[Federal Register Volume 63, Number 72 (Wednesday, April 15, 1998)]
[Notices]
[Pages 18470-18477]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9883]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 33-7524, File No. S7-11-98]
Securities Uniformity; Annual Conference on Uniformity of
Securities Laws
AGENCY: Securities and Exchange Commission.
ACTION: Notice of conference; request for comments.
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SUMMARY: The Commission and the North American Securities
Administrators Association, Inc. today announced a request for comments
on the proposed agenda for their annual conference to be held on May 4,
1998. This meeting is intended to carry out the policies and purposes
of section 19(c) of the Securities Act of 1933, which are to increase
cooperation between the Commission and state securities regulatory
authorities in order to maximize the effectiveness and efficiency of
securities regulation.
DATES: The conference will be held on May 4, 1998. Written comments
must be received on or before April 29, 1998 in order to be considered
by the conference participants.
ADDRESSES: Please send three copies of written comments by April 29,
1998 to Jonathan G. Katz, Secretary, Securities and Exchange
Commission, 450 5th Street, NW, Washington, DC 20549. Comments also can
be sent electronically to the following E-mail address: comments@sec.gov. Comment letters should refer to File No. S7-11-98; if
E-mail is used, please include this file number on the subject line.
Anyone can inspect and copy the comment letters at our Public Reference
Room, 450 5th Street, NW, Washington, DC 20549. All electronic comment
letters will be posted on the Commission's internet web site (http://
www.sec.gov).
FOR FURTHER INFORMATION CONTACT: John D. Reynolds, Office of Small
Business Review, Division of Corporation Finance, Securities and
Exchange Commission, 450 5th Street, NW, Washington, DC 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 trying to
raise capital through securities offerings, as well as participants in
the secondary trading markets, are responsible for complying with the
federal securities laws as well as all applicable state laws and
regulations. It has long been recognized that there is a need to
increase uniformity between federal and state regulatory systems, and
to improve cooperation among those regulatory bodies so that capital
formation can be made easier while investor protections are retained.
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\1\ 15 U.S.C. 77a et seq.
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Congress endorsed greater uniformity in securities regulation 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:
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\2\ Pub. L. 96-477, 94 Stat. 2275 (October 21, 1980).
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Maximum effectiveness of regulation;
Maximum uniformity in federal and state standards;
Minimum interference with the business of capital
formation; and
Substantial reduction in costs and paperwork to decrease
the burdens of raising investment capital, particularly by small
business, and reduce the costs of the government programs involved.
In order to establish methods to accomplish these goals, the Commission
is required to conduct an annual conference. The 1998 meeting will be
the fifteenth conference.
During 1996, Congress again examined the system of dual federal and
state securities regulation and 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''). 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.
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\3\ Pub. L. 104-290, 110 Stat. 3416 (October 11, 1996).
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II. 1998 Conference
The Commission and the North American Securities Administrators
Association, Inc. (``NASAA'') \4\ are planning the 1998 Conference on
Federal-State Securities Regulation (the ``Conference'') to be held May
4, 1998 in Washington, D.C. At the Conference, Commission and NASAA
representatives will form into working groups in the areas of
corporation finance, market regulation and oversight, investment
management, and
[[Page 18471]]
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 Commission and NASAA representatives to encourage 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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The Commission and NASAA 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 by submitting 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 and review of securities offerings
of ``covered securities.'' \6\ ``Covered securities'' are defined by
section 18 and include several types of securities, including
``nationally traded securities,'' i.e., securities traded on the New
York Stock Exchange, Inc. (``NYSE''), American Stock Exchange, Inc.
(``AMEX'') or the Nasdaq National Market System (''Nasdaq/NMS'').
``Covered securities'' also include registered investment company
securities and certain exempt securities and offerings.
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\5\ 15 U.S.C. 77r.
\6\ 15 U.S.C. 77r (a) and (b).
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Securities that are not ``covered securities'' remain subject to
state registration requirements. These securities include:
Securities quoted on the Nasdaq SmallCap market or the
NASD over-the-counter Bulletin Board (``OTC Bulletin Board'');
Securities quoted on the over-the-counter ``pink sheets'';
Securities listed on securities exchanges other than the
NYSE or AMEX; \7\
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\7\ The Commission may designate securities listed on other
exchanges to be covered securities if it determines by rule that the
listing standards of such exchanges are substantially similar to the
listing standards of the NYSE, AMEX or Nasdaq/NMS. The Commission
has adopted Rule 146(b) under the Securities Act which designates
securities listed on the Chicago Board Options Exchange, Tier I of
the Pacific Exchange and Tier I of the Philadelphia Stock Exchange
as covered securities for purposes of section 18. Securities Act
Release No. 7494 (January 13, 1998) [63 FR 3032].
