[House Report 104-622]
[From the U.S. Government Publishing Office]



                                                                       
104th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 2d Session                                                     104-622
_______________________________________________________________________


 
                     SECURITIES AMENDMENTS OF 1996

_______________________________________________________________________


 June 17, 1996.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______


  Mr. Bliley, from the Committee on Commerce, submitted the following

                              R E P O R T

                        [To accompany H.R. 3005]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Commerce, to whom was referred the bill 
(H.R. 3005) to amend the Federal securities laws in order to 
promote efficiency and capital formation in the financial 
markets, and to amend the Investment Company Act of 1940 to 
promote more efficient management of mutual funds, protect 
investors, and provide more effective and less burdensome 
regulation, having considered the same, report favorably 
thereon with an amendment and recommend that the bill as 
amended do pass.

                                CONTENTS

                                                                   Page
The Amendment....................................................     2
Purpose and Summary..............................................    16
Background and Need for Legislation..............................    16
Hearings.........................................................    20
Committee Consideration..........................................    20
Rollcall Votes...................................................    21
Committee Oversight Findings.....................................    21
Committee on Government Reform and Oversight.....................    21
New Budget Authority and Tax Expenditures........................    21
Committee Cost Estimate..........................................    21
Congressional Budget Office Estimate.............................    22
Inflationary Impact Statement....................................    29
Advisory Committee Statement.....................................    29
Section-by-Section Analysis of the Legislation...................    29
Committee Correspondence.........................................    54
Agency Views.....................................................    55
Changes in Existing Law Made by the Bill, as Reported............    56

                             The Amendment

  The amendment is as follows:
  Strike out all after the enacting clause and insert in lieu 
thereof the following:

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

  (a) Short Title.--This Act may be cited as the ``Securities 
Amendments of 1996''.
  (b) Table of Contents.--The table of contents of this Act is as 
follows:

Sec. 1. Short title; table of contents.

        TITLE I--CAPITAL MARKETS DEREGULATION AND LIBERALIZATION

Sec. 101. Short title.
Sec. 102. Creation of national securities markets.
Sec. 103. Margin requirements.
Sec. 104. Prospectus delivery.
Sec. 105. Exemptive authority.
Sec. 106. Promotion of efficiency, competition, and capital formation.
Sec. 107. Privatization of EDGAR.
Sec. 108. Coordination of Examining Authorities.
Sec. 109. Foreign press conferences.
Sec. 110. Report on Trust Indenture Act of 1939.

              TITLE II--INVESTMENT COMPANY ACT AMENDMENTS

Sec. 201. Short title.
Sec. 202. Funds of funds.
Sec. 203. Registration of securities.
Sec. 204. Investment company advertising prospectus.
Sec. 205. Variable insurance contracts.
Sec. 206. Reports to the Commission and shareholders.
Sec. 207. Books, records and inspections.
Sec. 208. Investment company names.
Sec. 209. Exceptions from definition of investment company.

        TITLE I--CAPITAL MARKETS DEREGULATION AND LIBERALIZATION

SEC. 101. SHORT TITLE.

  This title may be cited as the ``Capital Markets Deregulation and 
Liberalization Act of 1996''.

SEC. 102. CREATION OF NATIONAL SECURITIES MARKETS.

  (a) Securities Act of 1933.--
          (1) Amendment.--Section 18 of the Securities Act of 1933 (15 
        U.S.C. 77r) is amended to read as follows:

``SEC. 18. EXEMPTION FROM STATE REGULATION OF SECURITIES OFFERINGS.

  ``(a) Scope of Exemption.--Except as otherwise provided in this 
section, no law, rule, regulation, or order, or other administrative 
action of any State or Territory of the United States, or the District 
of Columbia, or any political subdivision thereof--
          ``(1) requiring, or with respect to, registration or 
        qualification of securities, or registration or qualification 
        of securities transactions, shall directly or indirectly apply 
        to a security that--
                  ``(A) is a covered security; or
                  ``(B) will be a covered security upon completion of 
                the transaction;
          ``(2) shall directly or indirectly prohibit, limit, or impose 
        conditions upon the use of--
                  ``(A) with respect to a covered security described in 
                subsection (b)(1) or (c)(1)--
                          ``(i) any offering document that is prepared 
                        by the issuer; or
                          ``(ii) any offering document that is not 
                        prepared by the issuer if such offering 
                        document is required to be and is filed with 
                        the Commission or any national securities 
                        organization registered under section 15A of 
                        the Securities Exchange Act of 1934 (15 U.S.C. 
                        78o-3);
                  ``(B) with respect to a covered security described in 
                paragraph (2), (3), or (4) of subsection (b), any 
                offering document; or
                  ``(C) any proxy statement, report to shareholders, or 
                other disclosure document relating to a covered 
                security or the issuer thereof that is required to be 
                and is filed with the Commission or any national 
                securities organization registered under section 15A of 
                the Securities Exchange Act of 1934 (15 U.S.C. 78o-3); 
                or
          ``(3) shall directly or indirectly prohibit, limit, or impose 
        conditions, based on the merits of such offering or issuer, 
        upon the offer or sale of any security described in paragraph 
        (1).
  ``(b) Covered Securities.--For purposes of this section, the 
following are covered securities:
          ``(1) Exclusive federal registration of nationally traded 
        securities.--A security is a covered security if such security 
        is--
                  ``(A) listed, or authorized for listing, on the New 
                York Stock Exchange or the American Stock Exchange, or 
                included or qualified for inclusion in the National 
                Market System of the National Association of Securities 
                Dealers Automated Quotation System (or any successor to 
                such entities);
                  ``(B) listed, or authorized for listing, on a 
                national securities exchange (or tier or segment 
                thereof) that has listing standards that the Commission 
                determines by rule (on its own initiative or on the 
                basis of a petition) are substantially similar to the 
                listing standards applicable to securities described in 
                subparagraph (A); or
                  ``(C) is a security of the same issuer that is equal 
                in seniority or senior to a security described in 
                subparagraph (A) or (B).
          ``(2) Exclusive federal registration of investment 
        companies.--A security is a covered security if such security 
        is a security issued by an investment company that is 
        registered under the Investment Company Act of 1940 (15 U.S.C. 
        80a et seq.).
          ``(3) Sales to qualified purchasers.--A security is a covered 
        security with respect to the offer or sale of the security to 
        qualified purchasers, as defined by the Commission by rule. In 
        prescribing such rule, the Commission may define qualified 
        purchaser differently with respect to different categories of 
        securities, consistent with the public interest and the 
        protection of investors.
          ``(4) Exemption in connection with certain exempt 
        offerings.--A security is a covered security if--
                  ``(A) the offer or sale of such security is exempt 
                from registration under this title pursuant to section 
                4(1) or 4(3), and--
                          ``(i) the issuer of such security files 
                        reports with the Commission pursuant to section 
                        13 or 15(d) of the Securities Exchange Act of 
                        1934 (15 U.S.C. 78m, 78o(d)); or
                          ``(ii) the issuer is exempt from filing such 
                        reports;
                  ``(B) such security is exempt from registration under 
                this title pursuant to section 4(4);
                  ``(C) the offer or sale of such security is exempt 
                from registration under this title pursuant to section 
                3(a), other than the offer or sale of a security that 
                is exempt from such registration pursuant to paragraph 
                (4) or (11) of such section, except that a municipal 
                security that is exempt from such registration pursuant 
                to paragraph (2) of such section is not a covered 
                security with respect to the offer or sale of such 
                security in the State in which such security is issued; 
                or
                  ``(D) the offer or sale of such security is exempt 
                from registration under this title pursuant to 
                Commission rule or regulation under section 4(2) of 
                this title.
  ``(c) Conditionally Covered Securities.--
          ``(1) Federally registered offerings.--Subject to the 
        limitations contained in paragraphs (2) and (3), a security is 
        a covered security if--
                  ``(A) the issuer of such security has (or will have 
                upon conclusion of the transaction) total assets 
                exceeding $10,000,000;
                  ``(B) such security is the subject of a registration 
                statement that is filed with the Commission pursuant to 
                this title; and
                  ``(C) the issuer files with such registration 
                statement audited financial statements for each of the 
                two most recent fiscal years of its operations ending 
                before the filing of the registration statement.
          ``(2) Limitations for certain offerings.--Notwithstanding 
        paragraph (1), a security is not a covered security if such 
        security is--
                  ``(A) a security of an issuer which is a blank check 
                company (as defined in section 7(b) of this title), a 
                partnership, a limited liability company, or a direct 
                participation investment program;
                  ``(B) a penny stock (as such term is defined in 
                section 3(a)(51) of the Securities Exchange Act of 1934 
                (15 U.S.C. 78c(a)(51)); or
                  ``(C) a security issued in an offering relating to a 
                rollup transaction (as such term is defined in 
                paragraphs (4) and (5) of section 14(h) of such Act (15 
                U.S.C. 78n(h)(4), (5)).
          ``(3) Limitations based on misconduct.--Notwithstanding 
        paragraph (1), a security is not a covered security--
                  ``(A) with respect to any State, if the issuer, or a 
                principal officer or principal shareholder thereof--
                          ``(i) is subject to a statutory 
                        disqualification, as defined in subparagraph 
                        (A), (B), (C), or (D) of section 3(a)(39) of 
                        the Securities Exchange Act of 1934 (15 U.S.C. 
                        78c(a)(39));
                          ``(ii) has been convicted within 5 years 
                        prior to the offering of any felony under 
                        Federal or State law in connection with the 
                        offer, purchase, or sale of any security, or 
                        any felony under Federal or State law involving 
                        fraud or deceit; or
                          ``(iii) is currently named in and subject to 
                        any order, judgment, or decree of any court of 
                        competent jurisdiction acting pursuant to 
                        Federal or State law temporarily or permanently 
                        restraining or enjoining such issuer, officer, 
                        or shareholder from engaging in or continuing 
                        any conduct or practice in connection with a 
                        security; or
                  ``(B) with respect to a particular State, if the 
                issuer, or a principal officer or principal shareholder 
                thereof--
                          ``(i) has filed a registration statement 
                        which is the subject of a currently effective 
                        stop order entered pursuant to that State's 
                        securities laws within 5 years prior to the 
                        offering;
                          ``(ii) is currently named in and subject to 
                        any administrative enforcement order or 
                        judgment of that State's securities commission 
                        (or any agency or office performing like 
                        functions) entered within 5 years prior to the 
                        offering, or is currently named in and subject 
                        to any other administrative enforcement order 
                        or judgment of that State entered within 5 
                        years prior to the offering that finds fraud or 
                        deceit; or
                          ``(iii) is currently named in and subject to 
                        any administrative enforcement order or 
                        judgment of that State which prohibits or 
                        denies registration, or revokes the use of any 
                        exemption from registration, in connection with 
                        the offer, purchase, or sale of securities.
          ``(4) Exceptions to limitations.--
                  ``(A) Exemptions.--The limitations in paragraph 
                (3)(A) shall not apply if the Commission has exempted 
                the subject person from the application of such 
                paragraph by rule or order, and the limitations in 
                paragraph (3)(B) shall not apply if the securities 
                commission (or any agency or office performing like 
                functions) of the affected State has exempted the 
                subject person from the application of such paragraph 
                by rule or order.
                  ``(B) Reasonable steps.--The provisions of paragraph 
                (3) shall not apply if the issuer has taken reasonable 
                steps to ascertain whether any principal officer or 
                principal shareholder is subject to such paragraph, and 
                such steps do not reveal a person who is subject to 
                such paragraph. An issuer shall be considered to have 
                taken reasonable steps if such issuer or its agent has 
                conducted a search of any centralized data bases that 
                the Commission may designate by rule, and has received 
                an affidavit under oath by each such principal officer 
                or principal shareholder stating that such officer or 
                shareholder is not subject to the provisions of 
                paragraph (3).
                  ``(C) Effect of limitations on remedies.--
                Notwithstanding paragraph (3), an issuer shall not be 
                subject to a right of rescission under State securities 
                laws solely as a result of the operation of such 
                paragraph.
          ``(5) No effect under subsection (b).--No limitation under 
        this subsection shall affect the treatment of a security that 
        qualifies as a covered security under subsection (b).
  ``(d) Preservation of Authority.--
          ``(1) Fraud authority.--Consistent with this section, the 
        securities commission (or any agency or office performing like 
        functions) of any State or Territory of the United States, or 
        the District of Columbia, shall retain jurisdiction under the 
        laws of such State, Territory, or District to investigate and 
        bring enforcement actions with respect to fraud or deceit in 
        connection with securities or securities transactions.
          ``(2) Preservation of filing requirements.--
                  ``(A) Notice filings permitted.--Nothing contained in 
                this section shall prohibit the securities commission 
                (or any agency or office performing like functions) of 
                any State or Territory of the United States, or the 
                District of Columbia, from requiring the filing of any 
                documents filed with the Commission pursuant to this 
                title solely for notice purposes, together with any 
                required fee.
                  ``(B) Preservation of fees.--Until otherwise provided 
                by State law enacted after the date of enactment of the 
                Securities Amendments of 1996, filing or registration 
                fees with respect to securities or securities 
                transactions may continue to be collected in amounts 
                determined pursuant to State law as in effect on the 
                day before such date.
                  ``(C) Fees not permitted on listed securities.--
                Notwithstanding subparagraphs (A) and (B), no filing or 
                fee may be required with respect to any security that 
                is a covered security pursuant to subsection (b)(1) of 
                this section, or will be such a covered security upon 
                completion of the transaction, or is a security of the 
                same issuer that is equal in seniority or senior to a 
                security that is a covered security pursuant to such 
                subsection.
          ``(3) Enforcement of requirements.--Nothing in this section 
        shall prohibit the securities commission (or any agency or 
        office performing like functions) of any State or Territory of 
        the United States, or the District of Columbia, from suspending 
        the offer or sale of securities within such State, Territory, 
        or District as a result of the failure to submit any filing or 
        fee required under law and permitted under this section.
  ``(e) Definitions.--For purposes of this section:
          ``(1) Principal officer.--The term `principal officer' means 
        a director, chief executive officer, or chief financial officer 
        of an issuer, or any other officer performing like functions.
          ``(2) Principal shareholder.--The term `principal 
        shareholder' means any person who is directly or indirectly the 
        beneficial owner of more than 20 percent of any class of equity 
        security of an issuer. When two or more persons act as a 
        partnership, limited partnership, syndicate, or other group for 
        the purpose of acquiring, holding, or disposing of securities 
        of an issuer, such syndicate or group shall be deemed a 
        `person' for purposes of this paragraph. In determining, for 
        purposes of this paragraph, any percentage of a class of any 
        security, such class shall be deemed to consist of the amount 
        of the outstanding securities of such class, exclusive of any 
        securities of such class held by or for the account of the 
        issuer or a subsidiary of the issuer.
          ``(3) Offering document.--The term `offering document' has 
        the meaning given the term `prospectus' by section 2(10), but 
        without regard to the provisions of clauses (a) and (b) of such 
        section, except that, with respect to a security described in 
        subsection (b)(2) of this section, such term also includes a 
        communication that is not deemed to offer such a security 
        pursuant to a rule of the Commission.
          ``(4) Prepared by the issuer.--Within 6 months after the date 
        of enactment of the Securities Amendments of 1996, the 
        Commission shall, by rule, define the term `prepared by the 
        issuer' for purposes of this section.''.
          (2) Study of uniformity.--The Securities Exchange Commission 
        shall conduct a study after consultation with States, issuers, 
        brokers, and dealers on the extent to which uniformity of State 
        regulatory requirements for securities or securities 
        transactions has been achieved for securities that are not 
        covered securities (within the meaning of section 18 of the 
        Securities Act of 1933 as amended by paragraph (1) of this 
        subsection). Such study shall specifically focus on the impact 
        of such uniformity or lack thereof on the cost of capital, 
        innovation and technological development in securities markets, 
        and duplicative regulation with respect to securities issuers 
        (including small business), brokers, and dealers and the effect 
        on investor protection. The Commission shall submit to the 
        Congress a report on the results of such study within one year 
        after the date of enactment of this Act.
  (b) Broker/Dealer Regulation.--
          (1) Amendment.--Section 15 of the Securities Exchange Act of 
        1934 (15 U.S.C. 78o) is amended by adding at the end the 
        following new subsection:
  ``(h) Limitations on State Law.--
          ``(1) Capital, margin, books and records, bonding, and 
        reports.--No law, rule, regulation, or order, or other 
        administrative action of any State or political subdivision 
        thereof shall establish capital, custody, margin, financial 
        responsibility, making and keeping records, bonding, or 
        financial or operational reporting requirements for brokers, 
        dealers, municipal securities dealers, government securities 
        brokers, or government securities dealers that differ from, or 
        are in addition to, the requirements in those areas established 
        under this title. The Commission shall consult periodically the 
        securities commissions (or any agency or office performing like 
        functions) of the States concerning the adequacy of such 
        requirements as established under this title.
          ``(2) Exemption to permit service to customers.--No law, 
        rule, regulation, or order, or other administrative action of 
        any State or political subdivision thereof shall prohibit an 
        associated person from effecting a transaction described in 
        paragraph (3) for a customer in such State if--
                  ``(A) such associated person is not ineligible to 
                register with such State for any reason other than such 
                a transaction;
                  ``(B) such associated person is registered with a 
                registered securities association and at least one 
                State; and
                  ``(C) the broker or dealer with which such person is 
                associated is registered with such State.
          ``(3) Described transactions.--A transaction is described in 
        this paragraph if--
                  ``(A) such transaction is effected--
                          ``(i) on behalf of a customer that, for 30 
                        days prior to the day of the transaction, 
                        maintains an account with the broker or dealer; 
                        and
                          ``(ii) by an associated person (I) to which 
                        the customer was assigned for 14 days prior to 
                        the day of the transaction, and (II) who is 
                        registered with a State in which the customer 
                        was a resident or was present for at least 30 
                        consecutive days during the one-year period 
                        prior to the transaction;
                except that, if the customer is present in another 
                State for 30 or more consecutive days or has 
                permanently changed his or her residence to another 
                State, such transaction is not described in this 
                subparagraph unless the associated person files with 
                such State an application for registration within 10 
                business days of the later of the date of the 
                transaction or the date of the discovery of the 
                presence of the customer in the State for 30 or more 
                consecutive days or the change in the customer's 
                residence;
                  ``(B) the transaction is effected--
                          ``(i) on behalf of a customer that, for 30 
                        days prior to the day of the transaction, 
                        maintains an account with the broker or dealer; 
                        and
                          ``(ii) within the period beginning on the 
                        date on which such associated person files with 
                        the State in which the transaction is effected 
                        an application for registration and ending on 
                        the earlier of (I) 60 days after the date the 
                        application is filed, or (II) the time at which 
                        such State notifies the associated person that 
                        it has denied the application for registration 
                        or has stayed the pendency of the application 
                        for cause; or
                  ``(C) the transaction is one of 10 or fewer 
                transactions in a calendar year (excluding any 
                transactions described in subparagraph (A) or (B)) 
                which the associated person effects in the States in 
                which the associated person is not registered.
          ``(4) Alternate associated persons.--For purposes of 
        paragraph (3)(A)(ii), each of up to 3 associated persons who 
        are designated to effect transactions during the absence or 
        unavailability of the principal associated person for a 
        customer may be treated as an associated person to which such 
        customer is assigned for purposes of such paragraph.''.
          (2) Study.--Within 6 months after the date of enactment of 
        this Act, the Commission, after consultation with registered 
        securities associations, national securities exchanges, and 
        States, shall conduct a study of--
                  (A) the impact of disparate State licensing 
                requirements on associated persons of registered 
                brokers or dealers; and
                  (B) methods for States to attain uniform licensing 
                requirements for such persons.
          (3) Report.--Within one year after the date of enactment of 
        this Act, the Commission shall submit to the Congress a report 
        on the study conducted under paragraph (2). Such report shall 
        include recommendations concerning appropriate methods 
        described in paragraph (2)(B), including any necessary 
        legislative changes to implement such recommendations.
          (4) Technical amendment.--Section 28(a) of the Securities 
        Exchange Act of 1934 (15 U.S.C. 78bb(a)) is amended by striking 
        ``Nothing'' and inserting ``Except as otherwise specifically 
        provided elsewhere in this title, nothing''.

