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U.S. Securities and Exchange Commission

Report on Reciprocal Subpoena Enforcement Laws

November 2000

Table of Contents

Executive Summary

I. Introduction

A. Congressional Directive

B. Steps Taken in Coordination with the States

C. Scope and Structure of the Report

II. Background

A. Importance of State Securities Regulation

B. Need for Out-Of-State Evidence

III. State Securities Regulators' Authority

A. State Statutory Context

B. Subpoena Authority

C. Reciprocal Subpoena Authority

IV. States' Experience in Seeking Out-of-State Evidence

A. States' Experience in Requesting Assistance

B. States' Experience in Receiving Requests for Assistance

C. Reported Benefits and Disadvantages of Seeking Assistance

D. States' Views on the Importance of Subpoena Enforcement Laws

E. States' Suggestions to Improve Use of Reciprocal Subpoenas

F. States' Views on the Pro Hac Vice Process

V. State Reciprocal Subpoena Enforcement Statutes in Context

A. Exercise of Direct Authority Over Non-Residents

B. Multi-State Enforcement Initiatives

C. Benefits of Reciprocal Subpoena Enforcement Laws

VI. Promotion of Broader Adoption of Reciprocal Subpoena Enforcement Laws

(Available in PDF format)

A. Copy of the Survey Sent to the States [Note: to come]

B. List of States With Reciprocal Subpoena Enforcement Laws

C. Investigations in Which Out-of-State Evidence Is a Significant Factor

D. State Requests to Other States For Assistance

E. Requests for Assistance That States Received From Other States

F. Views on the Importance of Reciprocal Subpoena Laws

Executive Summary

Congress directed the Commission, in cooperation with the states, to take steps to encourage the adoption of state laws authorizing reciprocal subpoena enforcement in state securities investigations. The Commission was directed to submit a report identifying the states that have adopted such provisions, describing the actions undertaken to promote their adoption, and identifying any further recommended actions. This report responds to that requirement.

As Congress recognized, the states play an important role in policing local securities markets. To carry out this role, as transactions increasingly occur in more than one state, state securities regulators must have effective tools to obtain out-of-state evidence. Reciprocal subpoena enforcement laws, which authorize one state securities administrator to issue and enforce subpoenas at the request of another, are intended to serve this purpose. Some states have had such provisions since the 1980s. As of the date of this report, nineteen states have adopted reciprocal subpoena enforcement laws.

Our initial review, however, suggested that these laws had been little used. After discussions with representatives of the North American Securities Administrators Association and the National Conference of Commissioners on Uniform State Laws, the staff distributed a survey to all the states' securities authorities to obtain further information about their experience in seeking out-of-state evidence. We received thirty responses.

Based on our research and the survey responses, the staff has drawn the following conclusions. Through a variety of provisions under the Uniform Securities Act, which a majority of the states have substantially adopted, state administrators already have broad authority to obtain out-of-state evidence directly. In addition, state securities authorities have a tradition of cooperation, and frequently issue subpoenas in their state to assist other states needing information there. The states also have increasingly used joint enforcement initiatives to leverage their resources. While, for the most part, the survey respondents consider these mechanisms adequate, they would welcome improvements.

Legal authority is not ordinarily the only consideration in decisions about whether and how to obtain out-of-state evidence. State authorities also must weigh practical and strategic considerations. In this respect, reciprocal subpoena enforcement laws appear to offer little, if any, advantage over existing alternatives. On the other hand, some of the states have found reciprocal subpoena enforcement statutes do offer a superior tool in some circumstances. These circumstances might include situations in which the out-of-state evidence sought is from persons who lack, or claim to lack, cognizable ties to the investigating state, or where the state in which the evidence is located for some reason lacks other authority to assist another state's investigation.

The survey and discussions we had with the states seem to have raised awareness of the potential benefits of reciprocal subpoena enforcement laws. As a result, at least four additional state authorities are presently considering whether to recommend adoption of such a law to their legislatures. A number of survey respondents suggested that the goal of broader adoption would be best achieved through the uniform law process. The staff will continue to work with NCCUSL and NASAA to further this goal.

I. Introduction

A. Congressional Directive

The Securities Litigation Uniform Standards Act of 1998 ("Uniform Standards Act") directed the Commission, in cooperation with the states, to encourage the adoption of reciprocal subpoena enforcement laws and to submit a report to Congress.1 The report was to:

(1) identify the states that have adopted reciprocal subpoena laws;
(2) describe the actions undertaken by the Commission and state securities commissions to promote the adoption of such laws; and
(3) identify any further actions that the Commission recommends.

This report responds to that requirement.

B. Steps Taken in Coordination with the States

In carrying out the Congressional mandate, the staff conducted independent research and analysis, and extensively consulted with the states. The staff reviewed existing state law, the history of state securities reciprocal subpoena enforcement laws, and surveyed related case law and legal principles. Throughout this process, the staff conferred with state regulatory representatives. Notably, the staff held discussions with the representatives of the North American Securities Administrators Association ("NASAA"),2 and representatives of the drafting committee of the National Conference of Commissioners on Uniform State Laws ("NCCUSL") that has been formed to recommend a new version of the Uniform Securities Act.3 Our research and discussions led us to conclude that, although a number of states had adopted reciprocal subpoena enforcement laws, there was little evidence that these provisions had been widely used.

With the advice and suggestions of the NASAA and NCCUSL representatives, the staff prepared and distributed a survey to all the state securities regulators to explore these issues.4 The survey requested information about: (1) each state's current laws, regulations, and policies relating to reciprocal subpoena enforcement; (2) each state's experience in seeking assistance with their investigations from other states, and in handling such requests from other states; and (3) each state's proposals and suggestions for improving the reciprocal subpoena enforcement process. The staff received thirty responses to the survey.5 Where appropriate, the staff called survey respondents for further development or clarification of their responses, as well as certain other state securities authorities where issues arose about their specific laws.