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Various securities of non-listed issuers, such as asset-
backed and mortgage-backed securities;
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 issued in exempt offerings under Regulation A
\9\ and Rules 504 and 505 of Regulation D.
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\9\ 17 CFR 230.251 through 230.263.
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The states retain certain authority in connection with offerings of
covered securities. With respect to these offerings (other than
nationally-traded securities), the states have the right to require
specified fee payments and/or notice filings.\10\ The states' authority
over securities offerings continues the need for uniformity between the
federal and state registration systems, where consistent with investor
protection.
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\10\ Following the 1996 Act, the states also retain anti-fraud
authority over all securities offerings, including offerings of
covered securities.
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The 1996 Act required the Commission to conduct a study about the
extent of uniformity among state regulatory requirements for securities
and securities transactions that are not ``covered securities'' (the
``Uniformity Study'').\11\ The Commission issued the study results in
its ``Report on the Uniformity of State Regulatory Requirements for
Offerings of Securities that are not `Covered Securities' '' in October
1997 (the ``Uniformity Report''). As part of the Uniformity Study, the
Commission distributed surveys to state securities administrators,
various issuers, broker-dealers and law firms requesting information
concerning the extent of uniformity among state regulatory requirements
for securities that are not preempted by the 1996 Act. The surveys also
were posted on the Commission's Internet web site. The Commission
received 46 responses from state securities regulators and more than
100 responses from issuers, law firms, broker-dealers, and others,
including NASAA and the Securities Industry Association.
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\11\ Section 102(b) of the 1996 Act.
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The Uniformity Study found that the states have taken significant
actions to increase uniformity in regulating offerings of securities
that are not ``covered securities.'' Examples of this progress include,
among others:
Coordinated state review of certain offerings registered
at the federal level;
A uniform registration statement for offerings exempt at
the federal level and a regional state review program for this form;
and,
Statements of policy on several matters that enhance
uniformity in review among the states.
Despite this significant progress, certain survey respondents reported
differences among the states in several areas including, for example,
the following:
Standards of merit review;
Length of comment periods;
Suitability standards; and
Notice requirements for exempt offerings.
The Uniformity Study focused on the degree of uniformity among
state regulatory requirements for offerings of securities that are not
``covered securities.'' Despite this focus, some survey respondents
provided information regarding the effects of preemption of ``covered
securities.'' While most respondents noted the benefits from
preemption, some commenters voiced concerns in the areas of Rule 506
offerings, issuer-dealer registrations and notices for secondary
trading transactions.
Conferees will discuss the Uniformity Report, the nature and extent
of uniformity at present and methods to increase uniformity.
B. Definition of Qualified Purchaser and Accredited Investor; NASAA's
Model Accredited Investor Exemption
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's rules to be ``qualified
purchasers.'' \12\ A security sold to a ``qualified purchaser'' is a
``covered security'' subject to the same regulatory approach as other
covered securities. The Commission will be undertaking rulemaking to
define ``qualified purchaser'' for this purpose. In this process, the
Commission is considering whether changes should be made to the
definition of ``accredited investor''\13\ under the Securities Act,
[[Page 18472]]
and whether the definitions of ``qualified purchaser'' and ``accredited
investor'' should be similar or different. The appropriate criteria for
these two definitions will be discussed by Commission and NASAA
representatives.
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\12\ 15 U.S.C. 77r(b)(3).
\13\ The term ``accredited investor,'' as defined by the
Securities Act and the Commission's rules, is intended to encompass
those persons whose financial sophistication render the protections
of the Securities Act registration process unnecessary. Offers and
sales to these investors are afforded special treatment under the
federal securities laws.
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Participants also will discuss NASAA's Model Accredited Investor
Exemption which was adopted in 1997. Generally, the model rule exempts
offers and sales of securities from state registration requirements if,
among other things, the securities are sold only to persons who are, or
are reasonably believed to be, accredited investors. To date, ten
states have adopted the exemption. Twelve other states indicate that
they intend to adopt the exemption in the near future and another six
are considering adoption. State representatives will share their
experiences with the exemption, including any issues that have arisen.