SEC. 103. MARGIN REQUIREMENTS.

  (a) Margin Requirements.--
          (1) Extensions of credit by broker-dealers.--Section 7(c) of 
        the Securities Exchange Act of 1934 (15 U.S.C. 78g(c)) is 
        amended to read as follows:
  ``(c) Unlawful Credit Extension to Customers.--
          ``(1) Prohibition.--It shall be unlawful for any member of a 
        national securities exchange or any broker or dealer, directly 
        or indirectly, to extend or maintain credit or arrange for the 
        extension or maintenance of credit to or for any customer--
                  ``(A) on any security (other than an exempted 
                security), in contravention of the rules and 
                regulations which the Board of Governors of the Federal 
                Reserve System shall prescribe under subsections (a) 
                and (b) of this section;
                  ``(B) without collateral or on any collateral other 
                than securities, except in accordance with such rules 
                and regulations as the Board of Governors of the 
                Federal Reserve System may prescribe--
                          ``(i) to permit under specified conditions 
                        and for a limited period any such member, 
                        broker, or dealer to maintain a credit 
                        initially extended in conformity with the rules 
                        and regulations of the Board of governors of 
                        the Federal Reserve System; and
                          ``(ii) to permit the extension or maintenance 
                        of credit in cases where the extension or 
                        maintenance of credit is not for the purpose of 
                        purchasing or carrying securities or of evading 
                        or circumventing the provisions of subparagraph 
                        (A) of this paragraph.
          ``(2) Exception.--This subsection and the rules and 
        regulations thereunder shall not apply to any credit extended, 
        maintained, or arranged by a member of a national securities 
        exchange or a broker or dealer to or for a member of a national 
        securities exchange or a registered broker or dealer--
                  ``(A) a substantial portion of whose business 
                consists of transactions with persons other than 
                brokers or dealers; or
                  ``(B) to finance its activities as a market maker or 
                an underwriter;
        except that the Board of Governors of the Federal Reserve 
        System may impose such rules and regulations, in whole or in 
        part, on any credit otherwise exempted by this paragraph if it 
        determines that such action is necessary or appropriate in the 
        public interest or for the protection of investors.''.
          (2) Extensions of credit by other lenders.--Section 7(d) of 
        the Securities Exchange Act of 1934 (78 U.S.C. 78g(d)) is 
        amended to read as follows:
  ``(d) Unlawful Credit Extension in Violation of Rules and 
Regulations; Exception to Application of Rules, Etc.--
          ``(1) Prohibition.--It shall be unlawful for any person not 
        subject to subsection (c) of this section to extend or maintain 
        credit or to arrange for the extension or maintenance of credit 
        for the purpose of purchasing or carrying any security, in 
        contravention of such rules and regulations as the Board of 
        Governors of the Federal Reserve System shall prescribe to 
        prevent the excessive use of credit for the purchasing or 
        carrying of or trading in securities in circumvention of the 
        other provisions of this section. Such rules and regulations 
        may impose upon all loans made for the purpose of purchasing or 
        carrying securities limitations similar to those imposed upon 
        members, brokers, or dealers by subsection (c) of this section 
        and the rules and regulations thereunder.
          ``(2) Exceptions.--This subsection and the rules and 
        regulations thereunder shall not apply to any credit extended, 
        maintained, or arranged--
                  ``(A) by a person not in the ordinary course of 
                business;
                  ``(B) on an exempted security;
                  ``(C) to or for a member of a national securities 
                exchange or a registered broker or dealer--
                          ``(i) a substantial portion of whose business 
                        consists of transactions with persons other 
                        than brokers or dealers; or
                          ``(ii) to finance its activities as a market 
                        maker or an underwriter;
                  ``(D) by a bank on a security other than an equity 
                security; or
                  ``(E) as the Board of Governors of the Federal 
                Reserve System shall, by such rules, regulations, or 
                orders as it may deem necessary or appropriate in the 
                public interest or for the protection of investors, 
                exempt, either unconditionally or upon specified terms 
                and conditions or for stated periods, from the 
                operation of this subsection and the rules and 
                regulations thereunder;
        except that the Board of Governors of the Federal Reserve 
        System may impose such rules and regulations, in whole or in 
        part, on any credit otherwise exempted by subparagraph (C) of 
        this paragraph if it determines that such action is necessary 
        or appropriate in the public interest or for the protection of 
        investors.''.
  (b) Borrowing by Members, Brokers, and Dealers.--Section 8 of the 
Securities Exchange Act of 1934 (15 U.S.C. 78h) is amended--
          (1) by striking subsection (a), and
          (2) by redesignating subsections (b) and (c) as subsections 
        (a) and (b), respectively.

SEC. 104. PROSPECTUS DELIVERY.

  (a) Report on Electronic Delivery.--Within six months after the date 
of enactment of this Act, the Commission shall report to Congress on 
the steps the Commission has taken, or anticipates taking, to 
facilitate the electronic delivery of prospectuses to institutional and 
other investors.
  (b) Report on Advisory Committee Recommendations.--Within one year 
after the date of enactment of this Act, the Commission shall report to 
Congress on the Commission's views on the recommendations of the 
Advisory Committee on Capital Formation, including any actions taken to 
implement the recommendations of the Advisory Committee.

