[Federal Register Volume 62, Number 69 (Thursday, April 10, 1997)]
[Notices]
[Pages 17653-17659]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-9204]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 33-7413, File No. S7-15-97]
Securities Uniformity; Annual Conference on Uniformity of
Securities Laws
AGENCY: Securities and Exchange Commission.
ACTION: Publication of release announcing issues to be considered at a
conference on uniformity of securities laws and requesting written
comments.
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SUMMARY: In conjunction with a conference to be held on April 28, 1997,
the Commission and the North American Securities Administrators
Association, Inc. today announced a request for comments on the
proposed agenda for the conference. This meeting is intended to carry
out the policies and purposes of section 19(c) of the Securities Act of
1933, adopted as part of the Small Business Investment Incentive Act of
1980, to increase uniformity in matters concerning state and federal
regulation of securities, to maximize the effectiveness of securities
regulation in promoting investor protection, and to reduce burdens on
capital formation through increased cooperation between the Commission
and the state securities regulatory authorities.
DATES: The conference will be held on April 28, 1997. Written comments
must be received on or before April 23, 1997 in order to be considered
by the conference participants.
ADDRESSES: Written comments should be submitted in triplicate by April
23, 1997 to Jonathan G. Katz, Secretary, Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549. Comments also
may be submitted electronically at the following E-mail address: comments@sec.gov. Comments should refer to File No. S7-15-97; this file
number should be included on the subject line if E-mail is used.
Comment letters will be available for public inspection at the
Commission's Public Reference Room, 450 5th Street, N.W., Washington,
D.C. 20549. Electronically submitted comment letters will be posted on
the Commission's internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT:
John D. Reynolds or Richard K. Wulff, Office of Small Business Review,
Division of Corporation Finance, Securities and Exchange Commission,
450 5th Street, N.W., Washington, D.C. 20549, (202) 942-2950.
SUPPLEMENTARY INFORMATION:
I. Discussion
A dual system of federal-state securities regulation has existed
since the adoption of the federal regulatory structure in the
Securities Act of 1933 (the ``Securities Act'').\1\ Issuers attempting
to raise capital through
[[Page 17654]]
securities offerings, as well as participants in the secondary trading
markets, are responsible for complying with the federal securities laws
as well as all applicable state laws and regulations. It has long been
recognized that there is a need to increase uniformity between federal
and state regulatory systems, and to improve cooperation among those
regulatory bodies so that capital formation can be made easier while
investor protections are retained.
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\1\ 15 U.S.C. 77a et seq.
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The importance of facilitating greater uniformity in securities
regulation was endorsed by Congress with the enactment of section 19(c)
of the Securities Act in the Small Business Investment Incentive Act of
1980.\2\ Section 19(c) authorizes the Commission to cooperate with any
association of state securities regulators which can assist in carrying
out the declared policy and purpose of section 19(c). The policy of
that section is that there should be greater federal and state
cooperation in securities matters, including: (1) Maximum effectiveness
of regulation; (2) maximum uniformity in federal and state standards;
(3) minimum interference with the business of capital formation; and
(4) a substantial reduction in costs and paperwork to diminish the
burdens of raising investment capital, particularly by small business,
and a reduction in the costs of the administration of the government
programs involved. In order to establish methods to accomplish these
goals, the Commission is required to conduct an annual conference. The
1997 meeting will be the fourteenth such conference.
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\2\ Pub. L. 96-477, 94 Stat. 2275 (October 21, 1980).
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Recently, Congress has examined the system of dual federal and
state securities regulation and the effects of such dual regulation on
the nation's securities markets. During this process, Congress
considered the need for regulatory changes to promote capital
formation, eliminate duplicative regulation, decrease the cost of
capital and encourage competition, while at the same time promoting
investor protection. These efforts resulted in passage of The National
Securities Markets Improvement Act of 1996 \3\ (the ``1996 Act''),
which was signed by President Clinton on October 11, 1996. The 1996 Act
contains significant provisions that realign the regulatory partnership
between federal and state regulators. The legislation reallocates
responsibility for regulation of the nation's securities markets
between the federal government and the states in order to eliminate
duplicative costs and burdens and improve efficiency, while preserving
investor protections. The 1996 Act addresses regulation applicable to
securities offerings, investment companies and advisers and broker-
dealers.
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\3\ Pub. L. 104-290, 110 Stat. 3416 (October 11, 1996).