C. Small Business Initiatives
In February 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.\14\ The proposals are
intended to provide flexibility and efficiency to qualified
registrants, enabling them to time their offerings to advantageous
market conditions, consistent with investor protection. The
coordination of Rule 430A procedures with state registration and review
procedures raises certain issues, such as when state registration fees
become payable and when state reviews will be conducted. Conferees will
discuss these various issues and ways to increase coordination between
federal and state procedures.
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\14\ Securities Act Release No. 7393 (February 20, 1997) (62 FR
9276).
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The Commission recently proposed revisions to Rule 701 under the
Securities Act.\15\ Rule 701 provides an exemption for the offer and
sale of securities to employees and certain other persons by private
companies under compensatory benefit plans or written compensation
agreements. The proposals are designed to expand the ability of issuers
to use the rule, improve the disclosures provided in offerings under
the rule and clarify and simplify the rule. For example, the proposals
would remove the current limitations based on offers and instead focus
only on the amount of sales permitted each year. Issuers would be
allowed to sell securities each year up to an amount determined under
two formulas (i.e., 15% of total assets or 15% of outstanding
securities) or $1 million, whichever is greater. The present $5 million
limitation on the aggregate offering amount would be removed from the
rule. Rule 701 now does not impose any specific disclosure obligations
on the issuer. The proposed rule revisions would require disclosure of
risk factors and the unaudited financial statements required in a
Regulation A offering.
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\15\ Securities Act Release No. 7511 (February 27, 1998) [63 FR
10785].
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The participants will discuss the impact of these proposed rule
changes, if adopted, and the need for any additional rulemaking in the
small business area.
Commission and state representatives will discuss whether changes
should be made to the Regulation D exemptions. Rule 506 of Regulation D
provides a ``safe harbor'' for non-public offerings under section 4(2)
of the Securities Act. An issuer which satisfies the requirements of
Rule 506 can be assured that its offering will qualify as a non-public
offering under section 4(2).\16\ As noted above, securities issued in a
Rule 506 offering are covered securities and therefore preempted from
state registration requirements. Because Rule 506 offerings are
preempted from state registration, conferees will consider whether Rule
506 requirements should be revised.
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\16\ An offering which does not meet the requirements of Rule
506 nevertheless may qualify as a section 4(2) non-public offering
based on the facts and circumstances of the offering.
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Rule 504 of Regulation D provides an exemption from the Securities
Act registration requirements for offerings up to $1 million in any 12-
month period, if certain conditions are met. Generally, Rule 504 is
available only to the smallest companies. Issuers in Rule 504 offerings
may use general solicitation or advertising, and the securities issued
in those offerings are freely tradeable. Rule 504 offerings are not
subject to specific federal disclosure requirements nor are these
offerings reviewed at the federal level. The Commission is concerned
that this current federal approach to Rule 504 offerings may be
contributing to fraudulent offerings by micro-cap issuers, i.e.,
issuers with small amounts of capitalization, or fraudulent aftermarket
trading in securities of micro-cap issuers on the OTC Bulletin Board or
in the ``pink sheets.'' Commission and state representatives will
discuss whether and how Rule 504 should be revised to address these
fraud concerns while at the same time preserving the ability of small
companies to raise capital.
Conferees will discuss several state initiatives designed to
facilitate offerings by smaller issuers. These initiatives include:
The Coordinated Equity Review (``CER'') program;
The Small Company Offering Registration (``SCOR'') form;
and
The state regional review program for SCOR and Regulation
A filings (the ``Regional Review Program'').
The CER program provides for a coordinated state review process for
offerings of equity securities registered at the federal level. Under
CER, the participating states coordinate with each other to produce one
comment letter to an issuer which addresses both substantive and
disclosure matters. To date, 38 states (out of 43 states that require
registration of these offerings) have agreed to participate in the
program.
Many states use a similar coordinated program to review state
registrations using the SCOR form, the ``Regional Review Program.'' The
SCOR form is a simplified question and answer format used for the
registration of securities offerings with approximately 40 states. This
form is used to register securities offerings exempt from registration
under Rule 504 of Regulation D or Regulation A at the federal level.
Under the Regional Review Program, states in certain regions of the
country elect one state to lead the review and issue comments on the
filing. Three regional programs have been started to date and include
about half of the states requiring registration of these offerings. The
SCOR form was adopted by NASAA in 1989. NASAA's Small Business Capital
Formation and Regional Review Committee is considering certain
revisions to update and modernize the form.
