[Federal Register Volume 64, Number 66 (Wednesday, April 7, 1999)]
[Notices]
[Pages 17042-17050]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-8515]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 33-7664, File No. S7-12-99]
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 April
19, 1999. This meeting seeks 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 April 19, 1999. We must receive
your written comments by April 14, 1999 in order to be considered by
conference participants.
ADDRESSES: Please send three copies of written comments to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 5th Street,
NW, Washington, DC 20549-0609. Comments also can be sent electronically
to the following E-mail address: rule-comments@sec.gov. Comment letters
should refer to File No. S7-12-99; 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, Stop 3-
4, (202) 942-2950.
SUPPLEMENTARY INFORMATION:
I. Discussion
The federal government and the states have jointly regulated
securities offerings 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, must comply with the
federal securities laws as well as all applicable state laws and
regulations. Parties involved in this process have long recognized the
need to increase uniformity and cooperation between the federal and
state regulatory systems so that capital formation can be made
[[Page 17043]]
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 that section's policy and
purpose. Section 19(c) mandates greater federal and state cooperation
in securities matters in order to:
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\2\ Pub. L. 96-477, 94 Stat. 2275 (October 21, 1980).
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Maximize effectiveness of regulation;
Maximize uniformity in federal and state standards;
Minimize interference with the business of capital
formation; and
Reduce the costs, paperwork and burdens of raising
investment capital, particularly by small business, and also reduce the
costs of the government programs involved.
The Commission is required to conduct an annual conference to establish
ways to achieve these goals. The 1999 meeting will be the sixteenth
conference.
During 1996, Congress again examined the system of dual federal and
state securities regulation. It 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. Congress passed The National
Securities Markets Improvement Act of 1996 \3\ (the ``1996 Act'') as a
result of this reexamination. The 1996 Act contains significant
provisions that realign the 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. 1999 Conference
The Commission and the North American Securities Administrators
Association, Inc. (``NASAA'') \4\ are planning the 1999 Conference on
Federal-State Securities Regulation to be held April 19, 1999 in
Washington, DC. At the conference, Commission and NASAA representatives
will divide into working groups in the areas of corporation finance,
market regulation and oversight, investment management, investor
education, and enforcement. Each group will discuss methods to enhance
cooperation in securities matters and improve the efficiency and
effectiveness of federal and state securities regulation. Generally,
only Commission and NASAA representatives may attend the conference to
encourage open and 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 preparing the conference agenda. We
invite the public, securities associations, self-regulatory
organizations, agencies, and private organizations to participate by
submitting written comments on the issues set forth below. In addition,
we request comment on other appropriate subjects. Conference attendees
will consider all comments.
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, investor education, and enforcement.
(1) Corporation Finance Issues
The 1996 Act amended section 18 of the Securities Act \5\ to
preempt state blue-sky registration and review of offerings of
``covered securities.'' \6\ ``Covered securities'' are defined by
section 18 and include several types of securities, including
securities traded on the New York Stock Exchange, Inc. (``NYSE''),
American Stock Exchange (``Amex'') and the Nasdaq National Market
System (``Nasdaq/NMS'') (these securities as a group are called
``nationally-traded'' securities). 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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The states retain some authority in connection with offerings of
covered securities despite this preemption. Except for covered
securities that are classified as nationally-traded securities, the
states have the right to require fee payments and notice filings. The
states also retain anti-fraud authority over all securities offerings,
including offerings of covered securities.
Securities that are not ``covered securities remain subject to
state registration requirements. These securities generally include the
securities of smaller companies, such as those quoted on the Nasdaq
SmallCap market or the NASD's over-the-counter Bulletin Board, or in
the ``pink sheets.'' Securities issued in a private offering under
section 4(2) of the Securities Act are not covered securities if the
offering does not meet the safe harbor requirements of Rule 506 of
Regulation D.\7\ Also, securities issued under Regulation A \8\ and
Rules 504 and 505 of Regulation D are not covered securities.\9\
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\7\ 17 CFR 230.501 through 230.508.
\8\ 17 CFR 230.251 through 230.263.
\9\ Other securities also are not considered covered securities.
These include securities traded on regional exchanges and asset-
backed and mortgage-backed securities.
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The states' authority over securities offerings, particularly their
ability to register and review offerings of non-covered securities,
continues the need for uniformity between the federal and state
registration systems, where consistent with investor protection. The
group will discuss ways to increase uniformity between the systems.