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II. 1997 Conference
The Commission and the North American Securities Administrators
Association, Inc. (``NASAA'') \4\ are planning the 1997 Conference on
Federal-State Securities Regulation (the ``Conference'') to be held
April 28, 1997 in Washington, D.C. At the Conference, representatives
from the Commission and NASAA will form into working groups in the
areas of corporation finance, market regulation and oversight,
investment management, and enforcement, to discuss methods of enhancing
cooperation in securities matters in order to improve the efficiency
and effectiveness of federal and state securities regulation.
Generally, attendance will be limited to representatives of the
Commission and NASAA in an effort to promote frank discussion. However,
each working group in its discretion may invite certain self-regulatory
organizations to attend and participate in certain sessions.
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\4\ NASAA is an association of securities administrators from
each of the 50 states, the District of Columbia, Puerto Rico, Mexico
and twelve Canadian Provinces and Territories.
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Representatives of the Commission and NASAA currently are
formulating an agenda for the Conference. As part of that process the
public, securities associations, self-regulatory organizations,
agencies, and private organizations are invited to participate through
the submission of written comments on the issues set forth below. In
addition, comment is requested on other appropriate subjects sought to
be included in the Conference agenda. All comments will be considered
by the Conference attendees.
III. Tentative Agenda and Request for Comments
The tentative agenda for the Conference consists of the following
topics in the areas of corporation finance, investment management,
market regulation and oversight, and enforcement.
(1) Corporation Finance Issues
A. Uniformity of Regulation
The 1996 Act amended Section 18 of the Securities Act \5\ to
preempt state blue-sky registration of securities offerings of
``covered securities'' \6\ and prohibit state reviews of offerings of
covered securities.\7\ The definition of covered securities does not
include the following which, therefore, remain subject to state
registration requirements:
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\5\ 15 U.S.C. 77r.
\6\ 15 U.S.C. 77r(b). ``Covered securities'' are defined in
Section 18. The term generally includes New York Stock Exchange,
Inc. (``NYSE''), American Stock Exchange, Inc. (``AMEX'') and Nasdaq
National Market System (``Nasdaq/NMS'') securities, registered
investment company securities and specified exempt securities and
offerings.
\7\ 15 U.S.C. 77r(a).
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Securities quoted on the Nasdaq SmallCap market;
Securities quoted on the Nasdaq over-the-counter
Electronic Bulletin Board;
Securities quoted on the over-the-counter ``pink sheets;''
Securities listed on national securities exchanges other
than the NYSE or AMEX (unless the Commission determines by rule that
the listing standards of such exchanges are substantially similar to
the listing standards of the NYSE, AMEX, or Nasdaq/NMS);
Various investment grade securities, such as asset-backed
and mortgage-backed securities, since these securities usually are not
listed on a national exchange or Nasdaq/NMS;
Private placements of securities under Section 4(2) of the
Securities Act that do not meet the requirements of Rule 506 of
Regulation D; \8\ and
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\8\ 17 CFR 230.501 through 230.508.
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Securities offered in reliance upon Commission rules
adopted under Section 3(b) of the Securities Act, e.g., offerings that
are exempt from registration with the Commission under Regulation A \9\
and Rules 504 and 505 of Regulation D.
\9\ 17 CFR 230.251 through 230.263.
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In addition, with respect to offerings of covered securities (other
than listed securities), the states retain the authority to require
specified fee payments and/or notice filings. The states' continuing
authority to regulate certain offerings and to require other filings
and fees continues the need for uniformity between the federal and
state registration systems where consistent with investor protection.
The 1996 Act requires the Commission to conduct a study as to the
extent to which uniformity of state regulatory requirements for
securities and securities transactions that are not covered securities
has been achieved.\10\ The Commission is instructed to consult with the
states as well as issuers,
[[Page 17655]]
brokers and dealers in conducting this study. The results of the study
are to be reported to Congress within a year following the enactment of
the 1996 Act. The Commission and NASAA will discuss the nature and
extent of uniformity at present and discuss steps to increase
uniformity in light of the 1996 Act.
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\10\ Section 102(b) of 1996 Act.
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B. Sales to Qualified Purchasers under the 1996 Act
Section 18 of the Securities Act, as amended by the 1996 Act,
excludes from state regulation and review securities offerings to
purchasers who are defined by Commission rules to be ``qualified
purchasers.'' \11\ A security sold to a ``qualified purchaser'' is a
``covered security'' subject to the same new regulatory approach as
other covered securities as described above. The Commission will be
undertaking rulemaking to define ``qualified purchaser'' for this
purpose, and will discuss with NASAA the appropriate criteria for this
definition.