As an adjunct to the survey, the staff used various forums for discussion between the Commission and the states to continue this dialogue. For example, the subject was discussed at the NASAA annual meetings in 1999 and 2000, at NASAA's annual Winter Enforcement Conference in 1999 and 2000, and at the Commission's annual conference with NASAA on the Uniformity of Securities Laws in 2000.6 The staff also has been participating in the on-going meetings of the NCCUSL Uniform Securities Act drafting committee.

C. Scope and Structure of the Report

As used in this report, reciprocal subpoena enforcement laws generally refer to state securities law provisions that authorize a state administrator to issue and enforce subpoenas within the state at the request of another state securities administrator.7 The primary purpose of these laws is to authorize assistance to the requesting securities authority in obtaining testimony or documents located outside of its state.

The report is structured in the following way. Part I identifies the Congressional directive to submit this report and summarizes the steps the staff and the states have taken. Part II explains the need for state securities authorities to have an effective procedure for obtaining out-of-state evidence. Part III gives an overview of existing state securities enforcement authority. Part IV summarizes the experience of states responding to our survey in seeking out-of-state evidence. Part V discusses the role of reciprocal subpoena enforcement laws in the context of states' existing authority. Part VI explains the benefits of broader adoption of these laws, and the steps underway to achieve this goal.

II. Background

A. Importance of State Securities Regulation

The states play an important role in the regulation of our nation's securities markets.8 Congress recognized this role in the legislative findings of the Uniform Standards Act, which directed the submission of this report, when it found that "[s]tate securities regulation is of continuing importance, together with Federal regulation of securities, to protect investors and promote strong financial markets," and that the appropriate enforcement powers of securities regulators should be preserved.9 Similarly, when Congress enacted the National Securities Markets Improvement Act of 1996, which realigned certain regulatory responsibilities between the Commission and the states, it specifically preserved the states' local regulatory role and expressly reaffirmed their antifraud enforcement authority.10

To carry out their role of policing local securities markets, states must possess effective investigative and evidence-gathering tools. The effectiveness of these tools is particularly important where out-of-state evidence plays a role. Since the 1930s, when federal securities laws were first adopted, it has been recognized that operating across state lines was a frequent device for attempting to evade state blue sky protections.11

B. Need for Out-of-State Evidence

Today, the securities markets are increasingly characterized by the mobility of the general population, the growth of interstate transactions, and the growing use of the Internet. These are just some of the factors that make it likely that state securities investigations will increasingly involve the need to obtain testimony or documents from outside of the state's borders. The survey included questions on the states' experience in this area, in order to identify any common themes or trends.

The survey asked each state the percentage of its securities investigations, on an average annual basis, in which out-of-state residents or documents play a significant role. Each of the thirty states that responded to the survey indicated that out-of-state residents or documents play a significant role in at least some of their state's securities investigations and cases. Nineteen survey respondents said that they play a significant role in over 50% of their state's securities investigations and cases, and eight survey respondents said they play a significant role in over 75% of their state's securities investigations and cases.

The survey also asked what types of cases were most likely to involve out-of-state residents or documents. The respondents gave a wide range of examples. They include cases involving unregistered securities offerings, fraudulent microcap12 and Internet initial public offerings, and fraud in the offer and sale of promissory notes, prime bank notes, viatical settlements,13 oil and gas ventures, and other investment contracts, as well as market manipulation, conversion, and ponzi schemes. They listed situations involving unregistered brokers, investment advisers and agents, and fraudulent sales practices, including excessive markups and boiler room and telemarketing schemes. A few states pointed to large cases or criminal cases as a focus of concern; several others said the out-of-state evidence was a concern in all types of cases. Their responses indicated that they may seek testimony or documents from any of a variety of out-of-state persons, including issuers, promoters, broker-dealers, investment advisers, investors, witnesses, banks, clearing agents, or other financial institutions.

In their totality, the survey responses indicate that the need for out-of-state evidence is not limited to any particular type of case or category of person. Moreover, the responses clearly confirm that the ability to obtain out-of-state evidence can play a significant role in the effective enforcement of each state's laws.

III. State Securities Regulators' Authority

A. State Statutory Context

All 50 states and the District of Columbia and Puerto Rico have some form of securities regulation.14 These securities statutes typically are "referred to as Blue Sky Laws,' because of their purpose of preventing speculative schemes which have no more basis than so many feet of blue sky.'"15 As early as 1917, state regulation of securities was upheld as a valid exercise of state police power, even though it may have some interstate effects.16

While some diversity remains among state securities laws, the majority of today's blue sky laws are patterned upon the Uniform Securities Act ("Uniform Act" or "1956 Act") that was adopted by NCCUSL in 1956.17 Approximately 35 jurisdictions have adopted, or substantially adopted the Uniform Act.18 Accordingly, blue sky law commentators commonly look to the 1956 Act as a guide in surveying state law. In 1985, NCCUSL adopted a revised Uniform Securities Act ("1985 Act").19 Approximately six states have adopted or substantially adopted the 1985 version.20 Thus, approximately forty-one states have enacted one of the two versions.