SEC. 105. EXEMPTIVE AUTHORITY.

  (a) General Exemptive Authority Under the Securities Act of 1933.--
Title I of the Securities Act of 1933 (15 U.S.C. 77a et seq.) is 
amended by adding at the end the following new section:

``SEC. 28. GENERAL EXEMPTIVE AUTHORITY.

  ``The Commission, by rules and regulations, may conditionally or 
unconditionally exempt any person, security, or transaction, or any 
class or classes of persons, securities, or transactions, from any 
provision or provisions of this title or of any rule or regulation 
thereunder, to the extent that such exemption is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors.''.
  (b) General Exemptive Authority Under the Securities Exchange Act of 
1934.--Title I of the Securities Exchange Act of 1934 (15 U.S.C. 78a et 
seq.) is amended by adding at the end the following new section:

``SEC. 36. GENERAL EXEMPTIVE AUTHORITY.

  ``Notwithstanding any other provision of this title, the Commission, 
by rule, regulation, or order, may conditionally or unconditionally 
exempt any person, security, or transaction, or any class or classes of 
persons, securities, or transactions, from any provision or provisions 
of this title or of any rule or regulation thereunder, to the extent 
that such exemption is necessary or appropriate in the public interest, 
and is consistent with the protection of investors. The Commission 
shall by rules and regulations determine the procedures under which an 
exemptive order under this section shall be granted and may, in its 
sole discretion, decline to entertain any application for an order of 
exemption under this section.''.

SEC. 106. PROMOTION OF EFFICIENCY, COMPETITION, AND CAPITAL FORMATION.

  (a) Securities Act of 1933.--Section 2 of the Securities Act of 1933 
(15 U.S.C. 77b) is amended--
          (1) by inserting ``(a) Definitions.--'' after ``Sec. 2.''; 
        and
          (2) by adding at the end the following new subsection:
  ``(b) Consideration of Promotion of Efficiency, Competition, and 
Capital Formation.--Whenever pursuant to this title the Commission is 
engaged in rulemaking and is required to consider or determine whether 
an action is necessary or appropriate in the public interest, the 
Commission shall also consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition, and 
capital formation.''.
  (b) Securities Exchange Act of 1934.--Section 3 of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c) is amended by adding at the end 
the following new subsection:
  ``(f) Consideration of Promotion of Efficiency, Competition, and 
Capital Formation.--Whenever pursuant to this title the Commission is 
engaged in rulemaking, or in the review of a rule of a self-regulatory 
organization, and is required to consider or determine whether an 
action is necessary or appropriate in the public interest, the 
Commission shall also consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition, and 
capital formation.''.
  (c) Investment Company Act of 1940.--Section 2 of the Investment 
Company Act of 1940 (15 U.S.C. 80a-2) is amended by adding at the end 
the following new subsection:
  ``(c) Consideration of Promotion of Efficiency, Competition, and 
Capital Formation.--Whenever pursuant to this title the Commission is 
engaged in rulemaking and is required to consider or determine whether 
an action is consistent with the public interest, the Commission shall 
also consider, in addition to the protection of investors, whether the 
action will promote efficiency, competition, and capital formation.''.

SEC. 107. PRIVATIZATION OF EDGAR.

  (a) Examination.--The Securities and Exchange Commission shall 
examine proposals for the privatization of the EDGAR system. Such 
examination shall promote competition in the automation and rapid 
collection and dissemination of information required to be disclosed. 
Such examination shall include proposals that maintain free public 
access to data filings in the EDGAR system.
  (b) Review and Report.--Within 180 days after the date of enactment 
of this Act, the Commission shall submit to the Congress a report on 
the examination under subsection (a). Such report shall include such 
recommendations for such legislative action as may be necessary to 
implement the proposal that the Commission determines most effectively 
achieves the objectives described in subsection (a).

SEC. 108. COORDINATION OF EXAMINING AUTHORITIES.

  (a) Amendments.--Section 17 of the Securities Exchange Act of 1934 
(15 U.S.C. 78q) is amended by adding at the end the following new 
subsection:
  ``(i) Coordination of Examining Authorities.--
          ``(1) Elimination of duplication.--The Commission and the 
        examining authorities, through cooperation and coordination of 
        examination and oversight as required by this subsection, shall 
        eliminate any unnecessary and burdensome duplication in the 
        examination process.
          ``(2) Planning conferences.--
                  ``(A) The Commission and the examining authorities 
                shall meet at least annually for a national general 
                planning conference to discuss coordination of 
                examination schedules and priorities and other areas of 
                interest relevant to examination coordination and 
                cooperation.
                  ``(B) Within each geographic region designated by the 
                Commission, the Commission and the relevant examining 
                authorities shall meet at least annually for a regional 
                planning conference to discuss examination schedules 
                and priorities and other areas of related interest, and 
                to encourage information-sharing and to avoid 
                unnecessary duplication of examinations.
          ``(3) Coordination tracking system for broker-dealer 
        examinations.--
                  ``(A) The Commission and the examining authorities 
                shall prepare, on a periodic basis in a uniform 
                computerized format, information on registered broker 
                and dealer examinations and shall submit such 
                information to the Commission.
                  ``(B) The Commission shall maintain a computerized 
                database of consolidated examination information to be 
                used for examination planning and scheduling and for 
                monitoring coordination of registered broker and dealer 
                examinations under this section.
          ``(4) Coordination of examinations.--
                  ``(A) The examining authorities shall share among 
                themselves such information, including reports of 
                examinations, customer complaint information, and other 
                non-public regulatory information, as appropriate to 
                foster a coordinated approach to regulatory oversight 
                of registered brokers and dealers subject to 
                examination by more than one examining authority.
                  ``(B) To the extent practicable, the examining 
                authorities shall assure that each registered broker 
                and dealer subject to examination by more than one 
                examining authority that requests a coordinated 
                examination shall have all requested aspects of the 
                examination conducted simultaneously and without 
                duplication of the areas covered. The examining 
                authorities shall also prepare an advance schedule of 
                all such coordinated examinations.
          ``(5) Prohibited non-coordinated examinations.--Any examining 
        authority that does not participate in a coordinated 
        examination pursuant to paragraph (4) of this subsection shall 
        not conduct a routine examination other than a coordinated 
        examination of that broker or dealer within 9 months of the 
        conclusion of a scheduled coordinated examination.
          ``(6) Examinations for cause.--At any time, any examining 
        authority may conduct an examination for cause of any broker or 
        dealer subject to its jurisdiction.
          ``(7) Broker-dealer examination evaluation panel.--The 
        Commission shall establish an examination evaluation panel 
        composed of representatives of registered brokers and dealers 
        that are members of more than one self-regulatory organization 
        that conducts routine examinations. Prior to each national 
        general planning conference required by paragraph (2)(A) of 
        this subsection, the Commission shall convene the examination 
        evaluation panel to review consolidated and statistical 
        information on the coordination of examinations and information 
        on examinations that are not coordinated, including the 
        findings of Commission examiners on the effectiveness of the 
        examining authorities in achieving coordinated examinations. 
        The Commission shall present any findings and recommendations 
        of the examination evaluation panel to the next meeting of the 
        national general planning conference, and shall report back to 
        the examination evaluation panel on the actions taken by the 
        examining authorities regarding those findings and 
        recommendations. The examination evaluation panel shall not be 
        subject to the Federal Advisory Committee Act (5 U.S.C. App.).
          ``(8) Report to congress.--Within one year after the date of 
        enactment of this Act, the Commission shall report to the 
        Congress on the progress it and the examining authorities have 
        made in reducing duplication and improving coordination in 
        registered broker and dealer examinations, and on the 
        activities of the examination evaluation panel. Such report 
        shall also indicate whether the Commission has identified 
        additional redundancies that have failed to be addressed in the 
        coordination of examining authorities, or any recommendations 
        of the examination evaluation panel established under paragraph 
        (7) of this subsection that have not been addressed by the 
        examining authorities or the Commission.''.
  (b) Definition.--Section 3(a) of the Securities Exchange Act of 1934 
(15 U.S.C. 78e) is amended by adding at the end the following 
paragraph:
          ``(54) The term `examining authority' means any self-
        regulatory organization registered with the Commission under 
        this title (other than registered clearing agencies) with the 
        authority to examine, inspect, and otherwise oversee the 
        activities of a registered broker or dealer.''.

SEC. 109. FOREIGN PRESS CONFERENCES.

  No later than one year after the date of enactment of this Act, the 
Commission shall adopt rules under the Securities Act of 1933 
concerning the status under the registration provisions of the 
Securities Act of 1933 of foreign press conferences and foreign press 
releases by persons engaged in the offer and sale of securities.

SEC. 110. REPORT ON TRUST INDENTURE ACT OF 1939.

  Within 6 months after the date of enactment of this Act, the 
Securities and Exchange Commission shall submit to the Congress a 
report on the benefits of, the continuing need for, and, if necessary, 
options for the modification or elimination of, the Trust Indenture Act 
of 1939 (15 U.S.C. 77aaa et seq.).

              TITLE II--INVESTMENT COMPANY ACT AMENDMENTS

SEC. 201. SHORT TITLE.

  This title may be cited as the ``Investment Company Act Amendments of 
1996''.

SEC. 202. FUNDS OF FUNDS.

  Section 12(d)(1) of the Investment Company Act of 1940 (15 U.S.C. 
80a-12(d)(1)) is amended--
          (1) in subparagraph (E)(iii)--
                  (A) by striking ``in the event such investment 
                company is not a registered investment company,''; and
                  (B) by inserting ``in the event such investment 
                company is not a registered investment company'' after 
                ``(bb)'';
          (2) by redesignating existing subparagraphs (G) and (H) as 
        subparagraphs (H) and (I), respectively;
          (3) by inserting after subparagraph (F) the following new 
        subparagraph:
  ``(G) The provisions of this paragraph (1) shall not apply to 
securities of a registered open-end company (the `acquired company') 
purchased or otherwise acquired by a registered open-end company (the 
`acquiring company') if--
          ``(i) the acquired company and the acquiring company are part 
        of the same group of investment companies;
          ``(ii) the securities of the acquired company, securities of 
        other registered open-end companies that are part of the same 
        group of investment companies, Government securities, and 
        short-term paper are the only investments held by the acquiring 
        company;
          ``(iii)(I) the acquiring company does not pay and is not 
        assessed any charges or fees for distribution-related 
        activities with respect to securities of the acquired company 
        unless the acquiring company does not charge a sales load or 
        other fees or charges for distribution-related activities; or
          ``(II) any sales loads and other distribution-related fees 
        charged with respect to securities of the acquiring company, 
        when aggregated with any sales load and distribution-related 
        fees paid by the acquiring company with respect to securities 
        of the acquired company, are not excessive under rules adopted 
        pursuant to either section 22(b) or section 22(c) of this title 
        by a securities association registered under section 15A of the 
        Securities Exchange Act of 1934 or the Commission;
          ``(iv) the acquired company shall have a fundamental policy 
        that prohibits it from acquiring any securities of registered 
        open-end companies in reliance on this subparagraph or 
        subparagraph (F) of this subsection; and
          ``(v) such acquisition is not in contravention of such rules 
        and regulations as the Commission may from time to time 
        prescribe with respect to acquisitions in accordance with this 
        subparagraph as necessary and appropriate for the protection of 
        investors.
For purposes of this subparagraph, a `group of investment companies' 
shall mean any two or more registered investment companies that hold 
themselves out to investors as related companies for purposes of 
investment and investor services.''; and
          (4) adding at the end the following new subparagraph:
  ``(J) The Commission, by rules and regulations upon its own motion or 
by order upon application, may conditionally or unconditionally exempt 
any person, security, or transaction, or any class or classes of 
persons, securities, or transactions from any provisions of this 
subsection, if and to the extent such exemption is consistent with the 
public interest and the protection of investors.''.

SEC. 203. REGISTRATION OF SECURITIES.