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\11\ 15 U.S.C. 77r(b)(3).
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C. Commission Exemptive Authority
The 1996 Act added new Section 28 to the Securities Act granting
the Commission extensive general authority to craft exemptions from the
Securities Act to the extent that such exemptions are necessary or
appropriate in the public interest and consistent with the protection
of investors.\12\ This new authority permits the Commission to adopt
rules which exempt any person, security or transaction, or any classes
thereof, from one or more of the provisions of the Securities Act. The
Commission is authorized to adopt conditions for the availability of
such exemptions or, if deemed appropriate, adopt unconditional
exemptions. The Commission and NASAA will discuss the nature and extent
of appropriate exemptions that may be adopted under the Commission's
new authority and the appropriate criteria of and conditions to such
exemptions. In this regard, the definition of covered securities does
not encompass securities issued pursuant to exemptions under new
Section 28. Accordingly, securities or transactions determined to be
exempt under Commission rules adopted pursuant to new section 28 may be
subject to state regulation and review. The conferees will discuss how
offerings exempted under new Section 28 may be regulated in a uniform
manner under state securities laws to the greatest possible extent,
consistent with investor protection.
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\12\ 15 U.S.C. 77z-3.
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D. Small Business Initiatives
During 1996 the Commission adopted and revised rules to provide
additional assistance to small business. On May 1, 1996, the Commission
adopted Rule 1001, a new Securities Act Section 3(b) exemption from the
registration requirements of the federal securities laws.\13\ Under the
exemption, offers and sales of securities, in amounts of up to $5
million, that satisfy the conditions of a 1994 exemption from
California state qualification requirements (Section 25102(n) of the
California Corporations Code) are exempt from federal registration.
Also on May 1, 1996, the Commission adopted amendments to certain rules
under the Securities Exchange Act of 1934 \14\ (``Exchange Act'') that
raised the asset threshold for when a company must become a ``public''
reporting company from $5 million to $10 million.\15\
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\13\ Securities Act Release No. 7285 (May 1, 1996) [61 FR
21356].
\14\ 15 U.S.C. 78a et seq.
\15\ Securities Exchange Act Release No. 37157 (May 1, 1996) [61
FR 21354].
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On February 20, 1997, the Commission adopted amendments to the
holding period requirements contained in Rule 144 under the Securities
Act.\16\ Rule 144 provides a Securities Act registration safe harbor
for resales of securities by persons who hold either ``restricted''
securities or securities of a company of which they are affiliates.
``Restricted'' securities generally include securities issued in
offerings under certain exemptions from federal registration. The
amendments permit the resale of limited amounts of restricted
securities after a one-year, rather than the previous two-year, holding
period. In addition, the amendments permit unlimited resales of
restricted securities by non-affiliates after a holding period of two
years, rather than the previous three-year period. The Commission
believes that these changes will reduce the cost of private capital
formation and especially benefit small businesses, without reducing
investor protections. In a companion release, the Commission proposed
certain changes to Rule 144 to simplify the rule's operation and
solicited comments on additional changes to Rule 144.\17\
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\16\ Securities Act Release No. 7390 (February 20, 1997) [62 FR
9242].
\17\ Securities Act Release No. 7391 (February 20, 1997) [62 FR
9246].
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Also on February 20, 1997, the Commission proposed amendments to
Rule 430A to permit certain smaller or less seasoned reporting
companies to price securities on a delayed basis after effectiveness of
a registration statement, if they meet specified conditions.\18\ The
proposals are intended to provide flexibility and efficiency to
qualified registrants, enabling them to time their offerings to
advantageous market conditions, consistent with investor protection.
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\18\ Securities Act Release No. 7393 (February 20, 1997) [62 FR
9276].
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The participants will discuss the impact of the recent Commission
rule changes and the need for any additional exemptive relief in the
small business area. Conferees will consider the recent proposals and
discuss the effects of such proposals, if adopted, on small business
and public investors.
During the fall of 1996, the Commission began meeting with small
businesses in town hall meetings conducted throughout the United
States. These town hall meetings are intended to provide basic
information to small businesses about fundamental requirements that
must be addressed when they wish to raise capital through the public
sale of securities. In addition, the Commission has learned and will
continue to learn more about the concerns and problems facing small
businesses in raising capital so that initiatives and programs can be
designed to meet their needs, consistent with the protection of
investors. To date, the Commission has held six town hall meetings
attended by more than 1,000 small business persons. The Commission
representatives will share information and ideas obtained from these
meetings with conference participants.
