sales Practice Sweep: A Review of the Sales
Practice Activities of Selected Registered Representatives and
the Hiring, Retention, and Supervisory Practices of the Brokerage
Firms Employing Them." The objectives of this joint initiative
were to identify possible problem registered representatives, to
review their sales practices, and to assess whether adequate
hiring, retention, and supervisory mechanisms were in place. The
findings of the report suggested generally that, while many firms
maintain satisfactory supervisory mechanisms, firms can and
should improve and strengthen their hiring, retention, and
supervisory practices. Consequently, the report contained
specific recommendations aimed at improving brokerage firms'
hiring, retention, and supervisory practices. The attendees will
discuss implementation of the recommendations.
D. Arbitration
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The NASD and other members of the Securities Industry
Conference on Arbitration have been developing new approaches to
important issues affecting the administration of securities
arbitration over the past year. Much of their work was prompted
by the 1996 report of the NASD's Arbitration Policy Task Force.
The participants will discuss the status of some of the important
developments in this area. For example, proposed changes related
to the variations in administering claims of different dollar
amounts, the administration of older claims, and punitive damages
are likely to be discussed.
E. Internet Fraud/ Electronic Delivery
A leading area of mutual interest to both the Commission
staff and NASAA is the impact of developments in technology.
This year there were ongoing discussions concerning a variety of
new issues. Areas of concern include: industry retention of
electronic records and communications; computer security;
unregistered brokerage, investment advisory and other regulated
financial business conducted through the Internet; foreign
exchange and foreign financial sector access to the U.S. through
electronic media; and industry and investor education about the
use of electronic media for the securities business. In 1996,
the Division issued no-action or information letters with respect
to certain financial business activities on the Internet,
including issuer-based bulletin board services, -[28]- non-
---------FOOTNOTES----------
-[28]- Spring Street Brewing Co. (April 17, 1996); Real
Goods Trading Corp. (June 24, 1996); PerfectData
(continued...)
==========================================START OF PAGE 24======
profit matching services, -[29]- and activities of on-line
service providers (America Online, Compuserve, and Microsoft).
-[30]- The Commission staff and NASAA also have ongoing
consultations on state securities law issues.
On May 9, 1996, the Commission published an interpretive
release expressing its views on the electronic delivery of
documents that broker-dealers, transfer agents, and investment
advisers are required to send to their customers. -[31]-
The conference participants will discuss these and other matters
concerning the Internet and the use of electronic media.
-[32]-
F. Regulation M
On December 18, 1996, the Commission approved Regulation M,
representing the most sweeping changes in the way the Commission
seeks to prevent the manipulation of securities offerings since
the Commission adopted Rules 10b-6, 10b-7, and 10b-8 (also known
---------FOOTNOTES----------
-[28]-(...continued)
Corp. (August 5, 1996); and Flamemaster Corp.
(November 6, 1996).
-[29]- Angel Capital Electronic Network (October 25,
1996).
-[30]- Charles Schwab & Co., Inc. (November 27, 1996).
-[31]- Securities Exchange Act Release No. 37182 (May 9,
1996) [61 FR 24644].
-[32]- See related discussion under Corporation Finance
Issues, supra page 13.
==========================================START OF PAGE 25======
as the "trading practices rules") over 40 years ago. -[33]-
Regulation M, which became effective March 4, 1997, differs from
the former trading practices rules by focusing the restrictions
on securities that are more susceptible to manipulation; using
better measures for manipulative potential; recognizing the
global nature of securities markets; assimilating the changes in
market transparency and surveillance; and codifying a variety of
earlier actions by the Commission to adapt the former rules to
current market conditions. Regulation M addresses the concern
that persons with a stake in a securities offering, such as
issuers, selling securityholders and underwriters, might
artificially influence the market price of the security in
distribution, thereby boosting its offering price. The
regulation seeks to prevent this result by restricting the
activities of these persons. In particular, Regulation M
requires offering participants to cease their market activities,
such as proprietary trading, during a restricted period that
begins one or five business days prior to the offering's pricing
and ends when the offering is over. A notable change from the
trading practices rules, and one which reflects the more focused
approach of Regulation M, is that underwriters of an actively-
traded security of a larger issuer would not be subject to these
restrictions. Participants will discuss issues raised by the new
regulation.
---------FOOTNOTES----------
-[33]- Securities Exchange Act Release No. 38067
(December 20, 1996) [62 FR 520].
==========================================START OF PAGE 26======
G. Order Execution Rules
In August of 1996, the Commission adopted Rule 11Ac1-4
-[34]- ("Limit Order Display Rule") and amendments to Rule
11Ac1-1 -[35]- ("Quote Rule") (collectively "Order
Execution Rules"). -[36]- The Limit Order Display Rule
requires, under certain circumstances, the public display of
customer limit orders priced better than an exchange specialist's
or market maker's quote. The Limit Order Display Rule also
requires that specialists and market makers add limit orders
priced at their quote to the size associated with their quote
when the quote represents the best market-wide price. The rule
establishes standard display requirements for limit orders in all
markets. The Quote Rule was amended to require specialists and
market makers to reflect in their quote any better priced order
that they enter into an electronic communication network, or in
the alternative, the electronic communication network may route
the best specialists' or market makers' orders entered therein
into the public quotation stream. In addition, the Quote Rule
was amended to require that substantial market makers for any
security listed on an exchange publish their quotations for such
security. The Order Execution Rules enhance the quality of
---------FOOTNOTES----------
-[34]- 17 CFR 240.11Ac1-4.