Conferees will focus primarily on the following topics:
A. Reform of the Securities Offering Process
For many years, the Commission has been actively reexamining the
regulatory framework for the offer and sale of securities under the
federal securities laws. As a result of this work, the Commission
issued a release in November 1998 proposing significant changes in the
regulation of securities offerings and the disclosure system that
applies to publicly reporting companies.\10\ The proposals relate to
five areas:
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\10\ Securities Act Release No. 7606 (November 3, 1998) [63 FR
67174].
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Registration system reform;
Communications around the time of a securities offering;
Prospectus delivery requirements;
Integration of private and public offerings; and
Periodic reporting under the Securities Exchange Act of
1934 (the ``Exchange Act'').
The Commission's staff will summarize these proposals and describe the
responses from the public received to date. While the group may
consider various aspects of the proposals, the representatives will
discuss primarily how the proposals would affect state regulation of
offerings of non-covered securities. The group will focus on some or
all of the following matters:
[[Page 17044]]
1. Registration System Reforms
The Commission proposed new Form B for large issuers that meet
certain reporting and annual report requirements and had registered
previously an offering of securities under the Securities Act which was
declared effective by the Commission's staff. Form B also would be
available to smaller issuers which meet the same requirements, but only
when they offer securities to relatively sophisticated investors or
knowledgeable investors.
These smaller issuers could use Form B for offerings to qualified
institutional buyers as defined in Rule 144A\11\ and for offerings to
certain existing security holders, such as: rights offerings;
securities offered under dividend or interest reinvestment plans; and
offerings to holders of common stock, options, warrants and convertible
securities.
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\11\ 17 CFR 230.144A.
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Form B would replace Form S-3, the current abbreviated registration
statement form, and provide issuers with more flexibility than under
the current system. The issuer would be able to delay filing the Form B
registration statement until shortly before the first sale of
securities and would be able to determine when its registration
statement becomes effective.
The Commission proposed new Form A for medium-sized issuers.\12\ It
would replace Form S-1, the current registration statement form used by
most issuers. Form A would be used by issuers that do not meet the
requirements to use Form B. Some Form A issuers would be able to
specify the time of effectiveness of their registration statements.
Form A issuers that are able to incorporate company information into
their prospectuses would be able to control the timing of effectiveness
if either:
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\12\ The effects of the reform proposals on small business
issuers are discussed under (1) B.1. below.
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They have a public float equal to or greater than $75
million; or
The Exchange Act annual report that is incorporated into
the Form A registration statement was reviewed by the Commission's
staff and amended to comply with any staff comments.
The group will discuss these proposed registration statement
reforms and consider how they would operate with state registration
procedures for offerings of non-covered securities.
2. Communications Around the Time of an Offering
Under current federal regulation, an issuer's communications to
investors and the market are strictly limited around the time of an
offering. The Commission's proposals in this area would loosen these
restrictions while preserving the legal remedies to investors for
inadequate disclosures.
The approach would depend upon the type of offering. For Form B
offerings, issuers would be able to make oral and written
communications in any format at any time regardless of whether the
offering is imminent or ongoing. Those communciations of course would
be subject to the liability provisions of the federal securities laws
and would need to be filed with the Commission.
For non-Form B offerings, the Commission has proposed a bright-line
safe harbor for all communications made before the 30-day period before
the date of filing the registration statement. Communications within 30
days of filing would remain restricted although the Commission has
proposed safe harbors for factual business communications and regularly
released, forward-looking information. After the registration statement
is filed, the Commission proposes to lift restrictions on
communications. These post-filing communications would be subject to
the liability provisions and would have to be filed with the
Commission.
The group will discuss the proposed federal approach to
communications. The conferees also will consider how the Commission's
proposals would coordinate with state regulations applicable to
communications.
3. Integration of Offerings
An issuer of securities that has commenced a private offering may
decide to switch to a registered public offering. Similarly, an issuer
may decide to end a registered offering and offer securities under a
private exemption. The current federal rules prevent most companies
from switching from registration to a private offering, and vice versa,
in a timely fashion. The Commission has proposed changes to remove most
of these impediments.
The Commission has proposed a safe harbor for issuers that have
started a registered offering and wish to switch to a private offering.
Under the safe harbor, the issuer may withdraw its registration
statement and either wait 30 days to sell privately or sell privately
sooner if it accepts a higher liability standard for written
disclosures provided to purchasers.
Another safe harbor would apply to an issuer that has started a
private offering and later decides to abandon it and file a
registration statement. Under this proposal, the issuer could file a
registration statement for a public offering immediately after
abandonment of the private offering, unless it had offered the
securities to persons ineligible to buy in a private offering. In that
case, the issuer would need to wait 30 days before filing its
registration statement.
The group will discuss the proposed integration safe harbors and
consider how they would coordinate with state rules that apply in these
situations.