E. Securities Act Concept Release
The Commission issued a concept release during 1996 to solicit
comment on the best means of improving the regulation of the capital
formation process while maintaining or enhancing investor
protection.\19\ The Commission has been engaged in a broad
reexamination of the regulatory framework for the offer and sale of
securities under the Securities Act.
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\19\ Securities Act Release No. 7314 (July 25, 1996) [61 FR
40044].
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The concept release solicited comment on different approaches, such
as: the recommendation of the Advisory Committee on the Capital
Formation and Regulatory Processes that a ``company registration''
approach be adopted; modifications to the existing shelf registration
system (many of which were recommended by the Commission's Task Force
on Disclosure
[[Page 17656]]
Simplification); reforms that would liberalize the treatment of
unregistered securities; and an approach that would involve
deregulation of offers. Comment also was requested with regard to any
other approaches that should be considered. The comment period ended
October 31, 1996. The participants will discuss the conceptual issues
raised by the release and the comments received in response to such
release and consider the changes that should be made in the regulation
of securities offerings.
F. Report of the Advisory Committee on the Capital Formation and
Regulatory Processes
On July 24, 1996, the Advisory Committee on the Capital Formation
and Regulatory Processes (the ``Advisory Committee'') presented its
report to the Commission recommending the adoption of a company
registration system. The Advisory Committee recommended a fundamental
conceptual change in the scheme of regulation governing offerings by
public companies. The Advisory Committee advised the Commission to
shift the focus of the regulatory process for public offerings of
securities by these companies from a transactional registration system
to a company registration system, beginning with a pilot program. As a
part of this new approach, the Advisory Committee recommended
enhancements to the Exchange Act periodic reporting requirements. The
participants will consider the recommendations proposed by the Advisory
Committee, including the impact of such conceptual changes on the
coordination of federal and state securities regulation.
G. Disclosure Simplification
On March 5, 1996, the Commission published the Report of the Task
Force on Disclosure Simplification (the ``Task Force Report''). The
Task Force Report includes several recommendations intended to reduce
the costs of raising capital by both smaller and seasoned companies. In
addition, the Task Force Report includes a discussion on the ongoing
debate regarding the need to adapt existing Securities Act requirements
and related concepts to current market conditions. Since publication of
the Task Force Report, the Commission initiated implementation of
certain of the recommendations by eliminating 45 rules and four forms
that were viewed as redundant or otherwise no longer necessary \20\ and
published proposals to implement additional recommendations to
eliminate unnecessary requirements and streamline the disclosure
process.\21\
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\20\ Securities Act Release No. 7300 (May 31, 1996) [61 FR
30397].
\21\ Securities Act Release No. 7301 (May 31, 1996) [61 FR
30405].
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The conference participants will discuss the findings and
recommendations of the Task Force Report and consider the Commission's
proposals that would implement certain recommendations. Conferees will
consider how the Commission's proposals, if adopted, would impact the
system of dual federal and state regulation.
H. Plain English
One of major concerns of the Task Force on Disclosure
Simplification was the lack of readability of prospectuses and other
disclosure documents. The Task Force Report criticized prospectuses for
their dense writing, legal boilerplate and repetitive disclosures and
recommended using plain English disclosure to improve the readability
of prospectuses. The Commission on January 14, 1997 proposed several
rule amendments that would be a first step in implementing the Task
Force's recommendation.\22\ The proposals require the use of plain
English writing principles when drafting the front part of
prospectuses--the cover page, summary and risk factors sections of
these documents. Concurrently with the issuance of the plain English
proposal, the Commission's Office of Investor Education and Assistance
issued a draft copy of a handbook to help issuers write plain English
documents.
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\22\ Securities Act Release No. 7380 (January 14, 1997) [62 FR
3152].
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The Division of Corporation Finance is operating a pilot program
for companies that want to draft their documents in plain English. The
Division's staff works with volunteers on the techniques for designing
and writing plain English documents filed under either the Securities
Act or the Exchange Act. The company participants can draft plain
English documents and submit them to the staff for suggestions and
comments in a nonpublic forum.
Conferees will discuss the Plain English initiative, including
federal and state coordination needed to facilitate implementation of
the initiative.