-[35]- 17 CFR 240.11Ac1-1.
-[36]- Securities Exchange Act Release No. 37619A
(September 6, 1996) [61 FR 48290].
==========================================START OF PAGE 27======
public quotations for equity securities and improve investor
access to the best prices available. The new rules also present
investors with improved execution opportunities and improved
access to best prices when they buy and sell securities. The
participants will discuss the new rules and their implementation.
H. Bank Securities Activities
Last year, the NASD submitted a rule proposal to the
Commission that would govern the conduct of member broker-dealers
operating on the premises of financial institutions. The NASD
has since substantially revised its rule proposal to address a
number of issues raised by the commenters, and expects to submit
a revised rule proposal to the Commission shortly. The
participants will discuss the proposed rule revisions, as well as
other developments in this area, including a proposal by the
federal banking regulators to require bank employees that sell
securities directly to take certain qualification examinations
currently required of broker-dealer employees.
(3) INVESTMENT MANAGEMENT ISSUES
Title III of the 1996 Act (the "Investment Advisers
Supervision Coordination Act" ("Coordination Act")) made several
amendments to the Investment Advisers Act of 1940, -[37]-
the most significant of which reallocates federal and state
responsibilities over investment advisers. Under the new scheme
---------FOOTNOTES----------
-[37]- 15 U.S.C. 80b-1 et seq.
==========================================START OF PAGE 28======
larger advisers will principally be regulated by the Commission,
while smaller advisers the businesses of which tend to be more
local will be primarily regulated by the states.
Upon the effective date of the Coordination Act, an
investment adviser that is regulated or required to be regulated
as an investment adviser in a state in which it maintains its
principal office and place of business is prohibited from
registering with the Commission unless the adviser (i) has assets
under management of not less than $25 million (or such higher
amount as the Commission may, by rule, deem appropriate), or (ii)
is an adviser to an investment company registered under the
Investment Company Act of 1940. -[38]- The Commission is
authorized to deny registration to any applicant that does not
meet the criteria for Commission registration and is directed to
cancel the registration of any adviser that no longer meets the
criteria for registration.
The Coordination Act preempts state investment adviser
statutes as they apply to investment advisers registered with the
Commission. The Coordination Act preserves, however, the ability
of state regulators to (i) investigate and bring enforcement
actions against Commission-registered advisers with respect to
fraud and deceit, (ii) require Commission-registered advisers to
file notice documents with the state, and (iii) require
Commission-registered advisers to pay state registration and
---------FOOTNOTES----------
-[38]- 15 U.S.C. 80a-1 et seq.
==========================================START OF PAGE 29======
other fees. State law is also preempted as to certain
"supervised persons" of Commission-registered advisers, except
that a state retains the authority to register an investment
adviser representative that has a place of business in the state.
On December 20, 1996 the Commission proposed rules designed
to implement the provisions of the Coordination Act. -[39]-
The proposed rules (i) address the procedures by which advisers
not eligible to register will identify themselves to the
Commission and withdraw from registration, (ii) exempt certain
advisers that do not meet the criteria for Commission
registration from the new prohibition, and (iii) define certain
terms used in the statute. The comment period on the proposed
rules closed on February 10, 1997.
The conferees will discuss the Commission's rules as they
affect the allocation of regulatory responsibilities between the
states and the Commission. In addition, the conferees will
discuss mutual concerns regarding the implementation of the
Coordination Act, including the transition to the new regulatory
scheme, the sharing of information regarding the status of
registrants, and arrangements for the provision of technical
assistance by the Commission including training, conducting joint
exams and sharing of information with respect to investment
advisers. In addition, state and federal regulators will discuss
the coordination of regulatory, examination and enforcement
---------FOOTNOTES----------
-[39]- Investment Advisers Act Release No. 1601 (December
20, 1996) [61 FR 68480].
==========================================START OF PAGE 30======
activities subsequent to the effective date of the Coordination
Act. The conferees will also discuss progress with regards to
the development of a one-stop electronic filing system for
investment advisers, and the development of a system for
investors to obtain information regarding the disciplinary
history of investment advisers.
(4) ENFORCEMENT ISSUES
In addition to the above-stated topics, the state and
federal regulators will discuss various enforcement-related
issues which are of mutual interest.
(5) INVESTOR EDUCATION
The Commission is pursuing a number of programs for
investors on how to invest wisely and to protect themselves from
fraud and abuse. The states and NASAA have a longstanding
commitment to investor education and the Commission is intent on
coordinating and complementing those efforts to the greatest
extent possible. The participants at the conference will
discuss investor education and potential joint projects in some
of the working group sessions.
(6) GENERAL
There are a number of matters which are applicable to all,
or a number, of the areas noted above. These include EDGAR, the
Commission's electronic disclosure system, rulemaking procedures,
training and education of staff examiners and analysts and
sharing of information.
The Commission and NASAA request specific public comments
==========================================START OF PAGE 31======
and recommendations on the above-mentioned topics. Commenters
should focus on the agenda but may also discuss or comment on
other proposals which would enhance uniformity in the existing
scheme of state and federal regulation, while helping to maintain
high standards of investor protection.
By the Commission.
Jonathan G. Katz
Secretary
April 4, 1997