NASAA's representatives will discuss their experiences with the
SCOR form and the state coordinated review programs, including issues
which have arisen in their use. Participants will consider how these
programs may be improved to increase uniformity between the federal and
state levels.
During 1997 and 1998, the Commission continued to meet with small
businesses in town hall meetings conducted throughout the United
States. These town hall meetings are intended to provide basic
information about the securities offering process to small business
issuers and educate the Commission about the concerns and problems
facing small businesses in raising capital. To date, nine town hall
[[Page 18473]]
meetings have been held, attended by more than 2,500 small business
persons. NASAA and Commission representatives will discuss information
and ideas obtained from these meetings.
D. Securities Act Concept Release
The Commission has been engaged in a broad reexamination of the
regulatory framework for the offer and sale of securities under the
federal securities laws. A concept release was issued during 1996 to
solicit comment on the best means of improving the regulation of the
capital formation process while maintaining or enhancing investor
protection.\17\ The concept release solicited comment on several
different approaches, such as:
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\17\ Securities Act Release No. 7314 (July 25, 1996) (61 FR
40044).
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The recommendation of the Advisory Committee on the
Capital Formation and Regulatory Processes that a ``company
registration'' approach be adopted; \18\
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\18\ On July 24, 1996, the Advisory Committee on the Capital
Formation and Regulatory Processes presented its report recommending
a new approach to regulating securities offerings of public
companies. This new approach would switch from the current
transactional registration system to a company registration system.
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Modifications to the existing shelf registration system;
Reforms that would liberalize the treatment of
unregistered securities; and
An approach that would involve deregulation of offers.
Comment also was requested about any other approaches that should be
considered.
The participants will discuss the conceptual issues raised by the
release and the comments received and consider any changes that should
be made in the regulation of securities offerings.
E. Plain English; 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.
One major concern of the Task Force Report 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. On
January 22, 1998, the Commission adopted rule amendments that require
the use of plain English writing principles when drafting the front
part of prospectuses, namely, the cover page, summary and risk factors
sections of these documents.\19\ These principles include: Active
voice; short sentences; everyday language; tabular presentation or
``bullet lists'' for complex material, if possible; no legal jargon or
highly technical business terms; and, no multiple negatives. This
change becomes effective October 1, 1998. Conferees will discuss the
plain English initiative, including federal and state coordination
needed to facilitate implementation of the initiative.
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\19\ Securities Act Release No. 7497 (January 28, 1998) (63 FR
6370).
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F. Electronic Delivery of Disclosure Documents
With the relatively recent growth in the popularity of the
Internet, issuers of securities have begun to post securities offering
materials on the Internet. Both the Commission and NASAA have addressed
the impact of electronic media on the securities offering process.
NASAA adopted a resolution concerning Internet communications in
January 1996 that encouraged the states to exempt Internet offers from
the registration provisions of their securities laws, if certain
conditions are met. Based on state responses to the Uniformity Study,
33 states reported they have adopted NASAA's model exemption while
three other states are planning to adopt or considering adoption of the
model exemption. Another eight states said they have their own unique
exemptions for Internet offers.
The Commission believes that the use of electronic media to deliver
or transmit information under the federal securities laws should be at
least equivalent to paper delivery. The Commission has issued
interpretive releases and rules addressing the use of electronic
media.\20\
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\20\ 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 that technology in
securities offerings.
G. Registration of Securities on Form S-8
Form S-8, generally speaking, is an abbreviated registration
statement form under the Securities Act used to register the securities
of an issuer to its employees in a primarily compensatory context. Form
S-8 was expanded in 1990 to make the form available for offers and
sales of securities to consultants and advisors who render bona fide
services to the issuer if those services are not rendered in connection
with offers or sales of securities in a capital-raising transaction.
Since that change, the Commission has become aware of the improper use
of the form to distribute securities to the public. To address this
abuse, the Commission has proposed to expand the form requirements to
provide that the services rendered by a consultant or advisor must not
directly or indirectly promote or maintain a market for the issuer's
securities.\21\ Other changes to the form also were proposed.
Participants will discuss this proposal and how it will affect
coordination between the states and the Commission.
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\21\ Securities Act Release No. 7506 (February 17, 1998) (63 FR
9648).