I. Electronic Delivery of Disclosure Documents
The Commission has issued interpretive releases and rules
addressing the use of electronic media to deliver or transmit
information under the federal securities laws.\23\ These initiatives
reflect the Commission's continuing recognition of the benefits that
electronic technology provides to the financial markets. These releases
are premised on the belief that the use of electronic media should be
at least an equal alternative to the use of paper delivery.
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\23\ Securities Act Release No. 7233 (October 6, 1995) [60 FR
53458], Securities Act Release No. 7289 (May 9, 1996) [61 FR 24652].
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The participants will discuss the impact of electronic technology
on the capital formation process and consider the nature and extent of
regulatory changes to accommodate the use of such technology in
securities offerings. In particular, conferees will consider the
various approaches that have been taken by states and the Commission
relative to securities offerings on the Internet.
J. Internationalization of the Securities Markets
1. Foreign Issuers in the U.S. Market. Foreign companies raising
funds from the public or having their securities traded on a national
exchange or the Nasdaq Stock Market are generally subject to the
registration requirements of the Securities Act and the registration
and reporting requirements of the Exchange Act. The Commission has
provided a separate integrated disclosure system for foreign private
issuers that provides a number of accommodations to foreign practices
and policies. Foreign companies conducting securities offerings in the
U.S. continue to be subject to state regulation and review unless the
securities being offered are ``covered securities'' within the meaning
of the 1996 Act. The participants will discuss steps to increase
coordination of federal and state treatment of multinational offerings.
2. Regulation S. In 1990, the Commission adopted Regulation S \24\
to clarify the extraterritorial application of the registration
requirements of the Securities Act. The Commission intended for
Regulation S to make clear that registration of an offering of
securities under the Securities Act would not be required where the
offering takes place outside the United States and the securities
offered come to rest offshore. Following the adoption of Regulation S,
the Commission became aware of certain abusive practices under the
regulation. The Commission issued a release on February 20, 1997
proposing revisions to Regulation S to
[[Page 17657]]
prevent those abusive practices.\25\ The proposals include lengthening
the restricted period during which persons relying on the Regulation S
safe harbor may not sell equity securities into the United States from
40 days to two years (absent registration or a valid exemption) and
classifying equity securities placed offshore pursuant to Regulation S
as ``restricted securities'' under Rule 144. The proposals would apply
to offshore sales of equity securities of domestic issuers and of
foreign issuers where the principal market for those securities is the
United States.
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\24\ 17 CFR 230.901 through 230.904 and Preliminary Notes.
\25\ Securities Act Release No. 7392 (February 20, 1997) [62 FR
9258].
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Conferees will discuss the proposed changes to Regulation S, share
their experiences with Regulation S offerings and discuss steps to
increase coordination of federal and state regulation of such
offerings.
(2) Market Regulation Issues
A. National Securities Markets Improvement Act of 1996
1. State Licensing Requirements. The 1996 Act directed the
Commission to conduct a study of the impact of disparate state
licensing requirements on associated persons of registered broker-
dealers and the methods for states to attain uniform licensing
requirements for such persons. The Commission is required to consult
with the self-regulatory organizations (``SROs'') and the states, and
to prepare and submit a report to Congress by October 11, 1997. To this
end, Commission staff have been consulting with the SROs, NASAA, and
members of the securities industry. The initial goal is to determine
the extent to which state licensing requirements differ and the effect
of different state requirements and procedures upon associated persons
and broker-dealers. The next phase of the study will be to analyze the
need for and feasibility of requiring uniform state requirements
(through legislation or other means). The participants will discuss the
status of the study at the conference.
2. State Requirements for Exchange-Listed Securities. As noted
above, the 1996 Act amended Section 18 of the Securities Act to provide
an exemption from state blue sky laws and regulations for securities
that are listed on the NYSE, the AMEX, and the Nasdaq/NMS. The
amendments to Section 18 also allow the Commission by rule to designate
securities listed on other national securities exchanges as exempt from
state blue sky laws and regulations if the applicable listing standards
are substantially similar to those of the NYSE, AMEX, or Nasdaq/NMS.
Section 18 allows the Commission to adopt such a rule on its own
initiative or in response to a rulemaking petition. The Commission has
received rulemaking petitions from the Pacific Stock Exchange, Inc.,
the Chicago Board Options Exchange, Inc., and the Chicago Stock
Exchange, Inc. The participants will discuss these proposals and their
potential impact on NASAA members.