The provisions in the 1956 Act that govern the registration of securities and professionals, as well as liability for fraud and other violations, are generally triggered by an offer, a purchase, or a sale of a security in the state.21 Where conduct occurs across state lines, the interests of more than one state in protecting its citizens may be implicated. Under these provisions, it is contemplated that the laws of two or more states may apply to the same transaction where elements of the transaction occur in different states.22

The Uniform Act gives a state's securities authority a wide range of powers to carry out its responsibilities. Thus, for example, the Uniform Act gives each state broad authority to investigate both within and outside the state to determine whether a person has violated or is about to violate the state's securities law.23 In aid of an investigation, states are authorized to issue and enforce subpoenas, as discussed in the next section. Further, the Uniform Act requires that every applicant for registration, and every issuer proposing to offer a security in the state on an agency basis, file an irrevocable consent to service of process; the Uniform Act also provides for substituted service of process where other persons, including non-residents, engage in prohibited or actionable conduct.24

The 1985 Act also includes a specific provision authorizing cooperation.25 Under this provision, a state administrator is empowered expressly to cooperate with, among other persons, securities regulators of one or more states, and national organizations of securities officials. Cooperation may include, among other things, making joint examinations and investigations, sharing and exchanging personnel, and sharing and exchanging information. NASAA also adopted this provision as a NASAA amendment to the 1956 Act in 1987.26

B. Subpoena Authority

Under both the 1956 and the 1985 Acts, the state securities administrator is broadly empowered to subpoena witnesses and require the production of documents in any investigation or proceeding under the Act. For example, in the 1956 Act, the state administrator is granted broad discretionary authority to make investigations, the power to issue subpoenas, and the authority to apply to the court to enforce his subpoenas.27 With respect to this subpoena power, the 1956 Act provides:

For the purpose of any investigation or proceeding under this act, the Administrator or any officer designated by him may administer oaths and affirmations, subpoena witnesses, compel their attendance, take evidence, and require the production of any books, papers, correspondence, memoranda, agreements, or other documents or records which the Administrator deems relevant or material to the inquiry.28

Only one court, to our knowledge, has considered the extraterritorial scope of this power. That court concluded that the language of the statute was sufficient to show that the legislature intended the administrator "to have the authority necessary to fulfill its function to investigate, within and without the State, securities transactions involving [that state's] residents."29

Ordinarily, only the Due Process Clause of the Constitution would limit the exercise of this authority in any particular factual situation, if the agency were unable to acquire jurisdiction or effect service over an intended respondent of a subpoena.30 The Supreme Court has held that a state may exercise jurisdiction over a non-resident if he has "certain minimum contacts with it such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.'"31

The "minimum contacts" requirement is satisfied where there is some act by which the person "purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws."32 Minimum contacts may include acts performed in the state or acts performed outside the state that intentionally cause an effect in the state.33 Thus, where the need for the evidence would be greatest, such as where information is sought from a registered professional or an alleged violator of the state's securities laws, acquiring jurisdiction would not raise authority issues.

C. Reciprocal Subpoena Authority

The 1956 Act does not include any provision for reciprocal subpoena enforcement. The 1985 Act does address this issue, and specifically provides:

If the activities constituting an alleged violation for which the information is sought would be a violation of this [Act] had the activities occurred in this State, the [Administrator] may issue and apply to enforce subpoenas in this State at the request of a securities agency or administrator of another state.34

In 1987, NASAA adopted this provision, with a minor rewording, as a NASAA amendment to Section 407 of the 1956 Act. The NASAA amendment provides:

The (Administrator) may issue and apply to enforce subpoenas in this state at the request of a securities agency or administrator of another state if the activities constituting an alleged violation for which information is sought would be a violation of this (Act) if the activities had occurred in this state.

At the time of this report, nineteen states have enacted a reciprocal subpoena enforcement provision in their securities statutes.35 One of these nineteen states has already proposed to broaden its existing provision. In addition, another state without such a provision advised us that the agency had formally recommended adoption of a reciprocal subpoena enforcement provision. After receiving our survey, four additional states advised us that they too were considering recommending such legislation to their legislatures.

The 1985 Act also included another new provision concerning the administrator's authority to seek court enforcement of his subpoenas:

A request for an order of compliance may be addressed to: . . . (2) a court of another state able to assert jurisdiction over the person refusing to testify or produce, if the person is not subject to service of process in this State.36

We have identified five states that have adopted a version of this language.37 In all cases the language appears in statutes with the reciprocal subpoena enforcement provision.

IV. States' Experience in Seeking Out-of-State Evidence

As discussed above, the Uniform Act provides a state securities regulator with broad authority, including subpoena power, to obtain extraterritorial evidence. A substantial number of states have supplemented these powers with a reciprocal subpoena enforcement provision, but most have not. There is little authority or commentary discussing the states' practice in obtaining out-of-state evidence, the limitations of existing methods, or the use of reciprocal subpoena enforcement provisions in particular. One of the purposes of the survey was to obtain further information about the states' experiences in this area. The following discussion summarizes the responses we received on this subject.38

A. States' Experience in Requesting Assistance

The survey asked about the states' experience, on an average annual basis, in making requests for assistance in obtaining out-of-state evidence. Twenty-five of the thirty respondents have requested that another state provide some form of assistance with their subpoenas. Fifteen of the thirty survey respondents have requested that another state serve their subpoena. Thirteen of the responding states requested service of their subpoenas between one and five times a year, while two of the responding states requested service between six and ten times a year. None had asked that the requesting state's subpoena be enforced in the other state's court.

More commonly, survey respondents requested that another state issue and serve its own subpoena. Twenty-five respondents stated that they had requested this type of assistance: eighteen between one and five times a year; five between six and ten times a year; and two over ten times a year. Only six respondents indicated that they had requested the assisting state to seek judicial enforcement of the assisting state's subpoena.

Twenty respondents stated that they also have requested other forms of assistance with their investigations. Their requests included checking business premises, verifying addresses for service of a subpoena, locating witnesses and documents, obtaining public records, contacting or interviewing witnesses, and sharing information and records of common cases.