B. Small Business Initiatives
1. Registration System Reform--Effects on Small Business Issuers
Certain Commission registration reform proposals are tailored to
benefit smaller issuers. One important proposal would modify the
definition of ``small business issuer.'' In 1992 and 1993, the
Commission adopted special forms for small issuers to use in
registering under the Securities Act and Exchange Act and in reporting
under the Exchange Act. The disclosure requirements of these forms are
less extensive than those applicable to larger issuers. The Commission
adopted the definition of ``small business issuer'' to distinguish the
class of smaller issuers that would be permitted to use these special
forms. A small business issuer generally is a company with revenues of
less than $25 million and a public float of less than $25 million.\13\
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\13\ 17 CFR 228.10. Other requirements also must be met.
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The Commission proposed to change the definition by increasing the
revenue level to $50 million and removing the public float limitation.
This proposal would update the definition for the significant economic
and market changes that have occurred since the definition was adopted
in 1992. The proposal would significantly increase the number of public
companies that would qualify as small business issuers.
Another important reform proposal would allow small business
issuers to use Form B when offering securities to relatively
sophisticated or knowledgeable investors. Small business issuers would
be able to enjoy the various benefits of Form B in these offerings.\14\
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\14\ See discussion under (1) A.1. above.
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Other reform proposals also would benefit smaller issuers. Under
one proposal, a small business issuer whose registration statement has
become effective would be allowed to increase the size of its offering
by up to 50% of the maximum offering price of the earlier effective
registration statement. The second registration statement for the
additional offering amount would become effective automatically under
certain circumstances. Another proposal
[[Page 17045]]
would permit incorporation by reference of Exchange Act reports into
Form SB-2, the basic registration statement for small business issuers.
This change would permit earlier incorporation by reference than
allowed currently.\15\ Also, the Commission proposed a new Form SB-3, a
registration statement form designed especially for small business
issuers to use in business combinations.
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\15\ Existing Form S-2 permits incorporation by reference if the
issuer has been reporting for a three year period and meets other
requirements. Proposed Form SB-2 would reduce the three year period
to two years.
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The Commission's integration proposal, although applicable to all
issuers, may benefit small business issuers in particular. Because
small business issuers often have no market or only a limited market
for their securities before a securities offering, they may be unable
to predict investors' interest in their offerings. Once a smaller
issuer begins an offering, it may wish to switch between a registered
offering and an exempt offering depending upon the amount of investor
interest in its securities. The integration proposal would permit an
issuer to switch between registration and an exemption in a timely
manner if certain conditions are met.\16\
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\16\ See the discussion under (1) A. 3. above.
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The group will discuss the impact of these proposed changes, if
adopted, and the need for any additional rulemaking in the small
business area.
2. Rule 504
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 that do not report under the
Exchange Act. Under prior Rule 504, issuers were permitted to generally
solicit and advertise in Rule 504 offerings, and the securities issued
in those offerings were freely tradeable. The Commission recently
amended Rule 504 to address concerns with the previous approach.\17\
The revised rule limits the circumstances where general solicitation is
permitted and freely tradeable securities are issued under the rule.
Specifically, issuers may generally solicit and advertise and issue
freely tradeable securities only in transactions that are either:
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\17\ Securities Act Release No. 7644 (February 25, 1999) [64 FR
11090].
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Registered under state law requiring public filing and
delivery of a substantive disclosure document to investors before sale;
or
Exempted under state law permitting general solicitation
and general advertising so long as sales are made only to ``accredited
investors.'' \18\
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\18\ 17 CFR 230.501(a). 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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Only companies that do not report under the Exchange Act may use
Rule 504. Where an issuer becomes a reporting company during an ongoing
Rule 504 offering, the issuer may not continue to rely on the rule
after it becomes a reporting company. To address this case, one of the
Commission's reform proposals would amend Rule 504 to permit an issuer
that becomes a reporting company during an ongoing Rule 504 offering to
continue to rely on the rule in that offering, if certain conditions
are met.
The group will discuss the revisions and proposed amendment to Rule
504. Conferees will consider whether other changes are needed in the
rule while at the same time preserving the ability of small companies
to raise capital.
3. State Initiatives
The group will discuss several state initiatives designed to
facilitate offerings by smaller issuers. These 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 42 states that require
registration of these offerings) have agreed to participate in the
program. The states have reviewed approximately 32 registration
statements under this 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 47 states. This
form is used to register securities offerings exempt from federal
registration under Rule 504 of Regulation D or Regulation A. 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 22 of the
states requiring registration of these offerings.\19\ About 37 SCOR
filings have been reviewed under the Regional Review Program. 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.