3. Broker-Dealer Books and Records. Section 103 of the 1996 Act
prohibits any state from imposing broker-dealer books and records
requirements that are different from or in addition to the Commission's
requirements. In addition, the same section directs the Commission to
consult periodically with state securities authorities concerning the
adequacy of the Commission's requirements. The Commission's current
proposal to amend Rules 17a-3 and 17a-4 \26\ originated in discussions
between NASAA representatives and the Commission about the adequacy of
the existing broker-dealer books and records requirements.\27\ The
proposed amendments clarify, modify, and expand the Commission's
record-keeping requirements with respect to purchase and sale
documents, customer records, associated person records, customer
complaints, and certain other matters. In addition, the proposed
amendments specify certain types of books and records that broker-
dealers must make available in their local offices. In consideration of
the substantial number of organizations that have expressed interest in
commenting on the proposed amendments, the Commission extended the
comment period until March 31, 1997. The participants at the Conference
will discuss the proposed amendments and the comments received.
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\26\ 17 CFR 240.17a-3 and 17a-4.
\27\ Securities Exchange Act Release No. 37850 (October 22,
1996) [61 FR 55593].
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B. Central Registration Depository (``CRD'') Redesign
The CRD system is a computer system operated by the National
Association of Securities Dealers, Inc. (``NASD'') that is used by the
Commission, the states and the SROs primarily as a means to facilitate
registration of broker-dealers and their associated persons. The NASD
is in the process of implementing a comprehensive plan to redesign the
CRD and to expand its use by federal and state securities regulators as
a tool for broker-dealer regulation. As a result of the NASD's efforts,
the redesigned CRD system ultimately is expected to provide the
Commission, SROs, and state securities regulators with: (i) Streamlined
capture and display of data; (ii) better access to registration and
disciplinary information through the use of standardized and
specialized computer searches; and (iii) electronic filing of uniform
registration and licensing forms, including Forms U-4, U-5, BD and BDW.
The NASD has been testing the pilot version of the redesigned CRD
since mid-1996, and this version is now in use on a trial basis at
approximately 800 broker-dealers nationwide. Among other things, the
participants will discuss the status of the CRD implementation process,
and issues relating to the conversion of existing registration
information to the redesigned CRD and electronic filing of uniform
forms.
C. Broker-Dealer Examinations
In December 1995, regulators responsible for examining broker-
dealers (NASAA on behalf of state regulators, the AMEX, the CBOE, the
NYSE, the NASD and the Commission) signed a Memorandum of Understanding
(``MOU'') in which they committed to undertake their regulatory
responsibilities in the most efficient and effective manner possible by
sharing information, coordinating examinations and identifying
regulatory priorities. As part of the MOU, NASAA, the SROs and the
Commission agreed to meet yearly for a national planning summit and
each state securities regulator, NASD district office and Commission
regional office agreed to meet at least annually for a regional
planning summit, to discuss examination schedules and priorities,
review broker-dealers' examination histories, and discuss other areas
of related interest, with the goal of encouraging information-sharing
to avoid unnecessary duplication of examinations. Common regulatory
findings and the status of this coordination and of the implementation
of the MOU will be discussed.
In March 1996, the Commission, NASAA, the NASD and the NYSE
released a report on the findings of a joint regulatory effort--``The
Joint Regulatory Sales Practice Sweep: A Review of the Sales Practice
Activities of Selected Registered Representatives and the Hiring,
Retention, and Supervisory Practices of the Brokerage Firms Employing
Them.'' The objectives of this joint initiative were to identify
possible problem registered representatives, to review their sales
practices, and to assess whether adequate hiring, retention, and
supervisory mechanisms were in place.
[[Page 17658]]
The findings of the report suggested generally that, while many firms
maintain satisfactory supervisory mechanisms, firms can and should
improve and strengthen their hiring, retention, and supervisory
practices. Consequently, the report contained specific recommendations
aimed at improving brokerage firms' hiring, retention, and supervisory
practices. The attendees will discuss implementation of the
recommendations.
D. Arbitration
The NASD and other members of the Securities Industry Conference on
Arbitration have been developing new approaches to important issues
affecting the administration of securities arbitration over the past
year. Much of their work was prompted by the 1996 report of the NASD's
Arbitration Policy Task Force. The participants will discuss the status
of some of the important developments in their area. For example,
proposed changes related to the variations in administering claims of
different dollar amounts, the administration of older claims, and
punitive damages are likely to be discussed.