  (a) Amendments to Registration Statements.--Section 24(e) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-24(e)) is amended--
          (1) by striking paragraphs (1) and (2);
          (2) by redesignating paragraph (3) as subsection (e); and
          (3) in subsection (e) (as so redesignated) by striking 
        ``pursuant to this subsection or otherwise''.
  (b) Registration of Indefinite Amount of Securities.--Section 24(f) 
of the Investment Company Act of 1940 (15 U.S.C. 80a-24(f)) is amended 
to read as follows:
  ``(f) Registration of Indefinite Amount of Securities.--
          ``(1) Indefinite registration of securities.--Upon the 
        effectiveness of its registration statement under the 
        Securities Act of 1933, a face-amount certificate company, 
        open-end management company, or unit investment trust shall be 
        deemed to have registered an indefinite amount of securities.
          ``(2) Payment of registration fees.--Within 90 days after the 
        end of the company's fiscal year, the company shall pay a 
        registration fee to the Commission, calculated in the manner 
        specified in section 6(b) of the Securities Act of 1933, based 
        on the aggregate sales price for which its securities 
        (including, for this purpose, all securities issued pursuant to 
        a dividend reinvestment plan) were sold pursuant to a 
        registration of an indefinite amount of securities under this 
        subsection during the company's previous fiscal year reduced 
        by--
                  ``(A) the aggregate redemption or repurchase price of 
                the securities of the company during that year, and
                  ``(B) the aggregate redemption or repurchase price of 
                the securities of the company during any prior fiscal 
                year ending not more than 1 year before the date of 
                enactment of the Investment Company Act Amendments of 
                1996 that were not used previously by the company to 
                reduce fees payable under this section.
          ``(3) Interest due on late payment.--A company paying the fee 
        or any portion thereof more than 90 days after the end of the 
        company's fiscal year shall pay to the Commission interest on 
        unpaid amounts, compounded daily, at the underpayment rate 
        established by the Secretary of the Treasury pursuant to 
        section 3717(a) of title 31, United States Code. The payment of 
        interest pursuant to the requirement of this paragraph shall 
        not preclude the Commission from bringing an action to enforce 
        the requirements of paragraph (2) of this subsection.
          ``(4) Rulemaking authority.--The Commission may adopt rules 
        and regulations to implement the provisions of this 
        subsection.''.
  (c) Effective Date.--The amendments made by this section shall be 
effective 6 months after the date of enactment of this Act or on such 
earlier date as the Commission may specify by rule.

SEC. 204. INVESTMENT COMPANY ADVERTISING PROSPECTUS.

  Section 24 of the Investment Company Act of 1940 (15 U.S.C. 80a-24) 
is amended by adding at the end the following new subsection:
  ``(g) In addition to the prospectuses permitted or required in 
section 10 of the Securities Act of 1933, the Commission shall permit, 
by rules or regulations deemed necessary or appropriate in the public 
interest or for the protection of investors, the use of a prospectus 
for the purposes of section 5(b)(1) of such Act with respect to 
securities issued by a registered investment company. Such a 
prospectus, which may include information the substance of which is not 
included in the prospectus specified in section 10(a) of the Securities 
Act of 1933, shall be deemed to be permitted by section 10(b) of such 
Act.''.

SEC. 205. VARIABLE INSURANCE CONTRACTS.

  (a) Unit Investment Trust Treatment.--Section 26 of the Investment 
Company Act of 1940 (15 U.S.C. 80a-26) is amended by adding at the end 
the following new subsection:
  ``(e)(1) Subsection (a) shall not apply to any registered separate 
account funding variable insurance contracts, or to the sponsoring 
insurance company and principal underwriter of such account.
  ``(2) It shall be unlawful for any registered separate account 
funding variable insurance contracts, or for the sponsoring insurance 
company of such account, to sell any such contract, unless--
          ``(A) the fees and charges deducted under the contract in the 
        aggregate are reasonable in relation to the services rendered, 
        the expenses expected to be incurred, and the risks assumed by 
        the insurance company, and the insurance company so represents 
        in the registration statement for the contract; and
          ``(B) the insurance company (i) complies with all other 
        applicable provisions of this section as if it were a trustee 
        or custodian of the registered separate account; (ii) files 
        with the insurance regulatory authority of a State an annual 
        statement of its financial condition, which most recent 
        statement indicates that it has a combined capital and surplus, 
        if a stock company, or an unassigned surplus, if a mutual 
        company, of not less than $1,000,000, or such other amount as 
        the Commission may from time to time prescribe by rule as 
        necessary or appropriate in the public interest or for the 
        protection of investors; and (iii) together with its registered 
        separate accounts, is supervised and examined periodically by 
        the insurance authority of such State.
  ``(3) The Commission may adopt such rules and regulations under 
paragraph (2)(A) as it determines are necessary or appropriate in the 
public interest or for the protection of investors. For the purposes of 
such paragraph, the fees and charges deducted under the contract shall 
include all fees and charges imposed for any purpose and in any 
manner.''.
  (b) Periodic Payment Plan Treatment.--Section 27 of such Act (15 
U.S.C. 80a-27) is amended by adding at the end the following new 
subsection:
  ``(i)(1) This section shall not apply to any registered separate 
account funding variable insurance contracts, or to the sponsoring 
insurance company and principal underwriter of such account, except as 
provided in paragraph (2).
  ``(2) It shall be unlawful for any registered separate account 
funding variable insurance contracts, or for the sponsoring insurance 
company of such account, to sell any such contract unless (A) such 
contract is a redeemable security, and (B) the insurance company 
complies with section 26(e) and any rules or regulations adopted by the 
Commission thereunder.''.

SEC. 206. REPORTS TO THE COMMISSION AND SHAREHOLDERS.

  Section 30 of the Investment Company Act of 1940 (15 U.S.C. 80a-29) 
is amended--
          (1) by striking paragraph (1) of subsection (b) and inserting 
        the following:
          ``(1) such information, documents, and reports (other than 
        financial statements), as the Commission may require to keep 
        reasonably current the information and documents contained in 
        the registration statement of such company filed under this 
        title; and'';
          (2) by redesignating subsections (c), (d), (e), and (f) as 
        subsections (d), (e), (g), and (h), respectively;
          (3) by inserting after subsection (b) the following new 
        subsection:
  ``(c) In exercising its authority under subsection (b)(1) to require 
the filing of information, documents, and reports on a basis more 
frequently than semi-annually, the Commission shall take such steps as 
it deems necessary or appropriate, consistent with the public interest 
and the protection of investors, to avoid unnecessary reporting by, and 
minimize the compliance burdens on, registered investment companies and 
their affiliated persons. Such steps shall include considering and 
requesting public comment on--
          ``(1) feasible alternatives that minimize the reporting 
        burdens on registered investment companies; and
          ``(2) the utility of such information, documents, and reports 
        to the Commission in relation to the costs to registered 
        investment companies and their affiliated persons of providing 
        such information, documents, and reports.'';
          (4) by inserting after subsection (e) (as redesignated by 
        paragraph (2) of this section) the following new subsection:
  ``(f) The Commission may by rule require that semi-annual reports 
containing the information set forth in subsection (e) include such 
other information as the Commission deems necessary or appropriate in 
the public interest or for the protection of investors. In exercising 
its authority under this subsection, the Commission shall take such 
steps as it deems necessary or appropriate, consistent with the public 
interest and the protection of investors, to avoid unnecessary 
reporting by, and minimize the compliance burdens on, registered 
investment companies and their affiliated persons. Such steps shall 
include considering and requesting public comment on--
          ``(1) feasible alternatives that minimize the reporting 
        burdens on registered investment companies; and
          ``(2) the utility of such information to shareholders in 
        relation to the costs to registered investment companies and 
        their affiliated persons of providing such information to 
        shareholders.''; and
          (5) in subsection (g) (as so redesignated) by striking 
        ``subsections (a) and (d)'' and inserting ``subsections (a) and 
        (e)''.

SEC. 207. BOOKS, RECORDS AND INSPECTIONS.

  Section 31 of the Investment Company Act of 1940 (15 U.S.C. 80a-30) 
is amended--
          (1) by striking subsections (a) and (b) and inserting the 
        following:
  ``(a) Every registered investment company, and every underwriter, 
broker, dealer, or investment adviser that is a majority-owned 
subsidiary of such a company, shall maintain and preserve such records 
(as defined in section 3(a)(37) of the Securities Exchange Act of 1934) 
for such period or periods as the Commission, by rules and regulations, 
may prescribe as necessary or appropriate in the public interest or for 
the protection of investors. Every investment adviser not a majority-
owned subsidiary of, and every depositor of any registered investment 
company, and every principal underwriter for any registered investment 
company other than a closed-end company, shall maintain and preserve 
for such period or periods as the Commission shall prescribe by rules 
and regulations, such records as are necessary or appropriate to record 
such person's transactions with such registered company. In exercising 
its authority under this subsection, the Commission shall take such 
steps as it deems necessary or appropriate, consistent with the public 
interest and for the protection of investors, to avoid unnecessary 
recordkeeping by, and minimize the compliance burden on, persons 
required to maintain records under this subsection (hereinafter in this 
section referred to as `subject persons'). Such steps shall include 
considering, and requesting public comment on--
          ``(1) feasible alternatives that minimize the recordkeeping 
        burdens on subject persons;
          ``(2) the necessity of such records in view of the public 
        benefits derived from the independent scrutiny of such records 
        through Commission examination;
          ``(3) the costs associated with maintaining the information 
        that would be required to be reflected in such records; and
          ``(4) the effects that a proposed recordkeeping requirement 
        would have on internal compliance policies and procedures.
  ``(b) All records required to be maintained and preserved in 
accordance with subsection (a) of this section shall be subject at any 
time and from time to time to such reasonable periodic, special, and 
other examinations by the Commission, or any member or representative 
thereof, as the Commission may prescribe. For purposes of such 
examinations, any subject person shall make available to the Commission 
or its representatives any copies or extracts from such records as may 
be prepared without undue effort, expense, or delay as the Commission 
or its representatives may reasonably request. The Commission shall 
exercise its authority under this subsection with due regard for the 
benefits of internal compliance policies and procedures and the 
effective implementation and operation thereof.'';
          (2) by redesignating existing subsections (c) and (d) as 
        subsections (e) and (f), respectively; and
          (3) by inserting after subsection (b) the following new 
        subsections:
  ``(c) Notwithstanding any other provision of law, the Commission 
shall not be compelled to disclose any internal compliance or audit 
records, or information contained therein, provided to the Commission 
under this section. Nothing in this subsection shall authorize the 
Commission to withhold information from Congress or prevent the 
Commission from complying with a request for information from any other 
Federal department or agency requesting the information for purposes 
within the scope of its jurisdiction, or complying with an order of a 
court of the United States in an action brought by the United States or 
the Commission. For purposes of section 552 of title 5, United States 
Code, this section shall be considered a statute described in 
subsection (b)(3)(B) of such section 552.
  ``(d) For purposes of this section--
          ``(1) `internal compliance policies and procedures' means 
        policies and procedures designed by subject persons to promote 
        compliance with the Federal securities laws; and
          ``(2) `internal compliance and audit record' means any record 
        prepared by a subject person in accordance with internal 
        compliance policies and procedures.''.

SEC. 208. INVESTMENT COMPANY NAMES.

  Section 35(d) of the Investment Company Act of 1940 (15 U.S.C. 80a-
34(d)) is amended to read as follows:
  ``(d) It shall be unlawful for any registered investment company to 
adopt as a part of the name or title of such company, or of any 
securities of which it is the issuer, any word or words that the 
Commission finds are materially deceptive or misleading. The Commission 
is authorized, by rule, regulation, or order, to define such names or 
titles as are materially deceptive or misleading.''.

SEC. 209. EXCEPTIONS FROM DEFINITION OF INVESTMENT COMPANY.