The survey asked whether the states had been advised that the other state was unable to provide the requested assistance. Fourteen responded affirmatively. Many cited multiple reasons, and of these, thirteen said they were told it was due to a lack of authority, two were told it was the nature of the alleged violation, five said the reason given was staff or funding limitations, and one said other reasons.

B. States' Experience in Receiving Requests for Assistance

The survey also asked about the states' receipt of requests for assistance on an average annual basis. Eighteen of the thirty responding states have served another state's subpoena, fifteen of these responded that they did so between one and five times a year. None has applied to enforce the requesting state's subpoena.

Again, more respondents, twenty-three, stated that they had issued and served their own subpoenas at the request of another state. Seventeen did so between one and five times a year, two between six and ten times, and four over ten times. Ten of the states that had received requests to issue and serve subpoenas for another state had a reciprocal subpoena enforcement law in place, while the remaining thirteen did not.39 Three states said that they have also applied to their state's court to enforce subpoenas they had issued at the request of another state between one and five times in year.

Twenty-two respondents stated that they had assisted other states' investigations in other ways. Twenty-five of the thirty responding states said they had never advised another state that they would be unable to provided requested assistance; four states said that they had done so, citing lack of authority.

C. Reported Benefits and Disadvantages of Seeking Assistance

Twenty-four states that reported requesting assistance from another state responded to the survey question asking them to describe their experience. Nearly all reported that other states took a cooperative approach to their requests, and that their experience in obtaining evidence from other states was mostly or entirely positive. Only two responding states reported that they had been mostly unsuccessful in obtaining the assistance they asked for. One of these reported that it had been unsuccessful in getting assistance from two different states, one of which has a reciprocal subpoena enforcement law, and the other of which does not.

Several stated that they had been able to obtain evidence that was otherwise unavailable to them. Three specified that the assistance of other states had been of particular benefit in obtaining bank records. They noted, however, that state financial privacy laws introduced delays into the process, and one expressed concern about their typical requirement of notice to the account holder.

Six respondents discussed the disadvantages presented by the delays and resource limitations of requesting assistance. One stated that the process was facilitated where prior relationships existed. Another specifically acknowledged the significant commitment of resources another had made to assist in obtaining records.

D. States' Views on the Importance of Subpoena Enforcement Laws

The survey asked how important state reciprocal subpoena laws are to each state's enforcement program. Of the twenty-eight states responding to this question, five said the laws are not very important. Two of these respondents stated that most of their investigations are in state, but that when they subpoena out-of-state parties, the parties usually comply. A third indicated that when out-of-state evidence is involved, the state defers to the other jurisdiction to address the violations.

Nine respondents said that these laws are somewhat important. One said it rarely uses subpoena enforcement, but rather finds other means to obtain the information. Another said that few of its cases involve other states. Five reported that they rarely use them, but the laws could help in some circumstances. One respondent said that these laws were the only means to obtain certain records.

Fourteen respondents considered these laws to be very important. The most specific and frequent reason given for this view was that these laws are critical in obtaining out-of-state bank records. One of the five respondents expressing this view explained that obtaining out-of-state financial records has become an increasingly important concern because many banks are centralizing records and will only recognize a subpoena from the state in which the records are located.

Of the twenty-eight responding states, thirteen have a reciprocal subpoena enforcement law. Among this group, four believed that the law was somewhat important; six believed that the law was very important; and two did not respond to this question.

E. States' Suggestions to Improve Use of Reciprocal Subpoenas

The survey asked what factors impede the effectiveness of reciprocal subpoena enforcement laws, and what suggestion the states had for improving their efficacy. Among those responding, nine states pointed to concerns related to the time or resources the process involves. Concerns were expressed about out-of-state travel budgets, staff and funding limitations, and the allocation of resources. Two states pointed out that requests for assistance might have a disparate impact. A large state noted that some states receive a greater proportion of requests than others, with a consequent burden on their budget and resources. A small state noted that small states often have smaller staffs and less ability to accommodate requests. Different criteria for case selection also was mentioned as an issue. Some of the concerns expressed inhere in any subpoena enforcement action, and two states said they usually adopt another method of getting the information they need. It was noted that subpoenas are not always the best investigative tool in a particular situation.

Several respondents pointed to differing state substantive laws and procedures as obstacles. One of these expressed concern about conflicting statutes, as well as financial privacy laws that enable violators to learn of the investigation and abscond with ill-gotten gains before action can be taken. Two respondents expressed concern about Constitutional limitations.

Seven of the twelve states offering suggestions recommended adoption of uniform reciprocal subpoena laws. One took the position that multi-state investigations are the more cost-effective and efficient method for dealing with the problem. Two states believed that investigating states should have broader subpoena authority. One state expressed the view that more attention should be given to the underlying problem of non-compliance by banks and unregulated persons. One state felt that the solution lies in improving judicial procedures.

F. States' Views on the Pro Hac Vice Process

Recognizing the burden on states receiving requests, as well as the likelihood that this burden would not fall equally, the survey asked whether it would be feasible for another state's regulator to enforce a subpoena in the state where the evidence was located. In order to make an appearance in a state court, it is ordinarily necessary to be licensed to practice in that state. It appears that the latitude courts grant and the procedures required to effect appearances for purposes of a single case, referred to a "pro hac vice," vary among the states, and sometimes among their courts.40

Of the twenty-four states responding, twelve said that using such a procedure for subpoena enforcement in their states would be feasible, and thirteen said it would not be feasible. Two said that their substantive statutes would not permit this procedure. Three respondents saw travel expenses as a limitation.