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\19\ A fourth regional program is forming now. It will consist
of six states in the mid-Atlantic region and expects to accept
filings in late spring 1999.
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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.
C. Definition of Qualified Purchaser and Accredited Investor; NASAA's
Model Accredited Investor Exemption
Section 18 of the Securities Act, after the 1996 Act, excludes from
state regulation and review securities offerings to purchasers who are
defined by Commission's rules to be ``qualified purchasers.'' \20\ A
security sold to a ``qualified purchaser'' is a ``covered security''
subject to the same regulatory approach as other covered securities.
The Commission is planning to propose a definition of ``qualified
purchaser'' for this purpose. In this process, the Commission is
considering whether changes should be made to the definition of
``accredited investors'' under the Securities Act, and whether the
definitions of ``qualified purchasers'' and ``accredited investors''
should be similar or different. The Commission and state
representatives will discuss the appropriate criteria for these two
definitions.
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\20\ 15 U.S.C. 77r(b)(3).
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The group 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, 16 states
have adopted the exemption and other states indicate that they intend
to adopt the exemption in the near future. State representatives will
share their
[[Page 17046]]
experiences with the exemption, including any issues that have arisen.
D. Plain English Disclosure
Beginning October 1, 1998, issuers filing Securities Act
registration statements must use plain English writing principles when
drafting the front part of prospectuses, i.e., the cover page and the
summary and risk factors sections.\21\ These plain English principles
include: active voice; short sentences; everyday language; tabular
presentation or ``bullet lists'' for complex material, if possible; no
legal jargon or highly technical business terms; and, no multiple
negatives.
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\21\ Securities Act Release No. 7497 (January 28, 1998) [63 FR
6370].
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The Division of Corporation Finance, in its full review of a
registration statement, examines the prospectus for compliance with the
plain English requirements. If appropriate, the Division staff will
issue comments to obtain improved plain English disclosures. The
Division representatives will discuss their experiences with the plain
English system. The group will consider any issues that have arisen and
federal and state coordination needed to facilitate success of the
system.
E. Year 2000 Disclosure Issues
The Commission and its staff have published several statements
which provide guidance about the disclosure requirements of public
companies facing year 2000 technology problems. The Commission recently
provided guidance in a July 1998 release.\22\ That release provides
advice to public companies so they can determine whether their year
2000 issues should be disclosed in the Management's Discussion and
Analysis of Financial Condition and Results of Operations section of
their disclosure documents. The release also advises public companies
to consider Year 2000 issues when preparing their financial statements
and drafting other disclosures, such as risk factors and business
description disclosures. The working group will consider this issue and
discuss how to require and review disclosures on this matter in a
consistent manner.
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\22\ Securities Act Release No. 7558 (July 29, 1998) [63 FR
41394].
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(2) Market Regulation Issues
A. Books and Records
Section 103 of the 1996 Act prohibits any state from imposing
broker-dealer books and records requirements that differ from, or are
in addition to, the Commission's requirements. In addition, the same
section directs the Commission to consult periodically with the state
securities authorities concerning the adequacy of the Commission's
books and records requirements.
On October 2, 1998, the Commission reproposed amendments to the
books and records rules to clarify and expand recordkeeping
requirements with respect to purchase and sale documents, customer
records, associated person records, customer complaints, and certain
other matters. The reproposed amendments also specified the books and
records that broker-dealers would make available at their local
offices. The Commission modified the reproposed amendments to reduce
the burden on broker-dealers without substantially detracting from the
original objective of establishing rules that would facilitate
examinations and enforcement activities of the Commission, self
regulatory organizations (``SROs''), and state securities
regulators.\23\ Among other changes in the reproposed amendments, the
Commission redefined the term ``local office'' to include a place where
two or more associated persons regularly conduct a securities business.
The original proposal \24\ defined the term local office to include a
place where one associated person conducted a securities business.
Furthermore, as reproposed, a broker-dealer would be required to update
its customer account records at least once every three years. The
original proposal required broker-dealers to update the customer
account records annually.
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\23\ Exchange Act Rel. No. 40518 (October 2, 1998) [63 FR
54404].
\24\ Exchange Act Rel. No. 37850 (October 22, 1996) [61 FR
55593].
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The comment period closed December 9, 1998. The Commission received
approximately 120 comment letters in response to the release re-
proposing the amendments. The Commission's staff has been reviewing the
comments that have been submitted. The working group will discuss these
efforts to amend Rules 17a-3 and 17a-4.
