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U.S. Securities and Exchange Commission

Office of Small Business:
2000 Conference on
Federal-State Securities Regulation:
Final Report

September 2000

North American Securities Administrators Association, Inc.
10 G Street, N.E.
Suite 710
Washington, D.C. 20002

U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Table of Contents

  1. Summary

  2. Reports of the Working Groups

    1. Corporation Finance

    2. Investment Management

    3. Market Regulation

    4. Enforcement

    5. Investor Education and Assistance

  3. Exhibits

    1. Conference participants

    2. Commenters

I. Summary

The United States Securities and Exchange Commission (SEC or Commission) and the North American Securities Administrators Association, Inc. (NASAA) held their annual meeting in Washington, D.C. on April 3, 2000. The 2000 meeting was the 17th meeting held under Section 19(c) of the Securities Act of 1933. That Section requires the SEC to hold an annual meeting to promote the following goals:

  • maximize uniformity in federal and state securities regulation;

  • maximize effectiveness of regulation;

  • reduce costs and paperwork for issuers; and

  • minimize interference with capital formation.

Approximately 60 representatives from the states and from the SEC attended the 2000 meeting.1 Participants divided into five working groups in the following subject areas: corporation finance; investment management; market regulation; enforcement; and investor education and assistance.

SEC and NASAA representatives discussed matters of common interest and concern in these working groups. Part II of this report describes the discussion of each group. During the group meetings, participants outlined current state and federal regulatory efforts and initiatives. They identified areas where joint cooperation would be beneficial and discussed ideas and plans for more effective cooperation, coordination and communication.

The SEC and NASAA issued a joint release2 before the meeting to publish the proposed agenda and seek comment concerning the agenda topics as well as other relevant matters.3


II. Reports of the Working Groups

A. Corporation Finance

The 2000 meeting was the fourth meeting following passage of The National Securities Markets Improvement Act of 1996 (NSMIA or the 1996 Act). NSMIA contains significant provisions that realign the regulatory partnership between federal and state securities regulators.

NSMIA in part preempted the states from registration and review of offerings of securities called "covered" securities. The states retain authority to register and review, or exempt from registration, offerings of securities that are not covered securities. Non-covered securities generally include the securities of smaller companies, like those quoted on the NASDAQ SmallCap market, the NASD's over-the-counter Bulletin Board, or in the "pink sheets." In addition, many securities issued in transactions exempt from federal registration are not covered securities; the states retain authority to register or exempt those securities.4

The states' ongoing authority over many securities offerings continues the need for uniformity between the federal and state registration systems, where consistent with investor protection. Staff from the Commission's Division of Corporation Finance and state representatives discussed the following topics in this working group:

1. State small business initiatives

The group discussed several state initiatives designed to facilitate offerings by smaller issuers. These include:

  • the Small Company Offering Registration (SCOR) form;

  • the NASAA model state accredited investor exemption; and

  • the Coordinated Equity Review (CER) program.

NASAA first adopted the SCOR form in 1989 to help small businesses raise seed capital to expand their operations through small securities offerings. The SCOR form is a simplified question and answer format used for the registration of securities offerings. In September 1999, NASAA approved changes to simplify and improve the SCOR form.

One disclosure format for securities offerings exempt from federal registration under Regulation A is based on the 1989 version of the SCOR form.5 State representatives briefed the working group on the principal changes made to the SCOR form. Staff from the Division indicated that they were considering the revised SCOR form with a view to requesting the Commission to propose revising Regulation A to include the 1999 version of SCOR.

The group also discussed NASAA's model accredited investor exemption that was adopted in 1997. Generally, it exempts offers and sales of securities from state registration requirements if, among other things, the securities are sold only to persons who are, or are reasonably believed to be, accredited investors.6 Although the model exemption permits public offers to accredited investors, it limits the manner of the solicitation. The group discussed whether the exemption would be available for an offering registered at the federal level. The general view was that an issuer in a federally-registered offering should register by coordination at the state level rather than rely on the exemption. The group also noted that the exemption may not be available because the solicitation allowed in a federally registered offering is broader than the more limited solicitation permissible under the exemption.

Lastly, the state representatives discussed developments in the CER program for offerings registered with the states. That program provides for a coordinated state review process for some offerings of equity securities registered at the federal level. Under CER, the participating states coordinate with each other to produce one comment letter to an issuer that addresses both substantive and disclosure matters. To date, 43 states have agreed to participate in the program. As of the meeting, 48 registration statements had been filed under the program, and 19 had become effective.