Fifteen respondents, including those that thought it was feasible, indicated that there would still be obstacles to using "pro hac vice" admittance to the local court for purposes of the enforcement action. For example, it was noted that local counsel must sponsor or associate with the out-of-state counsel. Further, the out-of-state attorney typically becomes subject to the bar rules of the out-of-state court, and the in-state attorney may become accountable for the conduct of the action. As a result of such complications, in many jurisdictions this procedure would not significantly reduce the burdens on the assisting state, and may increase the burden on the investigating state that is litigating in an unfamiliar court.

V. State Reciprocal Subpoena Enforcement Statutes in Context

As previously noted, a review of state statutory law demonstrates that, in states that have adopted the Uniform Act, state securities regulators have broad authority to obtain extraterritorial evidence. The results of the survey suggest that the responding states use a variety of mechanisms for addressing the problem of out-of-state evidence. It appears that, for the most part, they consider these mechanisms adequate for present purposes, but would welcome improvements.

There was some diversity of opinion among survey respondents on the degree to which broader adoption of reciprocal subpoena enforcement provisions would assist them in obtaining out-of-state evidence. Several factors appear to account for this diversity of views. One is that local conditions vary, and some states observe less cross border activity. In those states that are confronted with issues of inter-state conduct, limited staff or programmatic priorities may militate against pursuing the out-of-state source of information. In other states, the use of the reciprocal enforcement process may not be viewed as the most effective method available for addressing the need for extraterritorial evidence.

The optimal approach in a given situation will depend upon a balance of various factors. The survey results suggest that statutory power is only one factor in a state's decision whether and how to obtain out-of-state evidence. In light of the variety of investigative tools available to them, the survey respondents indicated, as would be expected, that they take into consideration both practical and strategic factors in determining the best course in a particular case.

A. Exercise of Direct Authority Over Non-Residents

As discussed above, states operating under a Uniform Act statute have broad authority to obtain out-of-state evidence directly. Thus, for example, regulated persons may be subject to inspection and examination, and are also required to consent to service of process. Several survey respondents noted that they have not encountered compliance problems in dealing with regulated persons.

In the case of unregulated persons suspected of violations, the authority to issue subpoenas under the Uniform Act also is clear. Proceeding by subpoena, however, may entail additional administrative burdens, whether it is issued within or outside the state. Issuing subpoenas out of the state will involve additional costs. If the state anticipates noncompliance, and possible litigation, it may be more expeditious to seek information necessary for the investigation from other sources. Similarly, in some cases, the state may wish to avoid giving notice of the investigation to suspected violators, if there is a concern they may flee or secrete ill-gotten gains.

In some cases, issuance of an extraterritorial subpoena may be the preferred course. This accounts for the survey responses demonstrating a high number of informal requests for assistance, such as help in locating persons, checking addresses, and serving out-of-state subpoenas. In other situations, where issuance of an extraterritorial subpoena also may be desirable, the balance of practical and budgetary considerations may be less favorable. For example, some witnesses may reside in distant locations, where issuance of a subpoena would involve unfamiliar local procedures, difficulties in effecting service, delays, travel, and resource burdens. Such factors must be balanced with the relative significance of the evidence to the case, as well as of the case to the state, in light of its overall program, priorities and resources, and the interests of other affected jurisdictions.

The survey results suggest that the high level of cooperation among the states mitigates many of these disadvantages. The responses indicate that conduct under investigation will often have a nexus to more than one state. In some cases, the investigating state may find it appropriate to defer to the state in which the evidence is located. In other cases, the state in which the evidence is located will be able to provide assistance to the investigating state by issuing a subpoena for the evidence under its own statute. As reflected in the survey results, states typically are able to use the authority under their statutes to open independent investigations, and issue subpoenas at the request of another state, even in the absence of reciprocal subpoena enforcement provisions. Nevertheless, as respondents indicated, this procedure can place additional burdens on the resources of the assisting state, and requests for assistance do not fall equally on all states.

B. Multi-State Enforcement Initiatives

As noted in the survey responses, multi-state enforcement initiatives serve as another effective tool for addressing violative conduct that crosses state borders. Where states have a strong common enforcement interest, these joint investigations offer the leverage of combining the states' powers and resources, and may result in more efficient and rapid resolutions. Many state legislatures have adopted the NCCUSL or NASAA cooperation provisions that expressly support this form of cooperation among the states.

Joint investigations among the states, and among the states and federal agencies, have produced significant results, particularly in responding to schemes involving large-scale fraud or common fraudulent schemes. Prominent recent examples of this joint approach include the joint Commission and state regulators' promissory note sweep,41 which included twenty-eight states; a multi-state settlement of alleged sales practice abuses by a brokerage firm, which resulted from joint investigations by three states;42 and the formation of a task force on online trading issues, which was sponsored by NASAA.43 The NASAA membership unanimously recommitted itself to supporting multi-state enforcement initiatives at its annual meeting this September.44

C. Benefits Of Reciprocal Subpoena Enforcement Laws

The survey results indicate that the combination of securities regulators' existing broad authority, the high level of cooperation among the states, and the use of multi-state enforcement initiatives has enabled the states adequately to address improper cross-border activity. In many contexts, reciprocal subpoena enforcement would appear to offer limited, if any, advantages over existing investigative procedures for obtaining out-of-state evidence. Perhaps most notably, the survey results suggest that the delays, costs, and other limitations of this procedure are not likely to be any less than those of the other forms of assistance more commonly in use among the states.

Nevertheless, an increasing number of states appear to take the view that adoption of reciprocal subpoena enforcement provisions would provide state securities authorities with an additional, useful tool. Although only approximately six states have adopted the 1985 Act where the provision first seems to have appeared, nineteen states have now adopted, one has proposed adopting, and four states have advised us they are considering adopting, a reciprocal subpoena enforcement provision.