B. Central Registration Depository
The CRD system is a computer system operated by the National
Association of Securities Dealers, Inc. (``NASD'') and 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 regulators 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 regulators with: (1)
Streamlined capture and display of data; (2) better access to
registration and disciplinary information through the use of
standardized and specialized computer searches; and (3) electronic
filing of uniform registration and licensing forms, including Forms U-
4, U-5, BD and BDW.
The NASD is preparing to implement the web-based form filing
component of the modernized CRD system in the third quarter of 1999. In
the past year, NASAA, the NASD, the Commission and others have worked
together to modify Forms U-4, U-5 and BD in order to accommodate the
electronic filing environment that will exist in the modernized CRD. At
NASAA's Annual Fall conference held in October 1998, NASAA adopted new
versions of Forms U-4 and U-5. The NASD has submitted, and the
Commission is reviewing, a rule proposal to modify Forms U-4 and U-5.
The NASD rule proposes additional formatting and technical changes to
the forms in order to fully implement the web-based CRD system. Also,
the Commission is considering revisions to the Form BD to accommodate
web-based form filing.
In anticipation of the conversion to the web-based CRD system, the
NASD is planning a two week transition period during which time
registration activities will not be processed. This two week period is
currently scheduled for the beginning of August 1999.
The conference participants will discuss the CRD modernization
process, including the proposed changes to the forms and the transition
period.
C. Micro-cap Fraud Rules
Rule 15c2-11 under 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 in a number of ways.\25\ The
Commission received approximately
[[Page 17047]]
199 written comments from 193 commenters, including 68 identical
letters from OTC Bulletin Board issuers in response to the release
proposing amendments. Broker-dealers, trade associations, and law firms
representing broker-dealers submitted 45% of the comment letters. OTC
Bulletin Board issuers submitted 30% of the comment letters. State
securities regulators and NASAA accounted for 5% of the comment
letters. The majority of the comment letters opposed the proposed
amendments. Because of the significant comments received, the
Commission decided to modify some of these amendments and repropose
them for public comment.\26\ The reproposal acknowledges commenters'
concerns about the initial proposal by limiting the scope of the rule
principally to priced quotations and to those securities that are more
likely to be the subject of improper activities. The provisions
relating to the broker-dealer's obligations under the rule and the
specified issuer information that the broker-dealer must obtain and
review are essentially unchanged from the initial proposal. The
reproposed amendments would:
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\25\ Exchange Act Release No. 39670 (February 17, 1998) [63 FR
9661].
\26\ Exchange Act Release No. 41110 (February 25, 1999) [64 FR
11124].
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Eliminate the rule's piggyback provision and require all
broker-dealers to review current issuer information before publishing
priced quotations for a security;
Limit the rule's applicability to priced quotations only
(except in the case of the first broker-dealer to quote the security);
Require broker-dealers publishing priced quotations for a
security to review current information about the issuer at least
annually;
Require documentation of the broker-dealer's compliance
with the rule; and
Require broker-dealers publishing quotes in compliance
with the rule to make the issuer information available at the request
of customers, prospective customers, information repositories, and
other broker-dealers to the extent that such information is not
available through EDGAR, any other federal or state electronic
information system, or an information repository.
However, the new amendments would narrow the scope of the rule to
those kinds of securities most frequently involved in micro-cap fraud
schemes by excluding the following securities:
Securities with a worldwide average daily trading volume
value of at least $100,000 during each of the six full calendar months
immediately preceding the date of publication of a quotation, and
convertible securities where the underlying security satisfies this
threshold;
Securities with a bid price of at least $50 per share;
Securities of issuers with net tangible assets in excess
of $10,000,000, based on audited financial statements; and
Non-convertible debt, non-participatory preferred stock,
and investment grade asset-backed securities.
The amendments also reorganize and simplify the rule's provisions
consistent with the Commission's plain English program. 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
reproposal and the effects of such reproposal, if adopted, and other
ways to promote investor protection in the OTC market arena.
D. NASD Proposals
The NASD has undertaken several regulatory initiatives in the past
two years. A new rule change limited 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.
A proposed rule amendment would require clearing firms to (1)
forward customer complaints about an introducing firm to the
introducing firm and the introducing firm's designated examining
authority (``DEA''), (2) notify complaining customers that the
complaint has been forwarded to the introducing member and the
introducing member's DEA, (3) provide introducing firms with a list of
exception reports available to help the introducing firms supervise
their activities, and (4) permit introducing firms to issue checks
drawn on the clearing firm's account only after the introducing firm
has notified the clearing firm, in writing, that it has established and
will maintain and enforce appropriate supervisory procedures.