2. Federal small business initiatives

Rule 504 of Regulation D provides an exemption from the Securities Act registration requirements for offerings up to $1 million in any 12-month period. Rule 504 is available only to the companies that do not report under the Exchange Act if certain conditions are met. The Commission amended Rule 504 in April 1999 to limit the circumstances where general solicitation is permitted in offerings under the rule and freely tradeable securities are issued.7

The group discussed the operation of the revised rule. One issue considered by the group related to the use of the state accredited investor exemption in public Rule 504 offerings. The Division staff asked whether an issuer using the accredited investor exemption must specify in its offering materials the states in which offers to accredited investors are being made, or whether an issuer simply may offer the securities in any state where the exemption is available without specifying those states. The Division and state representatives agreed to consider this matter in future discussions.

The working group discussed Form D, which is the notice filed by an issuer with the Commission and many states that reports an offering under Regulation D. The eight-page form is filed in paper, rather than electronically. The group considered whether the form could be streamlined and shortened and formatted for electronic filing. Many views on this matter were expressed by participants, and the working group agreed to continue to discuss this matter in the future.

A blank check issuer or company is one in the development stage with no specific business plan or purpose, or one that indicates its plan is to engage in a merger or acquisition with an unidentified company or companies.8 Although blank check issuers cannot rely on some exemptions from federal registration, they may issue securities without federal registration in private offerings under Section 4(2) of the Securities Act. In many cases, the securities are issued for little or no consideration, and the promoters of the blank check company frequently "gift" part of their securities to various donees.

Securities issued in private offerings - including those issued by blank check issuers in private offerings - are restricted, which means that they cannot be resold without federal registration or an available exemption from federal registration. Several years ago, the Commission adopted Rule 144 to provide a safe harbor for a securities holder to rely upon when reselling restricted securities under a federal exemption. Where the requirements of Rule 144 are met, the holder of the restricted securities may resell those securities under the federal exemption. The working group discussed the application of Rule 144 to restricted securities issued by blank check issuers. The Division staff indicated that, in their view, the Rule 144 safe harbor would not be available for the resale of restricted securities of blank check issuers despite technical compliance with the rule.

The last topic in this area related to the federal exemption coordinating with a California state exemption. The Commission in 1996 adopted an exemption from federal registration for offerings up to $5 million made in compliance with one of California's exemptions from its qualification requirements. The California exemption - Section 25102(n) of the California Corporation Code - permits some forms of general solicitation but limits sales to persons called qualified purchasers.9 The working group discussed whether this exemption was available in offers and sales to persons who would meet the definition of qualified purchasers but are located outside California. The Division's staff expressed their view that the federal exemption applies only to offers and sales that satisfy the conditions of the California exemption and registration process, and that offers and sales to persons in states other than California could not be made in compliance with the California exemption. Consequently, offers and sales outside California would not be exempt at the federal level under Rule 1001.

3. Use of electronic communications and procedures in securities offerings

Both issuers and underwriters are expanding the use of electronic procedures in securities offerings. Many underwriters now use the Internet to offer and sell securities in public offerings by posting preliminary prospectuses on their websites, communicating with offerees and purchasers through electronic mail, and setting procedures as to prospectus access, account funding and the timing of offers and sales of the securities. Issuers also frequently use electronic means in direct offerings. For example, many have posted offering material on their websites. The group discussed recent developments in this area.

4. Plain English

Beginning October 1, 1998, issuers filing Securities Act registration statements must use plain English writing principles when drafting the front part of prospectuses, i.e., the cover page and the summary and risk factors sections.10

The Division's staff, in the full review of a registration statement, examines the prospectus for compliance with these plain English requirements. If appropriate, the staff will issue comments to obtain improved plain English disclosures. Because some states also review and comment upon prospectus disclosures, some questions have arisen on the staff's application of the plain English requirements. The group considered issues that have arisen in this area and discussed ways to facilitate federal and state coordination in the comment process.

5. Uniform Securities Act

A committee of the National Conference of Commissioners on Uniform State Laws is in the process of drafting a new version of the Uniform Securities Act - a uniform state securities law statute. The new version would modernize and update the law for many changes including, for example, NSMIA, technology advances, and internationalization of securities offerings and trading. The group discussed the status of this redrafting effort.

B. Investment Management

The investment management working group included representatives from the states and the Commission's Division of Investment Management and Office of Compliance Inspections and Examinations (OCIE).