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H. Year 2000 Disclosure Issues
The Commission published Staff Legal Bulletin No. 5 in October 1997
(revised in January 1998) which addresses the disclosure requirements
of companies facing electronic problems caused by the Year 2000. The
statement contains the Commission's views concerning companies'
disclosure obligations about anticipated costs, problems, and
uncertainties associated with this issue. Because of the potential
effects of this matter on future operating results and financial
condition, companies should consider whether the matter should be
addressed in their ``Management's Discussion and Analysis'' and
``Description of Business'' disclosures. The conference participants
will consider the extent of this issue and discuss how to require and
review disclosures on this matter in a consistent manner.
(2) Market Regulation Issues
A. 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 original proposal to amend Rules 17a-3
and 17a-4 \22\ resulted from discussions between NASAA representatives
and the Commission about the adequacy of the existing broker-dealer
books and records
[[Page 18474]]
requirements.\23\ The proposed amendments clarified, modified, and
expanded 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 specified 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 expressed
interest in commenting on the proposed amendments, the Commission
extended the comment period through March 31, 1997.
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\22\ 17 CFR 240.17a-3 and 240.17a-4.
\23\ Securities Exchange Act Release No. 37850 (October 22,
1996) [61 FR 55593].
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The Commission received 175 written comments in response to the
release proposing the amendments. Broker-dealers, trade associations,
and law firms representing broker-dealers submitted 110 of the comment
letters. State securities regulators and NASAA accounted for 33 of the
comment letters. The majority of these comment letters opposed the
proposed amendments. The balance of the comment letters received were
from other individuals or entities interested in the proposed
amendments and expressed varying degrees of support and opposition for
the proposed amendments. The Commission staff has been analyzing the
suggestions made in the comment letters, and will recommend that the
Commission repropose the amendments. The participants at the Conference
will discuss these efforts to amend Rules 17a-3 and 17a-4.
B. 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 was
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. During the latter part of 1996 and in 1997, the
Commission staff consulted with the SROs, NASAA, the state securities
authorities, and members of the securities industry to determine the
extent to which state licensing requirements differed and the effect of
different state requirements and procedures upon associated persons and
broker-dealers. The Commission submitted its report to Congress on
October 10, 1997.\24\
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\24\ Study of State Licensing Requirements for Associated
Persons of Broker-Dealers (October 10, 1997).
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The Commission found that the states have achieved substantial
uniformity in their licensing requirements and procedures. However, the
Commission believes that state licensing procedures could be
streamlined to a greater extent and that the states could attain this
goal without sacrificing the protection of their citizens. Therefore,
the Commission recommended in its report that the states work together
to achieve greater uniformity in their licensing requirements and
procedures and, in this regard, recommended certain areas that may
benefit from the implementation of more consistent or uniform
requirements, or from further study by the states. The participants at
the Conference will discuss the states' views on achieving greater
uniformity in their licensing requirements and procedures.
C. Central Registration Depository (``CRD'') Redesign
The CRD system is a computer system operated by the 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 modernize the CRD and to expand its use by federal and state
securities authorities as a tool for broker-dealer regulation. As a
result of the NASD's efforts, the modernized CRD system ultimately is
expected to provide the Commission, the SROs, and state securities
authorities 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.
In the past year, the NASD decided that the Internet should become
an integral component of the CRD modernization effort. Accordingly, the
NASD submitted, and the Commission approved, a rule proposal that
expands the NASD public disclosure program by amending the
Interpretation of NASD Rule 8310 to include electronic inquiries as
well as written and telephone inquiries.
Earlier this year, the NASD and the Commission issued releases
adopting interim Forms U-4, U-5, and BD that incorporated previously-
adopted language into a format compatible with current CRD technology.
The NASD's proposed effective date of February 17, 1998, for these
amended forms was changed to March 16, 1998, due to a request from the
Securities Industry Association to allow firms more time to prepare
their systems. The Commission also has made March 16, 1998, the
effective date for implementation of the interim Form BD. The NASD
expanded their public disclosure program also to reflect the additional
disclosure requirements of the interim Forms U-4 and BD.
The participants at the Conference will discuss the CRD
modernization process, including the interim Forms U-4, U-5, and BD.