The NASD submitted a proposed rule that would provide guidelines
that apply to the employment and supervision of unregistered persons
who contact prospective and existing customers, and provide for
heightened supervision of cold callers. This proposal is currently out
for comment.
Finally, a new rule proposed by the NASD in 1998 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.
These four initiatives are still being reviewed by the Commission.
The working group will discuss the impact of the new rules, the status
of the proposals, the comments received to date, and their implications
for small businesses and NASAA members.
E. Arbitration
The NASD submitted to the Commission rule filings that focus on and
deal with the eligibility rule, the contract rule, the creation of a
discovery guide for arbitrators, whether punitive damages should be
capped in arbitration, and the use of interim injunctive relief in
arbitration. On June 22, 1998, the Commission approved an NASD rule
filing which eliminated the NASD's regulatory requirement that
securities industry employees arbitrate statutory employment
discrimination claims.\27\ Additionally, on December 29, 1998, the
Commission approved by delegated authority the NYSE's proposal to
exclude statutory employment discrimination claims from its arbitration
forum unless all parties agreed to the arbitration after the claim
arose.\28\ On October 14, 1998, the Commission approved the NASD's rule
change altering the system for selecting arbitrators by substituting
for the current system of administrative appointment of arbitrators by
NASD staff a new system whereby parties are provided with lists of
arbitrators that they may rank by preference.\29\ Recently, the
Commission approved an NASD rule proposal to increase NASD
[[Page 17048]]
Regulation's arbitration fees and the honoraria it pays its
arbitrators.\30\
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\27\ Exchange Act Release No. 40109 (June 22, 1998) [63 FR
35299].
\28\ Exchange Act Release No. 40858 (December 29, 1998) [64 FR
1051]. Commission staff is working with the regional exchanges to
assure conforming changes to their rules. In December 1998, the
Commission approved proposals substantially similar to the NYSE's
filed by the Boston Stock Exchange and Chicago Stock Exchange.
Exchange Act Release No. 40861 (December 29, 1998) [64 FR 1039]
(Boston); Exchange Act Release No. 40873 (December 31, 1998) [64 FR
1253] (Chicago).
\29\ Exchange Act Release No. 40556 (October 14, 1998) [63 FR
56957].
\30\ Exchange Act Release No. 41056 (February 16, 1999) [64 FR
10041].
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The NASD filings resulted in part from its work with the Securities
Industry Conference on Arbitration (``SICA''). The participants are
likely to address some or all of the above proposed changes in the
securities arbitration process.
F. Day Trading
``Day trading'' has been in the news a great deal recently. A ``day
trader'' can be loosely defined as someone who buys and sells stocks
during the day, often within minutes, hoping to take profitable
advantage of intraday swings in share prices. What particularly
distinguishes a day trader from a more typical retail investor is that
he or she, generally, will (1) not carry a position overnight; (2) try
to make money on the ``spreads'' between the bids and offers; (3) trade
through automatic order execution systems, and not on-line through the
Internet, in order to obtain nearly instantaneous order execution; (4)
look at historical buying patterns in order to determine if the stock
is most actively sought during certain hours of the day, times of the
year, etc., rather than looking at a company's fundamentals or growth
prospects; (5) have the mind set of a ``trader'' rather than a long
term investor; and (6) focus on trading in volatile stocks.
The Commission is looking carefully at the activity of firms that
facilitate day trading. Areas that the Commission is looking into
include: (1) Activities that may require broker-dealer or investment
adviser registration with the Commission, or that may require
registration with the Commission of sales of shares of day trading
accounts or firms; (2) compliance by day trading firms with margin and
short sale rules, including loans made to customers; (3) capital
requirements; (4) the manner in which client funds are used; and (5)
suitability requirements.
In early 1998, NASAA formed a task force to examine day trading.
The work of the task force is ongoing. The participants are likely to
address the task force's work.
G. Migration of Rogue Brokers
The federal securities laws do not currently prevent persons
subject to disciplinary findings by state securities and insurance
commissions, and federal banking agencies,\31\ from entering the
securities industry (and vice-versa). A 1994 General Accounting Office
(``GAO'') study raised similar concerns about the migration of
unscrupulous brokers into the financial services industry, such as
banking and insurance.\32\ The GAO recommended that the Department of
Treasury work with the Commission and other financial regulators to (1)
increase disclosure of CRD information so that regulators can consider
a broker's disciplinary history in allocating examination resources and
employers can use the information in making hiring decisions and (2)
determine whether legislation or additional reciprocal agreements
between the Commission and other financial regulators are necessary to
prevent the migration of unscrupulous brokers to other financial
services industries.
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\31\ This includes the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation and the Office of Thrift Supervision.