1. Adviser Regulation Coordination

Division representatives reported that, in January, the Commission canceled the registrations of 410 investment advisers that had failed to file Schedule I. A list of these investment advisers had previously been provided to NASAA. A representative from OCIE explained that, on an ongoing basis, SEC regional offices will notify the appropriate state regulator when the regional office identifies an adviser that is not eligible to be registered with the Commission. The appropriate state regulator will also be notified when the Commission cancels an adviser's registration. The OCIE representative reported that 41 states had entered into a confidentiality/access agreement regarding examination information.

The conferees discussed issues associated with so-called "Internet advisers," including whether these advisers are required to register (and, if so, with which regulator) and how these advisers can comply with books and records requirements.

2. SEC Inspection and Examination Program

A representative from OCIE described the Commission's adviser inspection and examination program. The OCIE representative indicated that SEC examination staff, in the course of inspecting SEC-registered advisers, requires advisers to substantiate that they qualify for registration with the SEC. OCIE is placing particular emphasis on verifying SEC-registered advisers' assets under management.

The OCIE representative described the Commission's inspection and examination program for advisers located in Wyoming, which has no adviser registration statute. The OCIE representative explained that there are approximately 30 investment advisers in Wyoming and that OCIE inspects each of these advisers at least once every five years.

The transition from SEC to state registration for Ohio advisers occurred between January 1 and March 31, 2000. OCIE plans to examine the Ohio advisers that remained registered with the SEC to verify that they are eligible to maintain their SEC registration.

Advisers' soft dollar practices continue to be an important area for OCIE examiners. Planned revisions to Form ADV Part 2A would incorporate a number of OCIE's recommendations for improved soft dollar disclosure. These recommendations and best practices were outlined in OCIE's Soft Dollar Report, available on the SEC's website at http://www.sec.gov/news/studies/softdolr.htm. (The Commission proposed revisions to Form ADV Part 2A for public comment at an open meeting on April 5, 2000.)

3. Form ADV - Electronic Filing Project

The conferees discussed the progress of the combined project to establish an electronic federal and state adviser registration system and to revise Form ADV. During the past year, the Division and NASAA agreed on revisions to Form ADV, and worked with NASD Regulation, Inc. (NASDR) to develop the Investment Adviser Registration Depository (IARD) system. (At an open meeting April 5, 2000, the Commission proposed the revisions to Form ADV for public comment. On September 12, 2000, the Commission adopted revisions to Part 1 of Form ADV and rules requiring SEC-registered advisers' electronic filing.)

A representative from NASDR provided the conferees with a brief overview of the IARD, describing both how advisers would use the system to submit Form ADV to the SEC and to state regulators, and how the SEC and state regulators would use the system to review and process these filings. The NASDR representative gave a short presentation, allowing conferees to see how a revised Form ADV would appear on-line. Division and NASAA representatives explained to the other conferees that information filed through the IARD would also be the basis for a public disclosure system about investment advisers.

4. SEC Regulatory Developments

Division representatives explained the Commission's proposed rule, modeled on Municipal Securities Rulemaking Board Rule G-37, to curb "pay to play" abuses in the public pension fund arena. The proposed rule would prohibit an investment adviser from providing advisory services for compensation to a government client for two years after a contribution is made to an official of the government client by the adviser, or any of its partners, executive officers or solicitors. The proposed rule would not apply to state-registered advisers.

Division representatives then described the Commission's proposed rule excepting certain broker-dealers from the Advisers Act. They explained that most broker-dealers are currently excepted from the Act, but that new fee-based brokerage programs and some Internet-based execution-only brokerage programs could be considered "special compensation" that could cause the broker-dealer to lose its exception. The proposed rule would permit broker-dealers to retain the exception for non-discretionary brokerage accounts where the investment advice they give is incidental to their brokerage services.

5. State Adviser Activities

The conferees discussed several issues that the state regulators have identified in recent inspections of state-registered advisers. These issues included "bonus variable products" and advisers' pooling client assets into hedge funds. State regulators noted that hedge fund managers that structure their business so as to be exempt from SEC registration may be required to register with the states.

C. Market Regulation

State representatives and staff of the Commission`s Division of Market Regulation and OCIE discussed the following matters:

1. Books and Records

Section 103 of the 1996 Act prohibits any state from imposing broker-dealer books and records requirements that differ from, or are in addition to, the Commission's requirements. In addition, the same section directs the Commission to consult periodically with the state securities authorities concerning the adequacy of the Commission's books and records requirements.