In responding to the survey, twenty-three states considered this type of provision somewhat or very important to their enforcement program. This was true both of states that had adopted reciprocal subpoena enforcement, and of those that had not. The most frequent reason provided by survey respondents calling such provisions very important was that they facilitated obtaining out-of-state bank records. In this context, several considered the authority crucial. Doubtless, in some cases, there may be no better alternative source for this type of record, and an express statutory basis for obtaining it would simplify the process. Similarly, reciprocal subpoena enforcement authority would appear, more generally, to have advantages over existing mechanisms in any situation where the intended recipient of the subpoena is a third party who lacks, or claims to lack, any cognizable ties or connection to the investigating state.

It is also noteworthy that four states responding to the survey reported that they had advised another state on at least one occasion that they lacked the authority to provide requested assistance. Thirteen states reported that they had received this response from another state on at least one occasion. While no further explanation was provided, and these appear to represent a small percentage of the interactions among the states, reciprocal subpoena enforcement provisions also would provide a valuable alternative where more usual forms of assistance were not otherwise within the authority of the assisting state. Accordingly, there are some situations in which the adoption of a reciprocal subpoena enforcement law could provide a unique and important tool for state securities authorities.

VI. Promotion of Broader Adoption of Reciprocal Subpoena Enforcement Laws

A reciprocal subpoena enforcement provision authorizes the regulator in one state to provide assistance to the regulator of another state. Hence, the most direct benefit of the adoption of such a provision is conferred on a state other than the adopting state. The broader impact of the reciprocal subpoena procedure can only be realized as more states adopt this type of law.

It is also possible that the broader adoption of reciprocal subpoena enforcement laws will, by itself, make the process itself more useful. At present, even if they have the authority, some securities administrators may be deterred from using this procedure to some extent because of uncertainties presented by the relative lack of experience and precedent in this area. As reciprocal subpoena enforcement authority becomes more uniform, and regulators and the courts gain more familiarity with the process, the procedure may become more routine and expeditious.

The staff's survey and ongoing discussions with the states and state organizations have increased awareness of the possible benefits of broader adoption of reciprocal subpoena enforcement statutes. As might be expected, some states had not previously had occasion to consider this issue. As noted above, however, receiving our survey prompted at least four regulators of whom we are aware to begin to consider the advantages of adopting this type of statute in their states.

Other survey respondents had already considered how the advantages of reciprocal subpoena enforcement statutes would increase as more states enacted these laws. Among survey respondents offering suggestions for improving the reciprocal subpoena enforcement process, a significant number proposed that this goal could be best achieved through the uniform law process.

As noted above, NCCUSL has undertaken an initiative to modernize the Uniform Act. The staff has been providing assistance to the drafting committee preparing this new version, and has recommended that it include a reciprocal subpoena enforcement provision. The drafting committee's current discussion draft does include such a provision, and the staff will continue to work with NCCUSL and NASAA to further this goal.

1 Pub. L. No. 105-353, § 102, 112 Stat. 3227, 3233 (1998). Section 102 provides:

(a) COMMISSION ACTION. - The Securities and Exchange Commission, in consultation with State securities commissions (or any agencies or offices performing like functions), shall seek to encourage the adoption of State laws providing for reciprocal enforcement by State securities commissions of subpoenas issued by another State securities commission seeking to compel persons to attend, testify in, or produce documents or records in connection with an action or investigation by a State securities commission of an alleged violation of State securities laws.

(b) REPORT. - Not later than 24 months after the date of enactment of this Act, the Securities and Exchange Commission (hereafter in this section referred to as the "Commission") shall submit a report to the Congress--

(1) identifying the States that have adopted laws described in subsection (a);

(2) describing the actions undertaken by the Commission and State securities commissions to promote the adoption of such laws; and

(3) identifying any further actions that the Commission recommends for such purposes.

2 NASAA is an association whose membership consists of sixty-six state, provincial, and territorial securities administrators in the United States, Canada, and Mexico. In the United States, NASAA represents all state securities authorities responsible for the administration of state securities laws.
3 NCCUSL is an association composed of appointed representatives from each state, the District of Columbia, the Commonwealth of Puerto Rico, and the U.S. Virgin Islands. Its purpose is to identify areas of law that would benefit from uniformity among the states, to draft uniform acts to achieve that goal, and to seek to have those acts adopted in each jurisdiction. NCCUSL carries out its work primarily through drafting committees and the annual meeting of the full membership.

As discussed below, the Uniform Securities Act adopted by NCCUSL in 1956 is the predominant model for existing state laws. In 1998, NCCUSL undertook an initiative to modernize the Uniform Securities Act. NCCUSL appointed a drafting committee, chaired by former SEC Commissioner Richard B. Smith, to prepare the new law. Joel Seligman, currently Dean of the Washington University School of Law, was appointed to serve as reporter to the committee. The Commission supports the goal of promoting uniformity in state securities law, and authorized the staff to provide assistance to the committee.

4 The survey was sent to the securities authorities of each of the fifty states, the District of Columbia, and Puerto Rico (collectively referred to in this report as "the states"). A copy of the survey, the accompanying cover letter and instructions, are attached as Appendix A. Appendix
5 We received responses from the following states: Alabama, Alaska, Arizona, Arkansas, California, Connecticut, District of Columbia, Delaware, Hawaii, Illinois, Indiana, Kansas, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Mexico, Ohio, Oregon, Pennsylvania, Tennessee, Vermont, Virginia, Washington, Wisconsin, Wyoming.
6 Section 19(c) of the Securities Act of 1933 authorizes the Commission to cooperate with any association of state securities regulators to maximize the effectiveness of securities regulation; maximize uniformity in federal and state standards; minimize interference with the business of capital formation; and reduce the costs and paperwork of raising investment capital, particularly by small business, and of the administration of the government programs involved. The Commission conducts an annual conference to further these goals. 15 U.S.C. § 77s(c).
7 The term "reciprocal subpoena enforcement laws" is not a term of art. Our use of the term in this report reflects the language of the statutory directive and the prevailing understanding of reciprocal subpoena enforcement laws among state regulators.