\32\ Securities Markets: Actions Needed to Better Protect
Investors Against Unscrupulous Brokers (Letter Report, September 14,
1994, GAO/GGD-94-208).
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In 1996, the Commission's staff met with representatives from the
NASD, NASAA, and the National Association of Insurance Commissioners
(``NAIC''), to discuss steps that could be taken to stem the migration
of unscrupulous brokers. At that meeting, it was agreed that an
important first step would be to complete the ongoing CRD modernization
project. The participants also discussed ways for additional regulatory
authorities to obtain access to the insurance industry's Producer
Information Network (``PIN'').\33\
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\33\ The NAIC's five year strategic plan, issued in 1993,
included the development of a producer database and common
insurance/producer licensing procedures. PIN, developed in 1995, is
one of the tools to modernize the insurance licensing process. The
insurance industry will have access to the Producer Database
(``PDB'') through PIN. PDB access will include all non-confidential
information such as the states in which a producer is licensed, what
type of license is held as well as the status of the license and
lines of authority.
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The participants are likely to discuss the CRD modernization
program and other avenues of information sharing between federal and
state securities, insurance and banking regulators in order to address
the possible migration of unscrupulous brokers.
Similarly, the group also expects to discuss whether it would be
appropriate to amend the Exchange Act, to make persons subject to a
``statutory disqualification'' \34\ if they have been found by a state
securities or insurance commission, or state or federal banking agency,
to have committed certain fraudulent acts or violated the statutes
enforced by these agencies.
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\34\ Exchange Act Section 3(a)(39).
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H. 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'').
In particular, the Commission adopted rules that require broker-
dealers, non-bank transfer agents, and investment advisers to file with
the Commission (and, in the case of broker-dealers, with their
designated examining authority) reports regarding their Year 2000
efforts.\35\ The first reports for broker-dealers and transfer agents
were due August 31, 1998; the first reports for investment advisers
were due December 7, 1998. The Commission brought enforcement actions
against 37 broker-dealers and 9 transfer agents who failed to file the
first report or filed it late, while the NASD brought 59 similar
actions against broker-dealers.\36\
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\35\ Exchange Act Release Nos. 40162 and 40163 (July 2, 1998)
[63 FR 37668, 37688]; Investment Advisers Act Release No. 1769
(October 1, 1998) [63 FR 54308].
\36\ Exchange Act Release No. 40573 and 40574 (October 20, 1998)
and 40895 (January 7, 1999).
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Broker-dealers and non-bank transfer agents are required to file a
second report on April 30, 1999; larger broker-dealers and non-bank
transfer agents are also required to file a report prepared by an
independent public accountant regarding the broker-dealers' and the
non-bank transfer agents' processes for preparing for the Year 2000.
Investment advisers are required to file a second report on June 7,
1999.\37\
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\37\ Exchange Act Release Nos. 40608 (October 28, 1998) [63 FR
59208] and 40587 (October 22, 1998) [63 FR 58630].
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Also during the past year, the Commission has supported the
industry's efforts to conduct an industry wide test for Year 2000
problems in March 1999. Commission staff has worked with test
organizers and the SROs to identify key test participants. In
particular, the Commission has approved new SRO rules that allow the
SROs to mandate their member firms conduct Year 2000 testing.
Commission staff also meets regularly with the SROs to discuss member
readiness for Year 2000 and contingency planning.
Other Commission efforts regarding Year 2000 efforts include a
moratorium on the implementation of new Commission rules that require
major reprogramming of computer systems by Commission-regulated
entities between June 1, 1999 and March 31, 2000 \38\ and surveys of
Year 2000 remediation efforts
[[Page 17049]]
at the exchanges, Nasdaq and clearing agencies.
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\38\ Exchange Act Release No. 40377 (August 27, 1998) [63 FR
47051].
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I. Examination Issues
State and federal regulators also will discuss various examination-
related issues of mutual interest, including: summits and examination
coordination; branch office examinations; micro-cap issues; and day
trading.
(3) Investment Management Issues
A. Division of Regulatory Authority
Title III of the 1996 Act amended the Investment Advisers Act of
1940 (``Advisers Act'') \39\ to divide 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.\40\ Advisers that have
assets under management of less than $25 million must register with the
appropriate state securities authorities.
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\39\ 15 U.S.C. 80b-1 et seq.
\40\ 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,
Wyoming), or that have their principal office and place of business
outside the United States. In addition, the Commission has adopted
rules exempting five 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,\41\ including a requirement that each
Commission-registered adviser indicate whether it was eligible for
continued registration with the Commission and, if not, withdraw from
Commission registration. Approximately 11,800 advisers withdrew from
Commission registration and the Commission canceled the registrations
of 4,200 advisers that failed to indicate whether they were eligible
for continued registration with the Commission.\42\ Approximately 8,500
investment advisers are currently registered with the Commission.