On October 2, 1998, the Commission reproposed amendments to the books and records rules to clarify and expand recordkeeping requirements with respect to purchase and sale documents, customer records, associated person records, customer complaints, and certain other matters. The reproposed amendments also specified the books and records that broker-dealers would make available at their local offices. The Commission modified the reproposed amendments to reduce the burden on broker-dealers without substantially detracting from the original objective of establishing rules that would facilitate examinations and enforcement activities of the Commission, SROs, and state securities regulators.11 Among other changes in the reproposed amendments, the Commission redefined the term local office to include a place where two or more associated persons regularly conduct a securities business. The original proposal12 defined the term local office to include a place where one associated person conducted a securities business. Furthermore, as reproposed, a broker-dealer would be required to update its customer account records at least once every three years. The original proposal required broker-dealers to update the customer account records annually.

The comment period closed December 9, 1998. The Commission received approximately 120 comment letters in response to the release re-proposing the amendments. The Commission staff has been reviewing the comments that have been submitted. The participants at the Conference discussed the reproposed amendments, the comments received, and, in particular, a broad area of agreement such as the definition of what is an "office."

2. Capacity Issues

The participants discussed broker-dealer systems capacity issues in light of the increasing number of online brokerage accounts being opened by investors (9.7 million online accounts opened by the end of the second quarter of 1999, as compared to 7.3 million in 1998 and 3.7 million in 1997), and the instances of systems problems at broker-dealers. The participants also discussed the ability of firms to handle the operational side of the on-line trading business, as well as the Commission's Automation Review Policy as it might apply to systems capacity issues.

3. Significant SEC and SRO Rule Proposals

On January 28, 2000, the Commission issued an order directing self-regulatory organizations to develop a plan to implement decimal pricing in the equities and options markets beginning no later than July 3, 2000.13 The self-regulatory organizations are required to submit their decimalization implementation plan by March 13, 2000, and rule changes necessary to implement the plan by March 28, 2000. The participants discussed the issues associated with the decimalization implementation plan, as well as the challenges that are being faced by the self-regulatory organizations.

Day trading practices continue to be the focus of media attention. Presently, the Commission is carefully considering the various issues relating to day trading activities. In particular, the Commission has been considering proposed rule changes by the NYSE and the NASD to amend margin requirements for day trading customers of member firms.

On January 14, 2000, the Commission published the NYSE's proposal raising margin requirements for day traders. The NASD filed a similar proposal on January 13, 2000, which was published on February 11, 2000. The Commission has received numerous comment letters. Both the NYSE and the NASD proposals are available on the Commission's web site. A short discussion was held regarding the two proposals.

4. Financial Modernization Legislation

After over twenty years of debate, on November 22, 1999, the President signed S. 900 - the Gramm-Leach-Bliley Act of 1999 - into law. S. 900 permits securities, insurance, and banking firms to enter each other's lines of business. In the coming years, the Commission staff will continue to work with other financial regulators and the financial services industry to implement the various provisions of S. 900. One early project will be to implement regulations regarding the privacy of customer financial information. The participants at the Conference discussed this legislation as well as interpretive questions, which have arisen. The participants also discussed issues such as supervision, investment bank holding company's, and privacy regulation.

5. Central Registration Depository

The Central Registration Depository (CRD) system is operated and maintained by the NASD and is used by the Commission, self-regulatory organizations (SROs), and state securities regulators in connection with registering and licensing broker-dealers and their registered personnel. On August 16, 1999, the old "Legacy" CRD system was replaced by Web CRD, a new Internet-based system. The ability to file electronically through Web CRD is expected to further streamline and lower the costs associated with the one-stop registration process for broker-dealers and their associated persons. In connection with this transition, the Commission adopted technical amendments to Forms BD and BDW, the uniform forms for broker-dealer registration and withdrawal from registration, and related rules under the Exchange Act.14 The Commission also issued an order approving changes proposed by NASDR to Form U-4 (the Uniform Application for Securities Industry Registration or Transfer), and Form U-5 (the Uniform Termination Notice for Securities Industry Registration). These changes were also needed to conform to the Web CRD environment.15 The participants at the Conference discussed some issues related to Web CRD, such as uniformity on requests for information on Form BD.

6. Examination Issues

State and federal regulators also discussed various examination-related issues of mutual interest, including: summits and examination coordination; branch office examinations; micro-cap issues; and day trading.