E. Internet Fraud/Electronic Delivery
A leadership area of mutual interest to both the Commission staff
and NASAA is the impact of developments in technology. This year there
were ongoing discussions concerning a variety of new issues. Areas of
concern include: industry retention of electronic records and
communications; computer security; unregistered brokerage, investment
advisory and other regulated financial business conducted through the
internet; foreign exchange and foreign financial sector access to the
U.S. through electronic media; and industry and investor education
about the use of electronic media for the securities business. In 1996,
the Division issued no-action or information letters with respect to
certain financial business activities on the Internet, including
issuer-based bulletin board services,\28\ non-profit matching
services,\29\ and activities of on-line service providers (America
Online, Compuserve, and Microsoft).\30\ The Commission staff and NASAA
also have ongoing consultations on state securities law issues.
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\28\ Spring Street Brewing Co. (April 17, 1996); Real Goods
Trading Corp. (June 24, 1996); PerfectData Corp. (August 5, 1996);
and Flamemaster Corp. (November 6, 1996).
\29\ Angel Capital Electronic Network (October 25, 1996).
\30\ Charles Schwab & Co., Inc. (November 27, 1996).
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On May 9, 1996, the Commission published an interpretive release
expressing its views on the electronic delivery of documents that
broker-dealers, transfer agents, and investment advisers are required
to send to their customers.\31\ The conference participants will
discuss these and other matters concerning the Internet and the use of
electronic media.\32\
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\31\ Securities Exchange Act Release No. 37182 (May 9, 1996) [61
FR 24644].
\32\ See related discussion under Corporation Finance Issues,
supra page 13.
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F. Regulation M
On December 18, 1996, the Commission approved Regulation M,
representing the most sweeping changes in the way the Commission seeks
to prevent the manipulation of securities offerings since the
Commission adopted Rules 10b-6, 10b-7, and 10b-8 (also known as the
``trading practices rules'') over 40 years ago.\33\ Regulation M, which
became effective March 4, 1997, differs from the former trading
practices rules by focusing the restrictions on securities that are
more susceptible to manipulation; using better measures for
manipulative potential; recognizing the global nature of securities
markets; assimilating the changes in market transparency and
surveillance; and codifying a variety of earlier actions by the
Commission to adapt the former rules to current market conditions.
Regulation M addresses the concern that persons with a stake in a
securities offering, such as issuers, selling securityholders and
underwriters, might artificially influence the market price of the
security in distribution, thereby boosting its offering price. The
regulation seeks to prevent this result by restricting the activities
of these persons. In particular, Regulation M requires offering
participants to cease their market activities, such as proprietary
trading, during a restricted period that begins one or five business
days prior to the offering's pricing and ends when the offering is
over. A notable change from the trading practices rules, and one which
reflects the more focused approach of Regulation M, is that
underwriters of an actively-traded security of a larger issuer would
not be subject to these restrictions. Participants will discuss issues
raised by the new regulation.
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\33\ Securities Exchange Act Release No. 38067 (December 20,
1996) [62 FR 520].
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G. Order Execution Rules
In August of 1996, the Commission adopted Rule 11Ac1-4 \34\
(``Limit Order Display Rule'') and amendments to Rule 11Ac1-1 \35\
(``Quote Rule'') (collectively ``Order Execution Rules'').\36\ The
Limit Order Display Rule requires, under certain circumstances, the
public display of customer limit orders priced better than an exchange
specialist's or market maker's quote. The Limit Order Display Rule also
requires that specialists and market makers add limit orders priced at
their quote to the size associated with their quote when the quote
represents the best market-wide price. The rule establishes standard
display requirements for limit orders in all markets. The Quote Rule
was amended to require specialists and market makers to reflect in
their quote any better priced order that they enter into an electronic
communication network, or in the alternative, the electronic
communication network may route the best specialists' or market makers'
orders entered therein into the public quotation stream. In addition,
the Quote Rule was amended to require that substantial market makers
for any security listed on an exchange publish their quotations for
such security. The Order Execution Rules enhance the quality of public
quotations for equity securities and improve investor access to the
best prices available. The new rules also present investors with
improved execution opportunities and improved access to best prices
when they buy and sell securities. The participants will discuss the
new rules and their implementation.
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\34\ 17 CFR 240.11Ac1-4.
\35\ 17 CFR 240.11Ac1-1.
\36\ Securities Exchange Act Release No. 37619A (September 6,
1996) [61 FR 48290].