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\41\ Investment Advisers Act Rel. No. 1633 (May 15, 1997) [62 FR
28112].
\42\ The Commission published a Notice of Intention to Cancel
Registrations of Certain Investment Advisers on March 9, 1998. See
Investment Advisers Act Rel. No. 1705 [63 FR 12526].
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The conferees will discuss cooperation between Commission and state
adviser programs, including sharing information about past examinations
and monitoring advisers switching between federal and state
registration.
B. Electronic Filing System
The 1996 Act requires 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.\43\ In
October 1998, Commission staff announced that they would recommend that
the Commission designate NASD Regulation, Inc. (``NASDR'') to operate
an electronic investment adviser registration system.\44\ This decision
was made jointly with a NASAA committee.
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\43\ 1996 Act Section 306.
\44\ SEC News Release 98-120.
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The Commission has been working with NASAA, the state securities
authorities, and NASDR to develop a one-stop electronic filing system
that investment advisers will use to apply for registration with the
Commission or the appropriate state securities authorities, and to
update their registration. The Commission and state authorities will
have access to the resulting database to review adviser registration
materials and the database will be available to the public on an
Internet web site. Clients and prospective clients of investment
advisers will be able to quickly obtain disciplinary and other
information about investment advisers and persons associated with
investment advisers.
The conferees will discuss the progress to date in creating this
new electronic filing system.
C. Revised Registration and Disclosure Forms
The Commission and NASAA are revising the investment adviser
registration and disclosure forms. The revised registration form would
provide more useful information to the Commission and the state
securities regulators. The new disclosure form would require advisers
to provide clear and complete disclosures in plain English to clients
and prospective clients.
The conferees will consider and discuss ways in which the forms can
be made most useful to the Commission and state securities authorities,
and clients and prospective clients of investment advisers.
(4) Investor Education and Assistance
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 complement those
efforts to the greatest extent possible. The working group will discuss
the following investor education initiatives and potential joint
projects:
A. Financial Literacy 2001
In the spring of 1998, NASAA, the NASD, and the Investor Protection
Trust (``IPT'') joined forces to launch ``Financial Literacy 2001''
(``FL2001''), an unprecedented $1 million campaign targeting 25,000
high school teachers across America. The goal of FL2001 is to
encourage--and make it easier for--teachers in every state to teach the
basics on saving and investing. Working together, NASAA, the NASD, and
the IPT have developed a state-by-state customized classroom guide and
have begun to provide aggressive distribution and teacher training.
During the working group session, the states will brief the
Commission's staff on the progress of FL2001 and plans for
dissemination of the FL2001 program in the coming year.
B. Plain English Update
In January 1998, the Commission approved new rules that require
issuers to write the cover page, summary, and risk factors section of
prospectuses in plain English. These rules apply to all registration
statements filed with the Commission on or after October 1, 1998, and
to all mutual fund disclosure statements filed on or after December 1,
1998. During the working group session, the participants will discuss
the status of the Commission's plain English initiative.
C. Facts on Saving and Investing Campaign
In the spring of 1998, NASAA and the Commission, in conjunction
with the Council of Securities Regulators of the Americas, launched the
``Facts on Saving and Investing Campaign.'' The campaign is an ongoing,
grassroots effort to educate individuals about saving, investing, and
avoiding financial fraud. Twenty-one countries throughout the Western
Hemisphere participated in the campaign's enormously successful kick-
off week. In the U.S., campaign partners--including more than thirty
government agencies, consumer organizations, and financial industry
associations--held educational events and distributed information on
saving and investing throughout the country. In the coming year, the
campaign plans to target two key audiences--schools and
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the workplace. During the working group session, participants will
discuss the campaign and future campaign initiatives. The group also
will discuss other initiatives for international investor education.
D. New Investor Education Programs
Participants in the working group session will brainstorm ideas for
new investor education programs, including joint NASAA and Commission
initiatives.
E. Investor Education Resources
Participants in the working group session will assess existing
resources for investor education--including brochures, videotapes,
online materials, and other media--and identify gaps. Conferees also
will discuss the most efficient and effective ways to provide
educational resources to individuals at the grassroots level.
(5) Enforcement Issues
In addition to the above topics, state and federal regulators will
discuss various enforcement-related issues which are of mutual
interest.
(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: March 31, 1999.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-8515 Filed 4-6-99; 8:45 am]
BILLING CODE 8010-01-P