  (a) Amendments.--Section 3(c) of the Investment Company Act of 1940 
(15 U.S.C. 80a-3(c)) is amended--
          (1) in paragraph (1), by inserting after the first sentence 
        the following new sentence: ``Such issuer nonetheless is deemed 
        to be an investment company for purposes of the limitations set 
        forth in section 12(d)(1)(A)(i) and (B)(i) governing the 
        purchase or other acquisition by such issuer of any security 
        issued by any registered investment company and the sale of any 
        security issued by any registered open-end company to any such 
        issuer.'';
          (2) in subparagraph (A) of paragraph (1)--
                  (A) by inserting after ``issuer,'' the first place it 
                appears the following: ``and is or, but for the 
                exception in this paragraph or paragraph (7), would be 
                an investment company,''; and
                  (B) by striking all that follows ``(other than short-
                term paper)'' and inserting a period;
          (3) in paragraph (2)--
                  (A) by striking ``and acting as broker,'' and 
                inserting ``acting as broker, and acting as market 
                intermediary,''; and
                  (B) by adding at the end of such paragraph the 
                following new sentences: ``For the purposes of this 
                paragraph, the term `market intermediary' means any 
                person that regularly holds itself out as being willing 
                contemporaneously to engage in, and is regularly 
                engaged in the business of entering into, transactions 
                on both sides of the market for a financial contract or 
                one or more such financial contracts. For purposes of 
                the preceding sentence, the term `financial contract' 
                means any arrangement that (A) takes the form of an 
                individually negotiated contract, agreement, or option 
                to buy, sell, lend, swap, or repurchase, or other 
                similar individually negotiated transaction commonly 
                entered into by participants in the financial markets; 
                (B) is in respect of securities, commodities, 
                currencies, interest or other rates, other measures of 
                value, or any other financial or economic interest 
                similar in purpose or function to any of the foregoing; 
                and (C) is entered into in response to a request from a 
                counterparty for a quotation or is otherwise entered 
                into and structured to accommodate the objectives of 
                the counterparty to such arrangement.''; and
          (4) by striking paragraph (7) and inserting the following:
          ``(7)(A) Any issuer (i) whose outstanding securities are 
        owned exclusively by persons who, at the time of acquisition of 
        such securities, are qualified purchasers, and (ii) who is not 
        making and does not presently propose to make a public offering 
        of such securities. Securities that are owned by persons who 
        received the securities from a qualified purchaser as a gift or 
        bequest, or where the transfer was caused by legal separation, 
        divorce, death, or other involuntary event, shall be deemed to 
        be owned by a qualified purchaser, subject to such rules, 
        regulations, and orders as the Commission may prescribe as 
        necessary or appropriate in the public interest or for the 
        protection of investors.
          ``(B) Notwithstanding subparagraph (A), an issuer is within 
        the exception provided by this paragraph if--
                  ``(i) in addition to qualified purchasers, its 
                outstanding securities are beneficially owned by not 
                more than 100 persons who are not qualified purchasers 
                if (I) such persons acquired such securities on or 
                before December 31, 1995, and (II) at the time such 
                securities were acquired by such persons, the issuer 
                was excepted by paragraph (1) of this subsection; and
                  ``(ii) prior to availing itself of the exception 
                provided by this paragraph--
                          ``(I) such issuer has disclosed to such 
                        persons that future investors will be limited 
                        to qualified purchasers, and that ownership in 
                        such issuer is no longer limited to not more 
                        than 100 persons, and
                          ``(II) concurrently with or after such 
                        disclosure, such issuer has provided such 
                        persons with a reasonable opportunity to redeem 
                        any part or all of their interests in the 
                        issuer for their proportionate share of the 
                        issuer's current net assets, or the cash 
                        equivalent thereof.
          ``(C) An issuer that is excepted under this paragraph shall 
        nonetheless be deemed to be an investment company for purposes 
        of the limitations set forth in section 12(d)(1)(A)(i) and 
        (B)(i) governing the purchase or other acquisition by such 
        issuer of any security issued by any registered investment 
        company and the sale of any security issued by any registered 
        open-end company to any such issuer.
          ``(D) For purposes of determining compliance with this 
        paragraph and paragraph (1) of this subsection, an issuer that 
        is otherwise excepted under this paragraph and an issuer that 
        is otherwise excepted under paragraph (1) shall not be treated 
        by the Commission as being a single issuer for purposes of 
        determining whether the outstanding securities of the issuer 
        excepted under paragraph (1) are beneficially owned by not more 
        than 100 persons or whether the outstanding securities of the 
        issuer excepted under this paragraph are owned by persons that 
        are not qualified purchasers. Nothing in this provision shall 
        be deemed to establish that a person is a bona fide qualified 
        purchaser for purposes of this paragraph or a bona fide 
        beneficial owner for purposes of paragraph (1) of this 
        subsection.''.
  (b) Definition of Qualified Purchaser.--Section 2(a) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)) is amended by 
inserting after paragraph (50) the following new paragraph:
          ``(51) `Qualified purchaser' means--
                  ``(A) any natural person who owns at least 
                $10,000,000 in securities of issuers that are not 
                controlled by such person, except that securities of 
                such a controlled issuer may be counted toward such 
                amount if such issuer is, or but for the exception in 
                paragraph (1) or (7) of section 3(c) would be, an 
                investment company;
                  ``(B) any trust not formed for the specific purpose 
                of acquiring the securities offered, as to which the 
                trustee or other person authorized to make decisions 
                with respect to the trust, and each settlor or other 
                person who has contributed assets to the trust, is a 
                person described in subparagraph (A) or (C); or
                  ``(C) any person, acting for its own account or the 
                accounts of other qualified purchasers, who in the 
                aggregate owns and invests on a discretionary basis, 
                not less than $100,000,000 in securities of issuers 
                that are not affiliated persons (as defined in 
                paragraph (3)(C) of this subsection) of such person, 
                except that securities of such an affiliated person 
                issuer may be counted toward such amount if such issuer 
                is, or but for the exception in paragraph (1) or (7) of 
                section 3(c) would be, an investment company.
        The Commission may adopt such rules and regulations governing 
        the persons and trusts specified in subparagraphs (A), (B), and 
        (C) of this paragraph as it determines are necessary or 
        appropriate in the public interest and for the protection of 
        investors.''.
  (c) Conforming Amendment.--The last sentence of section 3(a) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-3(a)) is amended--
          (1) by inserting ``(i)'' after ``of the owner''; and
          (2) by inserting before the period the following: ``, and 
        (ii) which are not relying on the exception from the definition 
        of investment company in subsection (c)(1) or (c)(7) of this 
        section''.
  (d) Rulemaking Required.--
          (1) Implementation of section 3(c)(1)(b).--Within one year 
        after the date of enactment of this Act, the Commission shall 
        prescribe rules to implement the requirements of section 
        3(c)(1)(B) of the Investment Company Act of 1940 (15 U.S.C. 
        80a-3(c)(1)(B)).
          (2) Employee exception.--Within one year after the date of 
        enactment of this Act, the Commission shall prescribe rules 
        pursuant to its authority under section 6 of the Investment 
        Company Act of 1940 (15 U.S.C. 80a-6) to permit the ownership 
        by knowledgeable employees of an issuer or an affiliated person 
        of the issuer of the securities of that issuer or affiliated 
        person without loss of the issuer's exception under section 
        3(c)(1) or 3(c)(7) of such Act from treatment as an investment 
        company under such Act.

                          Purpose and Summary

    The purpose of this legislation is to modernize and 
rationalize certain important aspects of the regulatory scheme 
governing our capital markets, including the respective 
responsibilities of Federal and State governmental authorities 
over the securities markets. The legislation seeks to further 
advance the development of national securities markets and 
eliminate the costs and burdens of duplicative and unnecessary 
regulation by, as a general rule, designating the Federal 
government as the exclusive regulator of national offerings of 
securities. State governments generally retain authority to 
regulate small, regional, or intrastate securities offerings, 
and to bring actions pursuant to State laws and regulations 
prohibiting fraud and deceit, including broker-dealer sales 
practices abuses.
    The legislation also seeks to promote efficiency, 
competition, and capital formation in the capital markets 
without compromising investor protection by repealing anti-
competitive restrictions on entities from whom brokers may 
borrow; requiring the consideration of efficiency, competition, 
and capital formation whenever the Securities and Exchange 
Commission (Commission) makes a public interest determination 
in its rulemaking; providing for streamlining and coordinating 
of examinations of broker-dealers by self-regulatory 
organizations; significantly reducing regulatory burdens on the 
mutual fund industry; simplifying and reducing ineffective and 
anticompetitive restrictions imposed by the Investment Company 
Act; and establishing a new exception from the Investment 
Company Act for private investment pools (such as hedge funds, 
as well as venture capital firms raising capital for new and 
growing businesses) that will eliminate certain regulatory 
impediments on these investment pools by permitting interests 
in these pools to be sold to an unlimited number of qualified 
purchasers.

                  Background and Need for Legislation

    The Subcommittee on Telecommunications and Finance held a 
series of hearings in 1995 to examine the need for legislation 
modernizing and rationalizing our scheme of securities 
regulation. Several themes recurred throughout the testimony of 
the majority of witnesses. One was the need to rethink the 
system of dual Federal and State securities regulation. 
Testimony demonstrated a clear need for modernization and 
indicated that, notwithstanding past reform efforts, there 
continues to be a substantial degree of duplication between 
Federal and State securities regulation, and that this 
duplication tends to raise the cost of capital to American 
issuers of securities without providing commensurate protection 
to investors or our markets. Testimony also indicated that 
technological change has transformed the capital raising 
process, necessitating changes in the regulatory scheme to 
facilitate the flow of information to potential investors and 
reduce the marginal cost of capital to firms.
    The explosive growth of the investment company industry 
dramatically illustrates the transformation that our nation's 
capital raising process has undergone in recent years. In the 
56 years since the Investment Company Act became law, the 
mutual fund industry has grown from 68 funds with assets of 
about $400 million to over 5,500 funds with over $3 trillion in 
assets. Americans are relying on mutual fund investments with 
increasing frequency for purposes of investing and saving for 
retirement, college education, and other fundamental financial 
needs. Today, nearly one in every three American households 
owns mutual fund shares.
    The Investment Company Act has not, however, undergone 
significant change in response to the developments in the 
industry; the Act has been amended significantly only once, in 
1970. Accordingly, certain of the Act's provisions have become 
outdated and unduly burdensome, imposing unnecessary costs on 
funds and impeding innovation in the industry. The costs borne 
by the industry are passed on to shareholders in the form of 
lower returns on their investments and reduced flexibility in 
investment options.
    The Securities Amendments of 1996 eliminate many of these 
burdens and enhance innovation and efficiency for investment 
companies. The legislation facilitates the creation of funds of 
funds, which can be simple and economical asset allocation 
devices for investors. The legislation simplifies and 
streamlines the registration process that investment companies 
must undertake to sell their shares continuously. This change 
in the registration process eliminates the risk under current 
law that can cause investment companies to pay inordinately 
large penalties for a technical or clerical error that results 
in missing a filing deadline. And the legislation facilitates 
more flexible and useful investment company advertising by 
creating a new type of advertising document. Investment 
companies may use this new document to advertise performance 
data and other up-to-date information without having to limit 
the advertisement to information ``the substance of which'' is 
contained in the statutory prospectus.
    The growth of the industry has also raised questions with 
respect to industry regulation that were not anticipated by the 
authors of the Investment Company Act. To help maintain the 
strong record of investor protection that has characterized the 
regulation of the mutual fund industry, the legislation grants 
the Commission specific additional authority regarding 
investment company books and records, and the preparation of 
shareholder reports. In exercising this authority, the 
legislation directs the Commission to take appropriate steps to 
avoid unnecessary reporting by, and to minimize the compliance 
burdens on, investment companies and to consider the effects of 
new recordkeeping requirements on the integrity and continued 
effectiveness of internal compliance programs of investment 
companies. The legislation also grants the Commission new 
authority to adopt rules that will help ensure that an 
investment company's name is consistent with its investment 
objectives and policies, rather than having to seek to have the 
use of such a name enjoined by a Federal court.
    The legislation also clarifies and refines the regulation 
of variable insurance products, which are currently subject to 
anomalous regulatory requirements arising from the application 
of principles in the Investment Company Act that are not suited 
to these products, which did not exist at the time the Act was 
enacted.
    The legislation also provides a new exception from the 
definition of ``investment company'' to permit investment pools 
that sell their securities only to ``qualified purchasers'' who 
are deemed to be sophisticated investors to sell to an 
unlimited number of these investors. These pools, which include 
not only hedge funds but also financing vehicles such as 
venture capital funds that provide capital directly to start-up 
companies or businesses, currently operate pursuant to an 
exception in the Investment Company Act that limits the number 
of investors that can invest in these pools. Although there is 
no exact accounting of the total number and size of these 
private investment partnerships, estimates indicate that the 
total number may be as high as 3,000, with assets estimated 
between $75 and $160 billion. The Committee recognizes the 
important role that these pools can play in facilitating 
capital formation for U.S. companies. The Committee expects 
that the legislation will significantly reduce regulatory 
restrictions that have affected these pools, and will remove 
incentives that have caused some Americans to invest in 
unregulated offshore markets.
    During the course of the hearings on this bill, the 
Subcommittee on Telecommunications and Finance received written 
and oral testimony from witnesses representing the managed 
futures industry regarding the need for an explicit exception 
from both the Investment Company Act and the Investment 
Advisers Act of 1940 for commodity pools and commodity trading 
advisers whose business it is to trade, or give advice with 
respect to trading, commodity interests. Such persons are 
otherwise subject to regulation by an independent Federal 
agency, the Commodity Futures Trading Commission (``CFTC''), 
pursuant to a separate Federal statute, the Commodity Exchange 
Act, as amended (``CEA'') and the regulations thereunder, and 
are also subject to oversight by the National Futures 
Association, a self-regulatory organization.
    Commodity pool offering documents are subject to review by 
the CFTC. These documents are also subject to review by the 
Commission in a manner similar to offerings under the 
Securities Act. To some extent, this extensive regulatory 
system evolved in response to the volatility and risk 
associated with commodity pool investments. The Committee is 
concerned, however, that aspects of the regulations of 
commodity pools and commodity trading advisers under the 
Investment Company and Investment Advisers Acts may constitute 
unnecessarily burdensome regulation which does not enhance the 
protection of investors.
    The Commission staff has recognized a distinction between 
commodity pools and investment companies. The Committee, 
however, has been informed that the relief that the Commission 
staff has provided from the Investment Company and Investment 
Advisers Acts with respect to commodity pools and commodity 
trading advisers has proven to be unnecessarily restrictive to 
these entities.
    The Commission staff has represented to the Committee that 
it is willing to take appropriate action, pursuant to the 
Commission's authority under the Investment Company Act, to 
provide administrative relief from the provisions of that Act 
to issuers that are primarily engaged in the business of 
operating a commodity pool or investing in interests of such 
pools, operated by a person subject to regulation as a 
commodity pool operator under the CEA, and are held out as 
being primarily engaged in such business. The Commission staff 
has also represented that it is willing to consider 
recommending that the Commission take appropriate action 
pursuant to its authority under the Investment Advisers Act to 
provide administrative relief from the provisions of the Act to 
any commodity pool operator or commodity trading adviser 
registered as such with the CFTC pursuant to the CEA whose 
advice, analyses or reports concerning securities is solely 
related to (a) the securities issued by commodity pools that 
are the subject of any administrative relief by the Commission 
under the Investment Company Act, or (b) securities investments 
by such commodity pools.
    The Committee expects the Commission to take appropriate 
action to effect the administrative relief discussed above as 
soon as practicable following the date of enactment of this 
legislation.
    In addition, the Committee supports appropriate 
administrative action by the Commission to prevent the 
Investment Company Act from having unintended and adverse 
consequences to U.S. companies in the business of developing or 
acquiring and operating foreign infrastructure projects.
    The Committee has been informed that some of these 
companies face regulatory impediments under the Investment 
Company Act in connection with the acquisition of minority 
ownership interests in the foreign subsidiaries they establish 
in connection with these projects. Under current law, if the 
minority interest constitutes an investment security for 
purposes of the Investment Company Act, the company holding 
such an interest may meet the definition of an investment 
company set out in section 3(a)(3) of the Investment Company 
Act. Because registration and regulation under the Act can be 
inconsistent with the intended operations of the company, such 
a company may determine to avoid participation in such a 
project in order to avoid becoming subject to the Act.
    The Investment Company Act may therefore place U.S. 
companies at a competitive disadvantage vis-a-vis their foreign 
competitors, who are not subject to its requirements in 
developing or acquiring foreign infrastructure projects. These 
projects include roads, bridges, airports, schools, housing, 
and hospitals, among many other types of infrastructure 
projects. The activities of U.S. companies involved in foreign 
infrastructure projects are not the sort of activities the 
Investment Company Act was designed to regulate.
    The Committee is not suggesting that exemptive relief from 
the Commission is necessarily required in order for investments 
in these projects to proceed. However, where such relief is 
necessary, the Committee expects the Commission to take 
administrative action expeditiously, either on a case-by-case 
basis through exemptive orders or through rule making, to 
exempt from regulations as investment companies U.S. companies 
that own substantial interests in foreign infrastructure 
companies and that are (directly or through affiliates) 
actively involved in foreign infrastructure projects. Any such 
exemption or rulemaking should be subject to such conditions as 
the Commission deems necessary and appropriate in the public 
interest and consistent with the protection of investors and 
the purposes fairly intended by the Investment Company Act.