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H. Bank Securities Activities
Last year, the NASD submitted a rule proposal to the Commission
that would govern the conduct of member broker-dealers operating on the
premises of financial institutions. The NASD has since substantially
revised its rule proposal to address a number of issues raised by the
commenters, and expects to submit a revised rule proposal to the
Commission shortly. The participants will discuss the proposed rule
revisions, as well as other developments in this area, including a
proposal by the federal banking regulators to require bank employees
that sell securities directly to take certain qualification
examinations currently required of broker-dealer employees.
[[Page 17659]]
(3) Investment Management Issues
Title III of the 1996 Act (the ``Investment Advisers Supervision
Coordination Act'' (``Coordination Act'')) made several amendments to
the Investment Advisers Act of 1940, \37\ the most significant of which
reallocates federal and state responsibilities over investment
advisers. Under the new scheme larger advisers will principally be
regulated by the Commission, while smaller advisers the businesses of
which tend to be more local will be primarily regulated by the states.
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\37\ 15 U.S.C. 80b-1 et seq.
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Upon the effective date of the Coordination Act, an investment
adviser that is regulated or required to be regulated as an investment
adviser in a state in which it maintains its principal office and place
of business is prohibited from registering with the Commission unless
the adviser (i) has assets under management of not less than $25
million (or such higher amount as the Commission may, by rule, deem
appropriate), or (ii) is an adviser to an investment company registered
under the Investment Company Act of 1940. \38\ The Commission is
authorized to deny registration to any applicant that does not meet the
criteria for Commission registration and is directed to cancel the
registration of any adviser that no longer meets the criteria for
registration.
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\38\ 15 U.S.C. 80a-1 et seq.
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The Coordination Act preempts state investment adviser statutes as
they apply to investment advisers registered with the Commission. The
Coordination Act preserves, however, the ability of state regulators
to: (i) Investigate and bring enforcement actions against Commission-
registered advisers with respect to fraud and deceit, (ii) require
Commission-registered advisers to file notice documents with the state,
and (iii) require Commission-registered advisers to pay state
registration and other fees. State law is also preempted as to certain
``supervised persons'' of Commission-registered advisers, except that a
state retains the authority to register an investment adviser
representative that has a place of business in the state.
On December 20, 1996 the Commission proposed rules designed to
implement the provisions of the Coordination Act.\39\ The proposed
rules: (i) Address the procedures by which advisers not eligible to
register will identify themselves to the Commission and withdraw from
registration, (ii) exempt certain advisers that do not meet the
criteria from Commission registration from the new prohibition, and
(iii) define certain terms used in the statute. The comment period on
the proposed rules closed on February 10, 1997.
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\39\ Investment Advisers Act Release No. 1601 (December 20,
1996) [61 FR 68480].
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The conferees will discuss the Commission's rules as they affect
the allocation of regulatory responsibilities between the states and
the Commission. In addition, the conferees will discuss mutual concerns
regarding the implementation of the Coordination Act, including the
transition to the new regulatory scheme, the sharing of information
regarding the status of registrants, and arrangements for the provision
of technical assistance by the Commission including training,
conducting joint exams and sharing of information with respect to
investment advisers. In addition, state and federal regulators will
discuss the coordination of regulatory, examination and enforcement
activities subsequent to the effective date of the Coordination Act.
The conferees will also discuss progress with regards to the
development of a one-stop electronic filing system for investment
advisers, and the development of a system for investors to obtain
information regarding the disciplinary history of investment advisers.
(4) Enforcement Issues
In addition to the above-stated topics, the state and federal
regulators will discuss various enforcement-related issues which are of
mutual interest.
(5) Investor Education
The Commission is pursuing a number of programs for investors on
how to invest wisely and to protect themselves from fraud and abuse.
The states and NASAA have a longstanding commitment to investor
education and the Commission is intent on coordinating and
complementing those efforts to the greatest extent possible. The
participants at the conference will discuss investor education and
potential joint projects in some of the working group sessions.
(6) General
There are a number of matters which are applicable to all, or a
number, of the areas noted above. These include EDGAR, the Commission's
electronic disclosure system, rulemaking procedures, training and
education of staff examiners and analysts and sharing of information.
The Commission and NASAA request specific public comments and
recommendations on the above-mentioned topics. Commenters should focus
on the agenda but may also discuss or comment on other proposals which
would enhance uniformity in the existing scheme of state and federal
regulation, while helping to maintain high standards of investor
protection.
Dated: April 4, 1997.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-9204 Filed 4-9-97; 8:45 am]
BILLING CODE 8010-01-M