The concernsJurisdictional issues that reciprocal subpoena enforcement laws are intended to address domay be raised by a state agency's attempt to enforce its investigative subpoenas do not apply to the Commission. The Commission, an agency of the federal government, has been provided broadnation-wide subpoena authority to issue and enforce subpoenas in the United States.its investigations. See, e.g., 15 U.S.C. §§ 77s, 78u.
8 The Commission has long stated that state securities laws serve as an important supplement to federal law. For example, the Commission recently noted, with respect to broker-dealer regulation, that state securities authorities "are well-positioned to quickly detect and respond to fraudulent and abusive practices in their individual states, as well as to prevent unscrupulous agents from effecting securities transactions with their citizens." Securities and Exchange Commission, Study of State Licensing Requirements for Associated Persons of Broker-Dealers Pursuant to Section 510(d) of the National Securities Markets Improvement Act of 1996 48 (Oct. 10, 1997).
9 Pub. L. No. 105-353, § 2, 112 Stat. 3227 (1998).
10 15 U.S.C. § 77r(c)(1).
11 See 1 Louis Loss & Joel Seligman, Securities Regulation 146 (3d ed. 1989).
12 Cf. NNew York State Attorney General Dennis C. Vacco, Report On Micro-Cap Stock Fraud 132 (Bureau of Investor Protection and Securities 1997) (discussing problem of inter-state microcap fraud and recommending adoption of reciprocal subpoena enforcement laws).
13 A viatical settlement is an investment contract pursuant to which an investor acquires an interest in the life insurance policy of a terminally ill person.
14 1 Blue Sky L. Rep. (CCH) ¶ 501; 1 Matthew Bender, Blue Sky Regulation § 1.01 (A.A. Sommer, Jr. ed. Feb. 1997).
15 1 Blue Sky L. Rep. (CCH) ¶ 501 (citation omitted). Kansas adopted the first blue sky law in 1911.
16 See Hall v. Geiger-Jones Co., 242 U.S. 539 (1917); Caldwell v. Sioux Falls Stock Yards Co., 242 U.S. 559 (1917); and Merrick v. N.W. Halsey & Co., 242 U.S. 568 (1917).
17 The Uniform Securities Act was drafted in 1956 at NCCUSL's request by Professor Louis Loss of Harvard Law School in conjunction with his associate Edward M. Cowett. 1 Matthew Bender, Blue Sky Regulation § 1.03[4] (A.A. Sommer, Jr. ed. Feb. 1997). In recognition of the differing approaches to securities regulation the states had taken, it was drafted in a four-part structure that would allow a state to adopt all or some of the parts. It includes provisions prohibiting fraud; requiring registration of broker-dealers, agents, and investment advisers; requiring registration of securities; and providing definitions, exemptions, administrative powers, and remedies.
18 Because many state laws include variations of the Uniform Act's provisions, commentators sometimes categorize states differently. According to NCCUSL, these jurisdictions are Alabama, Alaska, Arkansas, Connecticut, Delaware, District of Columbia, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, North Carolina, Oklahoma, Oregon, Pennsylvania, Puerto Rico, South Carolina, South Dakota, Utah, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. Uniform Securities Act (1956), 7B U.L.A. 223 (Supp. 2000). Idaho, Iowa, and Montana have adopted many of the major provisions of both the 1956 and the 1985 Acts. Id.
19 1 Louis Loss & Joel Seligman, Securities Regulation 42 (3d ed. 1989). Loss and Seligman describe the differences between the two versions as "generally differences in detail rather than in structure or basic approach." Id. at 50 n. 58.
20 These states are: Colorado, Maine, Nevada, New Mexico, Rhode Island, and Vermont. Uniform Securities Act (1985), 7B U.L.A. 155 (Supp. 2000). Idaho, Iowa and Montana also could be included on this list. See supra n.17.note 17.
21 See Uniform Securities Act § 414 (1956). See also Uniform Securities Act § 801 (1985).
22 See A.S. Goldmen & Co. v. New Jersey Bureau of Securities, 163 F.3d 780 (3d Cir.), cert. denied, 120 S. Ct. 166 (1999) (upholding New Jersey jurisdiction over offers of securities by in-state broker to out-of-state-buyers, where offering was registered in other states but not in New Jersey). The Commission and NASAA each filed amicus curiae briefs in this case supporting the position of the Bureau.
23 See Uniform Securities Act § 407(a) (1956). In pertinent part, Section 407(a) provides: "The Administrator in his discretion may make such public or private investigations within or outside of this state as he deems necessary to determine whether any person has violated or is about to violate any provision of this act or any rule or order hereunder, or to aid in the enforcement of this act or in the prescribing of rules and forms hereunder ." The 1985 Act provision is substantially the same, but eliminates rulemaking as a basis for an investigation. Uniform Securities Act § 601(a) (1985).

In the case of registered broker-dealers and investment advisers, the Uniform Act also generally provides the administrator with the authority to make examinations of records both inside and outside the state. See Uniform Securities Act § 203(d) (1956). See also Uniform Securities Act § 211 (1985).