D. Enforcement

The Enforcement working group addressed a range of topics during its session. The meeting was attended by 48 enforcement officials, including representatives from 24 states and the District of Columbia, the Canadian provinces, the SEC's Division of Enforcement and each of the eleven SEC Regional/District Offices. Also attending were senior enforcement staff from the NASD-Regulation, Nasdaq, the NYSE, the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC).

1. SEC Trends and Priorities

The Director of the Division of Enforcement opened with a discussion of several of the SEC's current areas of enforcement concern, beginning with the continuing increase in financial and accounting fraud being uncovered in the context of a number of financial reporting failures and large restatements of earnings. He also highlighted problems with the lack of auditor independence and failures by companies' audit committees to address these reporting deficiencies. Several major enforcement actions filed by the SEC that involved these issues were described.

The SEC enforcement staff described a number of initiatives designed to address the growth of Internet securities fraud. The types of scams being uncovered involve several familiar kinds of fraudulent activities, including Ponzi schemes, pyramid schemes, market manipulation or "pump and dump" scams, illegal touting, and other bogus investment offerings. Among some of the newer frauds noted were cybersmears, the activities of certain "momentum" stock picking sites and the publication of phony websites posing as legitimate news service sites or company web pages.

The SEC staff reported new trends in insider trading cases, particularly the string of recent actions involving trading by registered representatives, compliance officers and securities analysts. Proposed Regulation FD and the recent amendments to Rule 10b-5 also were summarized.

The continuing problem of sales practice abuses found at the branch office level of both large and small broker-dealers was discussed, including the specific problems posed by firms which employ "independent contractors" or "franchise brokers."

The phenomenon of online trading and day trading was raised. The SEC enforcement staff described specific concerns with issues of operational capacity, advertising, suitability, the use of margin and net capital. There was a consensus regarding the need for federal and state regulators, self-regulatory organizations and the firms themselves to provide better guidance to investors on the pitfalls of this form of trading, especially day trading.

And finally, the Division also discussed the joint enforcement project with NASAA directed at the fraudulent sale of promissory notes. The goal was to jointly announce the filing of several SEC/state actions in early June, 2000, involving these note sales (which was accomplished). .

The SEC also requested feedback from the states on the impact of the recent appointment of "state liaison persons" in each Commission field office who serve as a point of contact for individual states on a range of enforcement issues.

The Division of Enforcement alerted the states to the two-day training program, scheduled for the fall of 2000, for the states, SROs and criminal prosecutors. The focus of this training initiative was on the investigation of offering and microcap frauds, Internet fraud, broker-dealer and investment adviser cases, insider trading and financial/accounting frauds.

In closing, the SEC senior enforcement staff, including the field office heads, emphasized the importance of the enforcement agencies represented at the 19(c) meeting coordinating and leveraging their respective resources and remedial powers to the fullest extent possible. They stressed the necessity of coupling criminal prosecutions with civil actions, where appropriate, at both the federal and state level.

2. State Trends and Priorities

The Chair of NASAA's Enforcement Section (Securities Commissioner of Massachusetts) described the major trends and priorities of state securities law enforcement. He emphasized the importance of the states acting on a coordinated multi-state basis to enhance their message that state regulation of the securities laws was a critical and necessary complement to federal regulation. He also stressed the growing need for better investor education and the role of the NASAA Special Project initiatives.

The state representatives identified a number of areas on which they have focused their enforcement resources, including telemarketing and microcap fraud.

The states continue to uncover sales practice abuses in a number of broker-dealer firms that promote and sell low priced securities. They reported similar problems with networks of "independent contractors." Frauds involving affinity groups, foreign currencies, CD brokers, prime bank notes, and viaticals were highlighted as continuing concerns of state securities commissions.

The states also commented on the status of their participation in the joint SEC/NASAA sweep involving the unregistered and often fraudulent offerings of promissory notes that they view as one of their major enforcement concerns. These offerings are frequently made by insurance agents who have not registered with the states.

The Assistant Commissioner for Enforcement from California discussed some of the more prominent special projects underway within NASAA. He stressed the importance of the state securities commissions maintaining a visible presence in the enforcement context. Among his specific suggestions were the greater use of enforcement "sweeps" by the states; the need for more coordination among the states in dealing with Internet fraud; the need for better tracking of "rogue" brokers who move from one microcap broker to another; the desirability of developing better enforcement data bases available to all of the state securities commissions; and the importance of the states `showing the flag' to a greater degree with regard to the smaller investment advisers which are now primarily the responsibility of the states from a regulatory standpoint.