D. Penny Stocks/Micro-cap Fraud
Rule 15c2-11 under the Securities Exchange Act of 1934 (the
``Exchange Act'') requires a broker-dealer to review current
information about an issuer before it publishes a quotation for the
issuer's security in the non-Nasdaq over-the-counter markets. Because
of the rule's ``piggyback'' provision, generally only the first broker-
dealer has to review this information. Once the security is quoted
regularly for 30 days, other broker-dealers can ``piggyback'' off those
quotes without reviewing any information about the issuer.
On February 17, 1998, the Commission proposed amendments to Rule
15c2-11 that would strengthen the rule by: (1) Eliminating the
piggyback provision, so that all broker-dealers must review issuer
information before initiating or resuming quotations for OTC securities
and thus independently evaluate that information; (2) requiring market
makers publishing priced quotations to review updated issuer
information annually, so that they are made aware of recent significant
changes in the issuer's ownership, operations or financial condition;
(3) requiring broker-dealers to document their compliance with the
rule; (4) requiring broker-dealers to document information about
significant relationships involving the issuer and the broker-dealer
(including any arrangements involving the payment of compensation by
the issuer or others for the purpose of publishing quotations); (5)
requiring broker-dealers to review more information than is currently
required when they publish quotes for non-reporting issuers'
securities, including information about insiders' and promoters' recent
disciplinary histories, so that broker-dealers will be alert to
possible ``red flags'' involving the issuer, and about recent
significant events involving the issuer, such as a
[[Page 18475]]
change in control, merger or acquisition, bankruptcy proceedings, or
the delisting from an exchange or Nasdaq; (6) eliminating the
requirement to obtain financial statements for prior years for those
issuers that are emerging from bankruptcy; (7) allowing broker-dealers
to review and retain issuer information electronically for information
available on EDGAR; and (8) promoting greater availability of Rule
15c2-11 information by requiring broker-dealers to provide the
information to anyone who requests it and by encouraging the
development of central repositories for this information.\25\
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\25\ Securities Exchange Act Release No. 39670 (February 17,
1998) (63 FR 9661).
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The goals of the amendments are to deter fraudulent or manipulative
quotations for OTC securities, improve the integrity of quotations for
OTC securities, enhance broker-dealer responsibility for quotations for
OTC securities, and provide market professionals, investors, and others
with greater access to issuer information. The participants will
discuss the recent proposals and the effects of such proposals, if
adopted, and other ways to promote investor protection in the OTC
market arena.
E. Arbitration
The NASD submitted to the Commission rule filings that focus on the
eligibility rule, whether punitive damages should be capped in
arbitration, whether fees should be increased, and whether employees
should be required under NASD rules to submit statutory employment
discrimination disputes to arbitration. In May 1997, the Commission
approved a proposal by the NASD that: (1) Raises the ceiling for
disputes to be eligible for resolution by a single arbitrator under
simplified arbitration procedures to $25,000, and (2) raises the
ceiling for disputes eligible for resolution by a single arbitrator
under standard arbitration procedures to $50,000.\26\
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\26\ Securities Exchange Act Release No. 38635 (May 14, 1997)
(62 FR 27819).
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The NASD filings resulted in part from its work with the Securities
Industry Conference on Arbitration (``SICA''). The SICA continues its
efforts to develop, among other things, a ``list selection'' method for
appointing arbitrators.
The participants at the Conference are likely to address some or
all of the above approaches for strengthening the securities
arbitration process.
F. NASD Proposals
The NASD has undertaken several regulatory initiatives in the past
year. A new proposed rule would require a member firm to tape record
conversations between its customers and registered representatives if
it hired a significant percentage of individuals from Disciplined
Firms. Disciplined Firms are defined as firms that have been expelled
by a self-regulatory organization or that have had their registrations
revoked by the Commission.\27\
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\27\ Securities Exchange Act Release No. 39361 (November 26,
1997) (62 FR 64422).
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A proposed rule amendment would require clearing firms to (a)
Forward customer complaints about an introducing firm to the
introducing firm's designated examining authority, (b) notify
complaining customers that they have the right to transfer their
accounts to another broker-dealer, (c) provide introducing firms with a
list of exception reports to help them supervise their activities, and
(d) assume liability for any mistakes or fraud made by an introducing
firm that issues checks drawn on the clearing firm's account.\28\
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\28\ Securities Exchange Act Release No. 39349 (November 21,
1997) (62 FR 63589).