24 See Uniform Securities Act §§ 414(g) and (h) (1956). See also Uniform Securities Act §§ 708(a) and (c) (1985).
25 Uniform Securities Act § 704 (1985).
26 NASAA supported the 1956 version of the Uniform Securities Act, but did not support the 1985 Act. NASAA has, from time to time, adopted its own amendments to provisions of the Uniform Securities Act, relating them back to the 1956 version. See 1 Louis Loss & Joel Seligman, Securities Regulation 49-50 (3d ed. 1989).
27 Uniform Securities Act, § 407(b) (1956).
28 Id. The 1985 Act section reflects some changes to the wording of this provision. Uniform Securities Act, § 601(c) (1985).
29 Silverman v. Berkson, 661 A.2d 1266, 1269 (N.J.), cert. denied, 516 U.S. 975 (1995) (construing Uniform Securities Act §§ 407(a) and (b)). As noted above, the 1985 Act contains similar provisions.
30 While the principal authorities in this area deal with the scope of in personam jurisdiction of state courts, it appears that the same principles would apply to the issuance of administrative subpoenas by state agencies. See Silverman v. Berkson, 661 A.2d 1266, 1270 (N.J.), cert. denied, 516 U.S. 975 (1995). Cf. FTC v. Compagnie De Saint-Gobain-Saint-Gobain-Pont-A-Mousson, 636 F.2d 1300, 1321 n.117 (D.C. Cir. 1980). See, generally, 116 Moore's Federal Practice § 108 (Matthew Bender 3d ed.).
31 International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (citations omitted). The Court said that due process requirements depend on the "quality and nature of the activity in relation to the fair and orderly administration of the laws which it was the purpose of the due process clause to insure." Id. at 319.

Significant factors include whether the activities in the state range from "single or occasional acts" to "continuous and systematic" conduct, and whether the cause of action arose from those activities. Id. at 316-319. However, the Due Process Clause "does not contemplate that a state may make binding a judgment in personam against an individual or corporate defendant with which the state has no contacts, ties, or relations." Id. at 319.

Historically, the scope of a state's power over non-residents under the Constitution was grounded on a territorial theory of the power of the state over a person. Generally, the state could exercise jurisdiction only where the person was domiciled in the state, was physically present in the state, or had consented to jurisdiction. In the landmark case, Pennoyer v. Neff, 95 U.S. 714 (1878), the Court's rationale for this theory relied heavily on principles of federalism and state sovereignty. Later cases have expressed differing views on the continued significance of federalism and sovereignty principles.

32 Hanson v. Denckla, 357 U.S. 235, 253 (1958). Where the contacts with a state are substantial, continuous, and systematic, a state may assert "general jurisdiction" over a defendant; more commonly, a state will have "specific jurisdiction" to adjudicate claims against a person that arise out of the person's contacts with a state. See Helicopteros Nacionales De Colombia, S.A., v. Hall, 466 U.S. 408, 414 (1984).
33 Keeton v. Hustler Magazine, Inc., 465 U. S. 770, 774-75 (1984). Once significant purposefully established contacts are shown, they are then considered in light of other factors to determine that the exercise of jurisdiction would not be unfair or unreasonable under the International Shoe balancing test. Burger King Corp. v. Rudzewicz, 471 U.S. 462¸ 476-77 (1985). These factors include the burden on the defendant, the state's interest in adjudicating the dispute, the plaintiff's interest in obtaining convenient and effective relief, the interstate judicial system's interest in obtaining the most efficient resolution of controversies, and the shared interest of the several states in furthering fundamental substantive social policies. However, the defendant must present a "compelling case" that the presence of other considerations would make jurisdiction unreasonable, and "[m]ost such considerations usually may be accommodated through means short of finding jurisdiction unconstitutional." Id. at 477.
34 Uniform Securities Act, § 601(d) (1985).
35 Citations to all the laws, and a summary of their provisions are included in the chart attached as Appendix B. Most laws appear to be based on the NASAA amendment version. Of the nineteen states with these laws, thirteen responded to the survey.

The nineteen states are: Connecticut, District of Columbia, Georgia, Illinois, Indiana, Iowa, Kansas, Maine, Missouri, Montana, Nebraska, Nevada, New Mexico, North Carolina, Ohio, Rhode Island, South Dakota, Vermont, and Washington.

36 Id. at § 601(f).
37 These states are: Maine, New Mexico, Nevada, Rhode Island, and Vermont.
38 Attached as Appendices C, D, E, and F, are charts and graphs compiling many of the responses toresponses to quantitative survey questions. The discussion of survey responses in this report reflects the surveys returned from thirty states, as well as, in some cases, follow-up telephone discussions.
39 Almost half of the requests came from states with a reciprocal subpoena enforcement law in place, while the other half ofcame from the states without it.
40 Pro hac vice means "[f]or this occasion or particular purpose . . . [A] lawyer who has not been admitted to practice in a particular jurisdiction but who is admitted there temporarily for the purpose of conducting a particular case." Black's Law Dictionary 1227 (7th ed. 1999).
41 See "SEC, State Securities Regulators Announce Promissory Note Enforcement Sweep," (June 1, 2000). See the Commission's web site at http://www.sec.gov/news/press/2000-72.txt (Sept. 2000). .
42 See "State Securities Regulators Announce Completion of D.H. Blair Settlement Agreement," (Mar. 31, 2000). See NASAA's web site at http://www.nasaa.org/nasaa/scripts/tx_display.asp?rcid=13 (Sept. 2000).
43 See "Online Trading Task Force Formed By State Securities Regulators," (May 3, 1999). See NASAA's web site at http://www.nasaa.org/nasaa/scripts/tx_display.asp?rcid=89 (Sept. 2000).
44 See "The New Economy' and State Securities Regulation," (Sept. 19, 2000). See NASAA's web site at http://www.nasaa.org/nasaa/Files/Top_Stories/visionstatement.36787-37962.pdf (Sept. 2000).


Modified: 07/05/2002