3. NASD-Regulation, Nasdaq and NYSE Trends and Priorities

Enforcement officials from these SROs described several areas of concern and discussed various initiatives aimed at those concerns - many of which overlapped with those raised by the SEC and the state securities commissioners. Their concerns included sales practice and trading abuses, online and day trading, microcap fraud, market manipulation and other issues generated by advances in technology.

The NASDR staff also discussed its enforcement sweep instituted to address day trading problems as well as its criminal assistance branch designed to help prosecutors deal with criminal referrals from the NASDR. NASDAQ representatives described enforcement initiatives regarding National Market System listings. They highlighted the work of the unit in charge of enforcing the listing requirements of the NASDAQ market and the further development of potential indicators of fraudulent activity.

NYSE officials described several market surveillance and enforcement initiatives, including a number of specific cases brought by the Exchange over the past year. They discussed certain issues raised by the changing structure of the markets, and possible linkages with other trading systems. Exchange priorities included firm management responsibility for employee trading violations, enforcement of its margin rules, capacity and operational issues related to the growth of online trading, the activities of bank owned securities firms and brokerage firms owned by foreign entities (particularly with regard to compliance with the Exchange's books and records rules), and the existence of adequate internal controls and supervisory procedures within member firms.

4. DOJ and U.S. Attorney's Offices Securities Fraud Programs

The DOJ representative devoted his presentation primarily to what the Department and various U.S. Attorney's Offices around the country look for in potential criminal cases referred to them by civil agencies and by the SROs. Specific suggestions were made as to what a referral should contain to improve its chances of being accepted by the criminal authorities for prosecution. The availability of staff and other resources from the SEC, states and SROs to assist the DOJ and U.S. Attorney's Offices and the limits on that availability were discussed. All participants agreed that more regular meetings at both the national and local level between criminal and civil enforcement staff would be helpful. Such meetings could facilitate the exchange of information, the development of joint or coordinated projects and the clarification of referral procedures. Internet fraud was also cited as a major priority of the Justice Department and various DOJ initiatives were described in that area.

5. FTC Enforcement Initiatives

The FTC representative focused his presentation on various projects designed to better monitor the Internet for a range of violative activities. He described specific investigative techniques utilized by the FTC to uncover these kinds of frauds and to develop enforcement cases. The FTC staff encouraged the other regulators to consider participating in FTC Internet "surf days" and enforcement sweeps. The Consumer Sentinel database and the information accessible from it were described and the agencies present were urged to become users of this system.

E. Investor Education and Assistance

Fifteen representatives from 11 U.S. states and 4 Canadian provinces and 2 representatives from the SEC's Office of Investor Education and Assistance attended the Investor Education Working Group session. The Working Group discussed the following items:

1. Online Investor Protection

The Chair of NASAA's Online Investor Education Committee discussed the December 1999 launch of the Investing Online Resource Center (IORC). Created by the Securities Division of the Washington State Division of Financial Institutions, the site features an interactive self-assessment tool that helps investors determine whether to consider trading online. The site also debunks common myths about online trading and provides links to helpful resources, including state regulators, the NASD, and the SEC. In its first 10 weeks the site-which is located at www.investingonline.org - received more than 5 million hits.

The SEC briefed NASAA on the materials it has developed to fight Internet fraud and to educate investors on how to use the Internet to invest wisely. These include both print and online publications and alerts on Internet fraud, prime bank scams, online trading, margin, and trade execution. The SEC also reported that one of its commissioners plans to conduct a survey to assess online investor behavior.

2. Financial Literacy 2001

In the spring of 1998, NASAA, the NASD, and the Investor Protection Trust (IPT) joined forces to launch "Financial Literacy 2001," an unprecedented $1 million campaign targeting 25,000 high school teachers across the United States. The goal of FL2001 is to encourage-and make it easier for-teachers in every state to teach the basics on saving and investing.

The Chair of NASAA's Investor Education Section briefed the Working Group on the status of FL2001. She reported that NASAA and the IPT have begun to revise the teacher's guide to make it more useful for high school economics courses. More than 28,000 teachers nationwide have received FL 2001 training as of March 2000. However, it is not yet clear how many students have been exposed to components of the curriculum.

In the coming months, NASAA and the IPT plan to update the FL 20001 web site (at www.FLl2001.org), create a list-serve for teachers, and continue to conduct teacher-training workshops to expose more teachers to the curriculum.