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Another new rule (Rule 1150) would provide NASD members with a
qualified immunity in arbitration proceedings for statements made in
good faith in certain disclosures filed with the NASD on Forms U-4 and
U-5. The proposal, as described in an NASD Notice to Members, would
require firms to give a terminated employee an opportunity to review
the proposed Form U-5 language at least 10 days before it was filed
with the NASD; any amendments would also be given to the employee
before being filed.\29\
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\29\ NASD Notice to Members 97-77 (November 1997).
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These three NASD initiatives have been filed with the Commission,
and are currently under review. Other initiatives still being
considered by the NASD include the following three proposals.
A proposed interpretive rule would require all unregistered
employees of an NASD member firm who cold call prospective customers,
either to solicit the purchase of securities or to market the member
firm's services generally, to register as representatives.\30\ A
proposed rule amendment would limit the securities that a member can
quote on the OTC Bulletin Board to the securities of issuers that are
registered under Section 12 of the Exchange Act, certain insurance
companies, and registered closed-end investment companies, but only if
they are current in their reporting obligations.\31\ Finally, a
proposed new rule would require a member to review current financial
statements of an issuer prior to recommending a transaction in the
issuer's OTC securities to a customer, and to deliver a disclosure
statement to its customer prior to making an initial purchase of an OTC
security for the customer and annually thereafter.\32\
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\30\ NASD Notice to Members 98-58 (September 1997).
\31\ NASD Notice to Members 98-14 (January 1998).
\32\ NASD Notice to Members 98-15 (January 1998).
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The participants at the Conference will discuss the status of these
proposals, the comments received to date, and their implications for
small businesses and NASAA members.
G. Year 2000
The Commission has been very active in addressing the potential
problems for securities industry computer systems as a consequence of
the date change on January 1, 2000 (``Year 2000''). For example, in
October 1997, Chairman Levitt sent a letter to all registered transfer
agents and broker-dealers emphasizing the importance of implementing
plans and devoting adequate resources to ensure that their computer
systems are ready for the Year 2000. The Chairman encouraged firms to
have all necessary modifications in place by the end of 1998 to allow
for participation in industry-wide testing scheduled for 1999. On
January 7, 1998, the Commission staff sent a letter to all non-bank
registered transfer agents which requested documentation regarding
their progress in Year 2000 preparations. The Commission is
coordinating efforts with the NYSE and the NASD, both of which have
surveyed their member firms for similar information on Year 2000
preparations. On March 5, 1998, the Commission issued releases to
solicit comment on proposed rule amendments and a proposed rule under
the Exchange Act which would require certain broker-dealers and all
non-bank registered transfer agents to file reports with the Commission
regarding their Year 2000 preparations.\33\
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\33\ Securities Exchange Act Release Nos. 39724 (March 5, 1998)
(63 FR 12056) and 39726 (March 5, 1998) (63 FR 12062).
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During the past year, the Commission supported the industry's
efforts to establish a testing program to aid firms and SROs in
preparing for potential computer problems associated with the Year
2000. The testing program involves bilateral testing, in which an SRO
or utility conducts one-on-one testing with its members or another SRO
or utility. Nasdaq, for example, intends to conduct
[[Page 18476]]
bilateral testing with the NYSE, the National Securities Clearing
Corporation, and several broker-dealers. This type of testing is
expected to be completed by the end of 1998. Bilateral testing will
help to ensure that communication and data exchanges between all
involved entities will not be disrupted. The testing program also calls
for industry-wide, or street-wide, testing, in which industry
participants will test sample trades from the trade date through
settlement. This latter type of testing will begin in March 1999 and
end in September 1999. The Commission staff has encouraged all SROs to
adopt appropriate testing plans to ensure that they and their member
organizations are prepared for the millennium.
The participants at the Conference will discuss the issues, testing
programs, and rule proposals involved in ensuring that the securities
industry's computer systems are ready for the Year 2000.
H. Examination Issues
State and federal regulators also will discuss various examination-
related issues of mutual interest, including: Summits and examination
coordination; training; micro-cap issues; independent contractors and
variable annuities.
(3) Investment Management Issues
A. Division of Regulatory Authority
Title III of the 1996 Act, the Investment Advisers Supervision
Coordination Act, included amendments to the Investment Advisers Act of
1940 (``Advisers Act'') \34\ that divided regulatory responsibility for
investment advisers between the Commission and state securities
regulators. The law generally requires advisers that have assets under
management of $25 million or more, or that advise registered investment
companies to register with the Commission; \35\ and requires advisers
that have assets under management of less than $25 million to register
with the appropriate state securities authorities.