                                Hearings

    The Subcommittee on Telecommunications and Finance held 
three days of hearings on H.R. 2131, the Capital Markets 
Deregulation and Liberalization Act of 1995, on November 14, 
1995, November 30, 1995, and December 5, 1995.
    Testifying before the Subcommittee on November 14, 1995, 
were: Dr. Charles Cox, Chief Executive Officer, Lexecon; Mr. J. 
Carter Beese, Jr., Chairman, Capital Markets Regulatory Reform 
Project, Center for Strategic and International Studies; Mr. 
Saul S. Cohen, Rosenman & Colin LLP; Professor John C. Coffee, 
Jr., Adolphe Berle Professor of Law, Columbia University; and 
Mr. A.A. Sommer, Jr., Morgan, Lewis & Bockius, LLP.
    Testifying before the Subcommittee on November 30, 1995, 
were: The Honorable Arthur Levitt, Chairman, Securities and 
Exchange Commission; and The Honorable Alan Greenspan, 
Chairman, Board of Governors, Federal Reserve System.
    Testifying before the Subcommittee on December 5, 1995, 
were: Mr. A.B. Krongard, Chairman, Securities Industry 
Association; Ms. Elaine LaRoche, Vice-Chair, Public Securities 
Association; Mr. John Gaine, General Counsel, Managed Futures 
Association; Mr. Matthew P. Fink, President, Investment Company 
Institute; Mr. R. Charles Shufeldt, representing the American 
Bankers Association; Mr. Stephen J. Friedman, Partner, 
Debevoise & Plimpton; Professor Mark A. Sargent, University of 
Maryland School of Law; Professor Rutherford B. Campbell, Jr., 
University of Kentucky College of Law; Mr. Morey W. McDaniel; 
Mr. Bradley D. Belt, Director of Capital Markets and Domestic 
Policy Issues, Center for Strategic and International Studies; 
Mr. Dee Harris, President, North American Securities 
Administrators Association; and Mr. Mark Saladino, representing 
the Government Finance Officers Association.
    The Subcommittee on Telecommunications and Finance also 
held a hearing on H.R. 1495, the Investment Company Act 
Amendments of 1995, on October 31, 1995. Testifying before the 
Subcommittee on October 31, 1995, were: Mr. Barry P. Barbash, 
Director, Division of Investment Management, Securities and 
Exchange Commission; Mr. Matthew P. Fink, President, Investment 
Company Institute; Mr. James S. Riepe, Managing Director, T. 
Rowe Price Associates, Inc.; Mr. Don G. Powell, Chief Executive 
Officer, Van Kampen American Capital, Inc.; Ms. Marianne 
Smythe, Partner, Wilmer, Cutler & Pickering; and Mr. Paul G. 
Haaga, Director and Senior Vice President, Capital Research & 
Management Company.

                        Committee Consideration

    On March 7, 1996, the Subcommittee on Telecommunications 
and Finance met in open markup session and approved H.R. 3005, 
the Securities Amendments of 1996, as amended, for Full 
Committee consideration, by a roll call vote of 25 yeas to 0 
nays, in lieu of H.R. 2131 and H.R. 1495. On May 15, 1996, the 
Full Committee met in open markup session and ordered H.R. 3005 
reported to the House, as amended, by a voice vote, a quorum 
being present.

                             Rollcall Votes

    Clause 2(l)2(B) of rule XI of the Rules of the House 
requires the Committee to list the recorded votes on the motion 
to report legislation and amendments thereto. There were no 
recorded votes taken in connection with ordering H.R. 3005 
reported or in adopting the amendment. The voice votes taken in 
Committee are as follows:

                 committee on commerce--104th congress

                       voice votes--may 15, 1996

    Bill: H.R. 3005, Securities Amendments of 1996.
    Amendment: Amendment in the Nature of a Substitute offered 
by Mr. Bliley.
    Disposition: Agreed to, by a voice vote.
    Motion: Motion by Mr. Bliley to order H.R. 3005, as 
amended, reported to the House.
    Disposition: Agreed to, by a voice vote.

                      Committee Oversight Findings

    Pursuant to clause 2(l)(3)(A) of rule XI of the Rules of 
the House of Representatives, the Committee held legislative 
hearings and made findings that are reflected in this report.

              Committee on Government Reform and Oversight

    Pursuant to clause 2(l)(3)(D) of rule XI of the Rules of 
the House of Representatives, no oversight findings have been 
submitted to the Committee by the Committee on Government 
Reform and Oversight.

               New Budget Authority and Tax Expenditures

    In compliance with clause 2(l)(3)(B) of rule XI of the 
Rules of the House of Representatives, the Committee states 
that H.R. 3005 would result in no new or increased budget 
authority or tax expenditures or revenues.

                        Committee Cost Estimate

    The Committee adopts as its own, with the reservation 
described below, the cost estimate prepared by the Director of 
the Congressional Budget Office (CBO) pursuant to section 403 
of the Congressional Budget Act of 1974.
    The Committee notes that in the Estimated Cost of 
Intergovernmental Mandates, the CBO states that the provision 
of H.R. 3005 entitled ``exemption to permit service to 
customers'' could result in a loss of revenue to States of as 
much as $10 million. In reaching that conclusion, the CBO 
assumes that under current law, registered representatives will 
routinely register in States in which their customers 
temporarily reside, if such customers seek to conduct 
transactions while out of their own State of residence. The 
Committee believes that under current law, transactions for 
such customers may be delayed until such customers return to 
their State of residence, or may be effected by the registered 
representative without knowledge of the location of the 
customer. As a result of the transactions permitted under the 
legislation's exemption, there will be minimal (if any) loss of 
revenue to States. The Committee further believes that the 
current volume of brokerage transactions of traveling clients 
is indeterminate, and thus any loss of revenue resulting from 
this provision is not able to be quantified with any degree of 
precision.

                  Congressional Budget Office Estimate

    Pursuant to clause 2(l)(3)(C) of rule XI of the Rules of 
the House of Representatives, the following is the cost 
estimate provided by the Congressional Budget Office pursuant 
to section 403 of the Congressional Budget Act of 1974:
                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 12, 1996.
Hon. Thomas J. Bliley, Jr.
Chairman, Committee on Commerce, House of Representatives, Washington, 
        DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimates for H.R. 3005, the 
Securities Amendments of 1996. The estimates encompass costs to 
the federal government, private-sector impacts (incorporated in 
the federal costs estimate), and costs to state and local 
governments (discussed in a separate intergovernmental mandate 
statement). The intergovernmental mandate statement supersedes 
the statement we prepared on June 6, 1996, and reflects a 
technical and conforming change to the base text of H.R. 3005 
regarding the scope of the preemption of state registration 
requirements.
    Enactment of H.R. 3005 would affect receipts. Therefore, 
pay-as-you-go procedures would apply to the bill.
    If you wish further details on this estimate, we will be 
pleased to provide them.
            Sincerely,
                                           June E. O'Neill,
                                                          Director.

               congressional budget office cost estimate

    1. Bill number: H.R. 3005.
    2. Bill title: Securities Amendments of 1996.
    3. Bill status: As ordered reported by the House Committee 
on Commerce on May 15, 1996.
    4. Bill purpose: H.R. 3005 would amend federal laws that 
regulate securities. The bill would streamline the securities 
laws and decrease the regulation of certain products offered by 
the capital markets.
    Title I of H.R. 3005 would preempt state law with respect 
to the following types of capital offerings: (1) securities 
issued by investment companies, (2) securities listed on the 
New York Stock Exchange and the American Stock Exchange, or 
included on the National Market System of the National 
Association of Securities Dealers Automated Quotation System 
(NASDAQ), (3) off-exchange securities that meet certain 
threshold requirements, and (4) offers or sales of securities 
to ``qualified purchasers'' as defined by the Securities and 
Exchange Commission (SEC) in later rulemaking. In addition, the 
bill would preempt state law regarding the registration of most 
debt securities. The bill would preserve the ability of states 
to require certain filings and fees and would allow states to 
pursue instances of fraud.
    Title I would require the SEC to study the following 
issues:
          privatization of the Electronic Data Gathering and 
        Retrieval (EDGAR) system;
          the impact of disparate state licensing requirements 
        on broker-dealers;
          the uniformity of state securities laws not preempted 
        by H.R. 3005;
          the feasibility of transmitting prospectuses 
        electronically; and
          possible modifications to the Trust Indenture Act.
    The bill also would require the SEC to promulgate a number 
of rules to consider the impact of such rules on the efficiency 
of the capital markets. Finally, Title I would exempt most 
broker-dealers and members of a national exchange from the 
margin requirements set by the Federal Reserve System, thus 
enabling sellers of securities to extend more credit to buyers.
    Title II would amend the Investment Company Act of 1940 to 
establish rules governing investment companies that wish to 
offer mutual funds comprised of other mutual funds. In 
addition, the title would authorize investment companies to 
include data related to the performance of mutual funds in a 
fund's prospectus and would exempt certain types of investment 
companies from the securities laws. The bill also would ease 
the regulations on the amount of fees that insurance companies 
could charge to customers who buy variable annuities.
    Title II would provide the SEC with more flexibility in 
determining which records are necessary for the agency to 
monitor investment companies. The SEC would be required to 
consider the costs and benefits of requiring additional filings 
and recordkeeping from the investment companies. Title II also 
would require the SEC to promulgate a number of rules 
concerning companies exempted from the Investment Company Act 
and suitable names for investment company products.
    Current law requires investment companies to file a 
registration statement with the SEC before offering shares of a 
mutual fund to the public. At the time of registration most 
mutual funds register an ``indefinite'' number of shares and 
pay a $500 regulatory fee. At the end of a company's fiscal 
year, the firm must pay a registration fee to the SEC based 
upon the net number of shares sold. H.R. 3005 would simplify 
the calculations needed to determine the amount owed to the SEC 
and would extend the window during which the investment 
companies must pay the registration fee from 60 days to 90 days 
after the end of a company's fiscal year.
    5. Estimated cost to the Federal Government: CBO estimates 
that enacting H.R. 3005 would result in a loss of revenues of 
about $9 million in fiscal year 1997, and new discretionary 
spending totaling about $1 million over fiscal years 1997 and 
1998, assuming appropriation of the necessary funds. The 
estimated budgetary impact of the bill is summarized in the 
following table.