3. Facts on Saving and Investing Campaign

In the spring of 1998, NASAA and the SEC, in conjunction with the Council of Securities Regulators of the Americas (COSRA), launched the Facts on Saving and Investing Campaign. The campaign is an ongoing, grassroots effort to educate individuals about saving, investing, and avoiding financial fraud. Twenty-one countries throughout the Western Hemisphere participated in the campaign's enormously successful kick-off week. In the U.S., campaign partners held educational events and distributed information on saving and investing throughout the country.

During 2000, campaign initiatives included school visits by state and federal securities regulators, widespread distribution of the Ballpark Estimate, and the development of new, interactive tools aimed at increasing financial literacy.

4. New Investor Education Programs

Participants in the Working Group session discussed recent investor education initiatives, including the use public service announcements in broadcast and print media to make investors aware of the programs state securities regulators offer. Members of NASAA from both the U.S. and Canadian provinces have explored purchasing banner advertisements on financial websites that link to the regulator's web site. Other NASAA initiatives include the creation of new tools to help investors read financial documents, such as account statements and prospectuses.

Representatives from the SEC's Office of Investor Education and Assistance and several states described their efforts to reach out to underserved populations, including minority groups, elementary and high school students, and the elderly.
5. Investor Education Resources

Participants in the Working Group session discussed existing resources for investor education-including brochures, videotapes, posters, and online resources-and identified gaps. The Chair of NASAA's Investor Education Section reported on efforts to secure additional funding for the IPT.


III. Exhibits

A. Conference Participants

NASAA Corporate Office

  • Bradley Skolnik, President
  • Karen O'Brien, General Counsel

SEC Executive Office

  • Commissioner Paul Carey
  • Lourdes Gonzalez, Counsel to Commissioner Unger
  • Elizabeth Murphy, Counsel to Commissioner Unger
  • Jill Peterson, Counsel to Commissioner Carey
  • Diane Sanger, Associate General Counsel

Corporation Finance Working Group


  • William Beatty
  • David Brant
  • Timothy Cox
  • Felipe Cruz
  • Nina Smeltzer Dawson
  • David Massey
  • Lynn Naefach
  • Christopher Prior
  • Philip Rutledge
  • Leah Schuman
  • Randall Schumann
  • Steven Wassom


  • Martin Dunn
  • David Fredrickson
  • Barbara Jacobs
  • Sandra Kinsey
  • James Moloney
  • David Martin
  • Michael McAlevey
  • Chris McCormick
  • John Reynolds
  • Bryce Stovell
  • Richard Wulff

Investment Management Working Group


  • Kevin Blake
  • Merilyn Bowman
  • Sheila Cahill
  • Franklin Terry Elder
  • Thomas Geyer
  • Craig Goettsch
  • Thomas Hampton
  • Kenneth Hojnacki
  • Melanie Senter Lubin
  • Blythe McLaughlin
  • Rhea Shelton
  • Ron Thomas
  • Richard White


  • Karen Goldstein
  • Jeff Himstreet
  • Robert Plaze
  • Lori Price
  • Jennifer Sawin
  • John Walsh

Market Regulation Working Group


  • Reginald Berry
  • Christine Bruenn
  • Lucy Cadwell
  • Thomas Cowan
  • Ralph Lambiase
  • Victor Rodarte
  • Don Saxon
  • Eric Spink
  • Ryan Ushijima
  • David Weaver
  • Howard Wetston
  • Frank Widmann
  • Doug Wilburn


  • Beth Badawy
  • Belinda Blaine
  • Larry Bergmann
  • James Brigagliano
  • Robert Colby
  • Kathy England
  • Bonnie Gauch
  • Irene Halpin
  • Richard Hannibal
  • Paula Jenson
  • George Lavdas
  • Mike Macchiaroli
  • Tom McGowan
  • Catherine McGuire
  • Joanne Swindler
  • Kevin Zambrowicz

Enforcement Working Group


  • Douglas Borba
  • Scott Borchert
  • T. Webster Brenner
  • Terryl L. Brown
  • Eric Dinallo
  • Brenda Elias
  • James Harlan
  • Peter Jamison
  • Guy Lemoine
  • Bill McDonald
  • Ann McDougal
  • Charles Moore
  • Matthew Nestor
  • Maria Piccirilli
  • Ronald Rubach
  • Marilyn Scanlan
  • Mark Sendrow
  • Dana Sheppard
  • Tanya Solov
  • Anthony Taggart
  • Chester Thompson
  • Nancy Thompson
  • Syver Vinje