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\34\ 15 U.S.C. 80b-1 et seq.
\35\ Advisers Act section 203A(a), 15 U.S.C. 80b-3a. The
Advisers Act also provides for registration with the Commission of
advisers that have their principal office and place of business in a
state that has not enacted an investment adviser statute (currently,
Colorado, Iowa, Ohio, and Wyoming), or that have their principal
office and place of business outside the United States. In addition,
the Commission has adopted rules exempting four categories of
investment advisers from the prohibition on registration with the
Commission. See Rule 203A-2, 17 CFR 275.203A-2.
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On May, 15, 1997, the Commission adopted rules to implement this
division of regulatory authority,\36\ including a requirement that each
Commission-registered adviser file a Form ADV-T with the Commission not
later than July 8, 1997, indicating whether the adviser was eligible
for continued registration with the Commission and, if not, withdrawing
from Commission registration.\37\ As of January 30, 1998, the
Commission had received Form ADV-T's from 7,476 advisers indicating
that they were eligible for registration with the Commission, and from
11,764 advisers withdrawing their registrations. Most states have also
now amended their securities laws and adopted new rules to implement
the division of authority. The conferees will discuss and coordinate
state and federal implementation of the 1996 Act.
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\36\ Investment Advisers Act Rel. No. 1633 (May 15, 1997) (62 FR
28112).
\37\ Rule 203A-5, 17 CFR 275.203A-5.
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B. Electronic Filing System
One of the requirements of the 1996 Act is for the Commission to
establish and maintain a ``readily accessible telephonic or other
electronic process'' to receive public inquiries about the disciplinary
histories of investment advisers and persons associated with investment
advisers.\38\ In order to implement this provision and to provide an
efficient and convenient means for filing and retrieving information
about investment advisers, the Commission is working with NASAA and the
state securities authorities to develop a one-stop electronic filing
system to be used by investment advisers to submit their initial
registrations and to update the information they are required to
provide. Since the information will be filed electronically, it will
create an electronic data base that will be easily accessible by both
the regulators and the public. As currently planned, all of this
information will be posted on an Internet web site and readily
available to the public. This will allow clients and prospective
clients of investment advisers to quickly obtain not only disciplinary
information, but a broad range of other important information as well.
The conferees will discuss the progress to date in creating this new
electronic filing system and offer ideas about how the system can be
made most efficient and effective.
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\38\ 1996 Act section 306.
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C. Revised Disclosure Forms
The Commission and NASAA are also working on new, easier-to-use
forms for investment adviser filings. These new forms should provide
more useful information both to the Commission and the state securities
regulators, and to clients and prospective clients of investment
advisers. The new disclosure form for clients and prospective clients
should also encourage advisers to provide clear and complete
disclosures in plain English. Disclosures will not be effective if
clients cannot understand them or if they are presented in a way that
discourages clients from reading them. The conferees will consider and
discuss ways in which the forms can be made most useful to clients and
prospective clients of investment advisers, as well as to state and
federal regulators.
D. Examination Issues
State and federal regulators also will discuss various examination-
related issues of mutual interest, including: Cooperation between
Commission and state adviser programs; sharing information about past
examinations, advisers moving from federal to state registration and
vice versa, and information potentially leading to cause examinations;
and examinations to verify an adviser's qualification for federal or
state registration.
(4) Enforcement Issues
In addition to the above topics, state and federal regulators will
discuss various enforcement-related issues which are of mutual
interest.
(5) Investor Education
The participants at the Conference will discuss investor education
and potential joint projects in some of the working group sessions. The
Commission currently pursues a number of programs to educate 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 intends to coordinate and complement
those efforts to the greatest extent possible. Our most recent joint
effort includes the launch of the ``Facts on Saving and Investing
Campaign,'' a national public awareness campaign to motivate Americans
to save and invest wisely. During the week of March 29 to April 4,
1998, federal agencies, securities regulators, consumer groups, the
financial industry, and the media will join together to conduct
educational events in our communities and schools and to announce
future initiatives. Securities regulators from twenty-one nations in
North, Central, and South America and the Caribbean will also offer
investor education programs in their countries that week.
[[Page 18477]]
(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.
By the Commission.
Dated: April 9, 1998.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-9883 Filed 4-14-98; 8:45 am]
BILLING CODE 8010-01-P