----------------------------------------------------------------------------------------------------------------
                                                           1996    1997    1998    1999    2000    2001    2002 
----------------------------------------------------------------------------------------------------------------
                                       SPENDING SUBJECT TO APPROPRIATIONS                                       
                                                                                                                
Spending under current law:                                                                                     
    Estimated authorization level \1\...................     103     103     103     103     103     103     103
    Estimated outlays...................................     102     105     103     103     103     103     103
Proposed changes:                                                                                               
    Estimated authorization level.......................  ......       1   (\2\)  ......  ......  ......  ......
    Estimated outlays...................................  ......       1   (\2\)  ......  ......  ......  ......
Estimated spending under H.R. 3005:                                                                             
    Estimated authorization level \1\...................     103     104     103     103     103     103     103
    Estimated outlays...................................     102     106     103     103     103     103     103
                                                                                                                
                                               CHANGES IN REVENUES                                              
                                                                                                                
    Registration fees: Estimated revenues...............  ......      -9  ......  ......  ......  ......  ......
----------------------------------------------------------------------------------------------------------------
\1\ The 1996 level is the amount appropriated for that year. The estimated authorization levels for 1997 through
  2002 reflect CBO baseline estimates for the SEC, assuming no adjustment for inflation.                        
\2\ Less than $500,000.                                                                                         

    The costs of this bill fall within budget function 370.
    6. Basis of estimate:
    Spending subject to appropriations.--Based on information 
from the SEC, CBO estimates that enacting H.R. 3005 would 
result in additional discretionary spending of about $1 million 
in 1997 and less than $500,000 in 1998, assuming appropriations 
of the necessary funds. This additional funding would be used 
to conduct the rulemakings and studies required by H.R. 3005. 
The bill also would require the SEC to consider the burden of 
regulations or rules on capital formation, efficiency, and 
competition. Because the SEC currently conducts cost-benefit 
analyses in conjunction with its rulemakings, CBO would not 
expect this provision to result in any additional costs to the 
federal government. Many other provisions of the bill would 
affect those who engage in securities; transactions but would 
not significantly affect spending by the SEC.
    Revenues.--H.R. 3005 would extend the deadline for 
investment companies to file registration fees on the net value 
of mutual funds sold to the public from 60 days to 90 days 
after the end of a company's fiscal year. CBO estimates that 
this delay in payments to the SEC would result in a one-time 
reduction in governmental receipts of about $9 million in 
fiscal year 1997, because it would shift payments by some 
companies from fiscal year 1997 into 1998. Similar shifts would 
occur in subsequent years. Thus, while total receipts from 
registration fees would remain largely unchanged, there would 
be a budgetary effect in 1997.
    Because companies filing beyond the deadline are subject to 
higher fees, extending the filing period also could reduce 
total fee collections. However, the bill would authorize the 
SEC to collect interest on late payments, and such interest 
would partially offset any reduction in the amount of 
delinquent fees. In addition, the bill would simplify the 
procedures by which registration fees are calculated; that 
simplification could increase fee collections through greater 
compliance. CBO estimates that these provisions taken together 
would not significantly affect the amount of fees collected by 
the SEC.
    7. Pay-as-you-go considerations: Section 252 of the 
Balanced Budget and Emergency Deficit Control Act of 1985 sets 
up pay-as-you-go procedures for legislation affecting direct 
spending or receipts through 1998. CBO estimates that enactment 
of H.R. 3005 would affect receipts by extending the due date 
for certain registration fees. Therefore, pay-as-you-go 
procedures would apply to the bill. The following table 
summarizes the estimated pay-as-you-go impact of H.R. 3005.

------------------------------------------------------------------------
                                              1996      1997      1998  
------------------------------------------------------------------------
Change in outlays.........................         1         1         1
Change in receipts........................         0        -9         0
------------------------------------------------------------------------
\1\ Not applicable.                                                     

    8. Estimated impact on State, local, and tribal 
governments: The bill would impose mandates on state 
governments (see the attached intergovernmental mandate cost 
statement).
    9. Estimated impact on the private sector: CBO has 
identified three private-sector mandates in this bill. We 
expect that these mandates would not impose any significant 
costs on the private sector. The first mandate would impose 
requirements on examining authorities, also referred to as 
self-regulating organizations (SROs), such as the National 
Association of Securities Dealers, the New York Stock Exchange, 
and the American Stock Exchange. The other two mandates would 
impose requirements on investment companies and certain related 
entities.
    The bill would require that the SROs meet annually to 
discuss the coordination of examination schedules for brokers 
and dealers, to develop a computerized tracking system for 
these examinations, and to coordinate the examination process 
to eliminate duplicate and overlapping examinations. The SROs 
currently conduct these activities and, therefore, would not 
incur any additional costs.
    The bill would give the SEC the authority to require 
investment companies to file information, documents, and 
reports more frequently and to include additional information 
in their semi-annual reports. In addition, the bill would allow 
the SEC to require investment companies to maintain additional 
record that are similar to those that the commission currently 
requires of investment advisers, brokers, and dealers. The SEC 
does not anticipate changing current filing and recordkeeping 
requirements as a result of these provisions. Therefore, CBO 
estimates that investment companies' costs would not be 
affected.
    10. Previous CBO estimate: None.
    11. Estimate prepared by: Federal cost estimate: Rachel 
Forward and Stephanie Weiner; Private sector impact: Jean 
Wooster.
    12. Estimate approved by: Robert A. Sunshine for Paul N. 
Van de Water, Assistant Director for Budget Analysis.

    congressional budget office estimated cost of intergovernmental 
                                mandates

    1. Bill number: H.R. 3005.
    2. Bill title: Securities Amendments of 1996.
    3. Bill status: As ordered reported by the House Committee 
on Commerce on May 15, 1996, and including a technical and 
conforming change to the base text.
    4. Bill purpose: H.R. 3005 would amend or repeal sections 
of the Securities Act of 1933, the Securities Exchange Act of 
1934, and the Investment Company Act of 1940. In doing so, the 
bill would preempt state laws and regulations regarding certain 
types of securities and transactions. The legislation would 
preserve the ability of states to require certain filings and 
fees and would allow states to pursue instances of fraud. H.R. 
3005 would also create a uniform exemption from state 
registration for securities salespersons.
    The bill would require the Securities and Exchange 
Commission (SEC) to conduct several studies, would exempt most 
broker-dealers and members of a national exchange from the 
margin requirements set by the Federal Reserve System, and 
would amend certain federal restrictions on investment 
companies.
    5. Intergovernmental mandates contained in bill: H.R. 3005 
would preempt, with certain limitations, state laws, rules, and 
regulations that require the registration or qualification of 
the following securities or transactions:
          securities listed or authorized for listing on the 
        New York Stock Exchange (NYSE), the American Stock 
        Exchange (AMEX), or included on the National Market 
        System (NMS) of the National Association of Securities 
        Dealers Automatic Quotation System (NASDAQ);
          debt securities issued by companies that have 
        securities listed on the above-mentioned exchanges;
          securities issued by investment companies registered 
        under the Investment Company Act of 1940;
          securities issued by companies that have (or will 
        have upon conclusion of the transaction) more than $10 
        million in total assets, subject to certain conditions;
          offers or sales of securities to ``qualified 
        purchasers'' as defined by the SEC in later rulemaking; 
        and
          certain offers or sales of securities that are 
        already exempt from federal registration requirements.
    The bill would also preempt state laws that:
          prohibit, limit, or impose conditions on the offering 
        documents, shareholder reports, or other disclosure 
        documents related to certain kinds of securities;
          prohibit, limit, or impose conditions on offers of 
        the securities listed above based on the merits of the 
        offer or the issuer; and
          establish capital, margin, books and records, 
        bonding, or reporting requirements for securities 
        brokers and dealers.
    Finally, H.R. 3005 would partially preempt state laws that 
require securities salespersons to register and pay a fee in 
order to conduct business in a state. Currently, most state 
laws contain some kind of ``de minimis'' exemption that allows 
a salesperson to conduct certain transactions in the state 
without registering there. The bill would create a national 
uniform exemption that is broader than most state laws, and 
would thus allow a salesperson to conduct business with pre-
existing customers who are temporarily residing in states even 
though the salesperson is not registered there. The exemption 
would also allow a salesperson to conduct a total of ten other 
transactions annually in those states in which the salesperson 
is not registered.
    6. Estimated direct costs of mandates to State, local, and 
tribal governments: (a) Is the $50 million threshold exceeded? 
No.
    (b) Total direct costs of mandates: The Unfunded Mandates 
Reform Act of 1995 (Public Law 104-4) defines the direct costs 
of an intergovernmental mandate as ``the aggregate estimated 
amounts that all state, local, and tribal governments would be 
required to spend or would be prohibited from raising in 
revenues in order to comply with the Federal intergovernmental 
mandate.'' CBO estimates that the mandates in this bill--
particularly the preemption of state requirements for 
securities listed on the national exchanges and the partial 
preemption of state registration requirements for securities 
salesperson--would prohibit states from collecting fees 
totaling about $15 million annually that they otherwise would 
collect.
    (c) Estimate of necessary budget authority: Not applicable.
    7. Basis of estimate: For the purposes of preparing this 
estimate, CBO contacted state securities regulators in twenty-
seven states to understand how state securities laws would be 
affected by H.R. 3005, and to request data about states' 
collections from fees that would be preempted by this bill. CBO 
also contacted securities industry associations for information 
about how the industry would likely react to provisions of the 
bill.

Preemption of State requirements for exchange-listed securities

    CBO estimates that the bill would lower state fee revenues 
by about $5 million annually by preempting state registration 
and filing requirements for securities listed or authorized for 
listing on the NYSE or the AMEX, or included on the NASDAQ NMS. 
While most states currently exempt these securities form any 
state requirements, CBO identified a few states that do not. We 
estimate that revenue losses in those states would total about 
$5 million annually.

Partial preemption of State registration requirements for securities 
        salespersons

    The bill would partially preempt state laws to create a 
uniform exemption from registration for securities 
salespersons. Because the exemption in the bill is broader than 
most of the exemptions in current state laws, the bill would 
likely result in fewer registrations by salespersons and thus a 
reduction in revenues from associated fees. States' annual 
registration fees for salespersons currently range from $15 to 
$235 per agent. CBO estimates that states collect a total of 
$150 million to $250 million annually from these fees. None of 
the states we surveyed collect data about the number of 
transactions that registered salespersons conduct in their 
states, but based on conversations with state regulators, CBO 
estimates that state fee collections would decrease by as much 
as $10 million per year. Revenue losses would be concentrated 
in those states that do not currently have an exemption, 
especially those that have a large number of seasonal 
residents.
    State enforcement costs could increase as a result of the 
uniform exemption, but CBO cannot estimate the extent of the 
increase. A state that does not currently offer an exemption 
need only prove that a salesperson who is conducting business 
in the state does not have a license in order to take action 
against the salesperson. If H.R. 3005 were enacted into law, 
however, the state would have to prove that the transactions 
conducted by the salesperson were not covered by the exclusion.