  • Bill Baker
  • James Clarkson
  • Stephen Crimmins
  • Stephen Cutler
  • Paul Gerlach
  • David Levine
  • Joan McKown
  • Chris Mixter
  • Richard Walker

SEC Regional/District Offices

  • Juan Marcelino, Boston District Office
  • Helane Morrison, San Francisco District Office
  • Valerie Caproni, Pacific Regional Office
  • Harold Degenhardt, Fort Worth District Office
  • Randall Fons, Southeast Regional Office
  • Kenneth Israel, Salt Lake City District Office
  • Mary Keefe, Midwest Regional Office
  • Carmen Lawrence, Northeast Regional Office
  • Ron Long, Philadelphia District Office
  • Dan Shea, Central Regional Office
  • Richard Wessel, Atlanta District Office

Self-Regulatory organizations

  • Dave Doherty, NYSE
  • Roger Sherman, NASD - Regulation
  • Gary Sundick, NASDAQ


  • John Arterberry, U.S. Department of Justice
  • Steve Gurwitz, Federal Trade Commission
  • Eileen Harrington, Federal Trade Commission

Investor Education and Assistance Working Group


  • Angela Cichoki
  • Carmen Crepin
  • Denise Crawford
  • Jack Herstein
  • Fred Joseph
  • Kiki Kachafanas
  • Colleen Keefe
  • Donald Murray
  • Anthony Patey
  • Daphne Smith
  • Donne Smith, Jr.
  • David Tatman
  • Tammy Valasquez
  • William Verant


  • Susan Ferris Wyderko
  • Gerri Walsh

B. Commenters

Certified Financial Planner Board of Standards

Investment Counsel Association of America, Inc.



1 Conference participants are listed in Exhibit A.

2 See Release No. 33-7808 (March 10, 2000).

3 The commenters are listed on Exhibit B. Comment letters are available for public viewing in file no. S7-08-00 in the Commission's Public Reference room.

4 These include securities issued in unregistered offerings under:

  • Section 4(2) of the Securities Act where the offering does not meet the safe harbor requirements of Rule 506 of Regulation D (17 CFR 230.506);
  • Regulation A (17 CFR 230.251 - 230.263); and
  • Rules 504 and 505 of Regulation D (17 CFR 230.504 and 230.505).

5 The Regulation A exemption allows companies that do not file reports with the Commission to offer and sell up to $5 million of securities within any twelve-month period without federal registration. An issuer relying on Regulation A must file an offering statement with the Commission that includes, among other things, a disclosure document called an offering circular. Issuers may provide the non-financial disclosure in their offering circulars based on one of three formats. One format includes the disclosure requirements of the 1989 SCOR form.

6 17 CFR 230.501(a). The term "accredited investor," as defined by the Securities Act and the Commission's rules under the Act, is intended to encompass those persons whose financial sophistication render the protections of the Securities Act registration process unnecessary. Offers and sales to these investors are afforded special treatment under the federal securities laws.

7 Securities Act Release No. 7644 (February 25, 1999) [64 FR 11090]. Specifically, issuers may generally solicit and advertise and issue freely tradeable securities only in transactions that are either:

  • registered under state law requiring public filing and delivery of a substantive disclosure document to investors before sale; or
  • exempted under state law as long as sales are made to "accredited investors" only.

8 See Section 7(b)(3) of the Securities Act. 15 U.S.C. 77g(b)(3).

9 17 CFR 230.1001.

10 Securities Act Release No. 7497 (January 28, 1998) [63 FR 6370]. These plain English principles include: active voice; short sentences; everyday language; tabular presentation or "bullet lists" for complex material, if possible; no legal jargon or highly technical business terms; and, no multiple negatives.

11 Exchange Act Rel. No. 40518 (October 2, 1998), 63 FR 54404 (October 9, 1998).

12 Exchange Act Rel. No. 37850 (October 22, 1996), 61 FR 55593 (October 28, 1996).

13 Exchange Act Release No. 42360 (January 28, 2000).

14 Release No. 34-41594 (July 2, 1999), 64 FR 37586-1 (July 12, 1999); Release No. 34-41356 (Apr. 30, 1999), 64 FR 25143 (May 10, 1999).

15 Release No. 34-41560 (June 25, 1999), 64 FR 36059 (July 2, 1999).