Preemption of State registration requirements

    The bill would preempt state laws requiring the 
registration or qualification of certain categories of 
securities and certain securities transactions. The bill 
provides, however, that states may require the filing of 
documents filed with the SEC together with any required fee. It 
further provides that states may continue to collect filing or 
registration fees pursuant to state laws in effect prior to the 
enactment of H.R. 3005. CBO estimates that these fees currently 
generate revenues for the states totaling $210 million to $240 
million annually, and that this bill would not preclude the 
collection of such fees.
    There is, however, some uncertainty as to whether these fee 
collections would continue uninterrupted in all states if H.R. 
3005 is enacted. The North American Securities Administrators 
Association and several states securities regulators have 
expressed concern that if H.R. 3005 were enacted, some states, 
because of the construction of their own statutes, would not be 
able to withstand legal challenges to their right to collect 
current fees. However, CBO believes that because the scope of 
the federal preemption in H.R. 3005 is limited, any loss of 
revenues would not be a direct cost of a federal mandate as 
defined in Public Law 104-4.
    By prohibiting states from registering investment company 
offering or reviewing disclosure documents, the bill would 
produce administrative savings for those states that currently 
devote staff resources to those tasks. In our survey of state 
securities regulators, however, CBO found that only about a 
dozen states actively review and comment on disclosure 
documents, and that only a few staff members in each state were 
assigned those tasks. Therefore, we estimate that the 
administrative savings to states would not significantly offset 
revenue losses from other mandates in the bill.

Other preemptions of State laws

    CBO estimates that the other preemptions of state law 
contained in the bill would not impose direct costs on state, 
local, or tribal governments.
    8. Appropriation or other Federal financial assistance 
provided in bill to cover mandate costs: None.
    9. Other impacts on State, local, and tribal governments: 
None.
    10. Previous CBO estimate: On June 6, 1996, CBO provided a 
cost estimate for H.R. 3005, the Securities Amendments of 1996, 
as ordered reported by the House Committee on Commerce on May 
15, 1996. At that time, CBO estimated that H.R. 3005 contained 
intergovernmental mandates that would prohibit states from 
collecting certain fees totaling over $125 million annually 
that they otherwise would collect. Based on a technical and 
conforming change to the base text of H.R. 3005 regarding the 
scope of the preemption of state registration requirements, CBO 
now estimates that the mandate costs in H.R. 3005 would total 
about $15 million annually.
    11. Estimate prepared by: Pepper Santalucia.
    12. Estimate approved by: Robert A. Sunshine for Paul N. 
Van de Water, Assistant Director for Budget Analysis.

                     Inflationary Impact Statement

    Pursuant to clause 2(l)(4) of rule XI of the Rules of the 
House of Representatives, the Committee finds that the bill 
would have no inflationary impact.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act are created by this 
legislation.

             Section-by-Section Analysis of the Legislation

               Section 1.--Short Title; Table of Contents

    Section 1 states that this Act may be cited as the 
``Securities Amendments of 1996''. Section 1 also provides a 
table of contents for Titles I and II of the Act.

       TITLE I.--CAPITAL MARKETS DEREGULATION AND LIBERALIZATION

                        section 101--short title

    Section 101 provides that Title I may be cited as the 
``Capital Markets Deregulation and Liberalization Act of 
1996''.

          section 102--creation of national securities markets

    Section 102(a)--Exemption from State Regulation of 
Securities Offerings. This provision replaces existing section 
18 of the Securities Act of 1933 (``Securities Act''). Section 
18 currently provides that the authority of State governments 
to regulate securities offerings is not limited or restricted 
by the Securities Act. This provision adds a new Section 18 to 
the Securities Act in order to realign the respective 
responsibilities of Federal and State governmental authorities 
over certain aspects of the securities markets.
    Section 18(a) prohibits State governments from requiring 
the registration of, or otherwise imposing conditions on, 
offerings of ``covered securities'' as defined in Section 
18(b), subject to Section 18(d), which preserves State 
authority to investigate and bring enforcement actions with 
respect to fraud or deceit (including broker-dealer sales 
practices) in connection with securities or securities 
transactions. Section 18(d) also preserves the authority of 
States to require notice filings and fees with respect to 
certain offerings, and to suspend the offer or sale of 
securities within a State as a result of the failure to submit 
a filing or fee. Section 18(a) also limits State governments 
from requiring the regulation or otherwise imposing conditions 
on offerings of ``conditionally covered securities'' as defined 
in Section 18(c). Section 18(a) specifically provides that 
States may not conduct merit reviews of these offerings. In 
addition, Section 18(a) prohibits States from placing limits or 
imposing conditions upon (including outright prohibition of) 
the use of offering documents with respect to such ``covered 
securities'' offerings, including advertising or sales 
literature used in connection with such offerings. It further 
preempts State regulation of other disclosure documents such as 
proxy statements and annual reports. In each case, the 
prohibition applies both to direct and indirect State action, 
thus precluding States from exercising indirect authority to 
regulate the matters preempted by Section 18(a). Also, in each 
case, the prohibitions are subject to the provisions of 
subsection (d). By extending the prohibition to indirect State 
action, the Committee specifically intends to prevent State 
regulators from circumventing the provisions of section 18(a) 
that expressly prohibit them from requiring the registration 
of, or otherwise imposing conditions or limitations upon, 
offerings of covered securities. The Committee does not intend, 
however, that the extension of the prohibition to indirect 
actions by State regulators restrict or limit their ability to 
investigate, bring actions, or enforce orders, injunctions, 
judgments or remedies based on alleged violations of State laws 
that prohibit fraud and deceit or that govern broker-dealer 
sales practices in connection with securities or securities 
transactions.
    Section 18(b) defines ``covered securities'' for the 
purposes of the provisions of the bill that limit the 
securities regulatory authority of State governmental bodies. 
The following four categories of securities are set forth as 
``covered securities.''
    Paragraph 18(b)(1) includes as ``covered securities'' those 
securities listed, or authorized for listing, on the New York 
Stock Exchange (NYSE) or the American Stock Exchange (AMEX) as 
well as those that are included, or qualify for inclusion, in 
the National Market System of the National Association of 
Securities Dealers Automated Quotation System (NASDAQ-NMS). 
This paragraph codifies in the Securities Act of 1933 an 
exemption from State registration requirements similar to 
existing State statutes excepting from State registration 
requirements securities traded in such markets. In order to 
avoid competitive disparities, the Commission is given 
discretionary authority to extend similar preemption treatment 
to other national securities exchanges (or tiers or segments 
thereof) that have substantially similar listing standards. 
Some of the regional exchanges have developed tiers that have 
listing standards similar to NASDAQ-NMS and it is anticipated 
that other regional exchanges (or new exchanges) may seek to 
develop such tiers or segments of their markets. The Committee 
intends that the Commission use this authority to facilitate 
listings on such qualifying exchanges or tiers or segments 
thereof. The Committee expects the Commission to monitor the 
listing requirements of these exchanges, consistent with its 
supervisory authority under the Exchange Act, to ensure the 
continued integrity of these markets and the protection of 
investors.
    Finally, securities of the same issuer that are equal in 
seniority or senior to such listed or qualified securities are 
also ``covered securities'' for the purposes of Section 18(a). 
This provision is intended to afford to issuers of debt 
securities the same benefits of preemption as are enjoyed by 
issuers of equity securities.
    Paragraph 18(b)(2) includes as ``covered securities'' those 
securities issued by investment companies regulated under the 
Investment Company Act of 1940. In recent years, the Commission 
has directed an increasing percentage of its resources to 
overseeing the regulation of registered investment companies. 
The National Association of Securities Dealers (NASD) also 
maintains an effective program of reviewing the sales materials 
and advertising of registered investment companies that are 
also broker-dealers, accounting for approximately 90% of the 
industry. Registered investment companies themselves often 
maintain strong internal compliance departments, and the 
industry has a laudable record of maintaining a strong and 
genuine commitment to the principle of investor protection. The 
Committee expects that rather than being burdened with the 
time-consuming task of conducting a second review of investment 
company offering and sales materials, State regulatory 
authorities will be freed to spend more time investigating 
customer complaints, broker-dealer sales practice problems, and 
related issues.
    Paragraph 18(b)(3) includes as ``covered securities'' sales 
to qualified purchasers. This has the effect of preempting 
State regulation of offers and sales of securities to qualified 
purchasers. This paragraph anticipates that the Commission will 
adopt by rule or regulation a definition of qualified purchaser 
that would be used for determining the scope of this provision. 
The Committee intends that the Commission move promptly to 
adopt such a rule or regulation to give effect to the 
provision.
    The Committee believes that securities offered or sold to 
qualified purchasers generally should be included as ``covered 
securities'' for three reasons. First, many States currently 
exempt such securities from registration requirements, but the 
qualification standard can vary from State to State. This 
provision will result in a uniform national rule for qualified 
purchasers, which should greatly facilitate the ability of 
issuers to use it.
    Second, the Committee expects that the securities to be 
included will be fundamentally national in character and 
generally (though not always) subject to regulation at the 
Federal level. Thus, the Committee expects the Commission to 
craft and construe the definition so that, for example, 
purchasers of mortgaged-backed, asset-backed and other 
structured securities, as well as securities issued in 
connection with project financings, are generally included as 
qualified purchasers. The Committee notes that structured 
securities are routinely issued by special purpose vehicles or 
by trusts that are not listed on an exchange, and will often 
not have two years of audited financial statements needed to 
qualify for the listing exemption created by paragraph 
18(b)(1). As such, it is essential that the Commission craft 
regulations for qualified purchasers that will implement 
Congress's intention that such structured offerings be 
regulated exclusively by the Federal government.
    Third, the Commission is given flexible authority to 
establish various definitions of qualified purchasers. In all 
cases, however, the Committee intends that the Commission's 
definition be rooted in the belief that ``qualified'' 
purchasers are sophisticated investors, capable of protecting 
themselves in a manner that renders regulation by State 
authorities unnecessary. For guidance, the Committee suggests 
that the Commission consider a definition of qualified 
purchaser not more restrictive than that provided in Title II 
of this legislation under Section 3(c) of the Investment 
Company Act. The Committee further intends that the qualified 
purchaser exemption apply to all offerings of securities, 
whether registered or exempt under the Securities Act. In 
prescribing any such rule, the Commission may define the term 
``qualified purchaser'' differently with respect to different 
categories of securities, consistent with the public interest 
(including consideration of efficiency, competition and capital 
formation) and the protection of investors.
    Finally, the qualified purchaser provision allows State 
preemption, State exemptions and State registrations to be 
tacked together to comply with State requirements. Thus, sales 
to qualified purchasers would qualify for preemption without 
regard to whether, in the same offering, offers and sales are 
also made to non-qualified purchasers.
    Paragraph 18(b)(4) defines as ``covered securities'' 
certain offerings and transactions that are exempted from 
registration under the Securities Act of 1933. Specifically, a 
``covered security'' would include secondary market trading 
transactions exempt from Federal registration pursuant to 
sections 4(1) or 4(3) of the Securities Act (provided that the 
issuer is reporting under the Securities Exchange Act of 1934 
(``Exchange Act'') or is exempt from filing such reports), as 
well as similar transactions exempt from registration pursuant 
to section 4(4) of the Securities Act. ``Exempted securities'' 
under section 3(a) of the Securities Act also would be 
``covered securities'' and thus preempted from State 
registration, with three exceptions: (i) securities of non-
profit and similar entities set forth in Section 3(a)(4); (ii) 
intrastate offerings under section 3(a)(11)(i); and (iii) 
municipal securities as defined in section 3(a)(2) (which would 
be preempted in every State but the State in which the issuer 
of such municipal securities is located). Finally, securities 
sold in private transactions under section 4(2) of the 
Securities Act would be ``covered securities,'' and thus 
preempted, if offered or sold pursuant to a Commission rule or 
regulation adopted under such section 4(2). The Committee 
intends that the section 4(2) exemption from State regulation 
facilitate private placement of securities consistent with the 
public interest and the protection of investors.
    Section 18(c) defines ``conditionally covered securities,'' 
which will not be subject to registration requirements and 
routine review by State securities regulators, subject to 
certain conditions, and subject to 18(d).
    Paragraph 18(c)(1) states that, subject to the conditions 
set forth in paragraphs (2) and (3), certain Federally 
registered offerings also will be ``covered securities'' for 
the purpose of this legislation. Such offerings are defined as: 
registered securities offerings by issuers with total assets 
exceeding $10 million (which may be measured upon conclusion of 
the transaction) and two years of audited financial statements 
ending before the filing of the registration statement. The 
Committee intends that an issuer qualifying under this 
provision would have at least two years of actual operating 
history.
    Paragraph 18(c)(2) provides that certain offerings--those 
involving securities issued by blank check companies, 
partnerships, limited liability companies, direct participation 
investment programs, penny stock companies, and roll-up 
transactions, are excluded from the operation of paragraph 
18(c)(1). Thus, certain, categories of offerings that have been 
a disproportionate source of fraudulent practices and 
disclosure abuse would continue to be subject to State 
regulation (as well as Federal regulation), unless they are 
``covered securities'' pursuant to Section 18(b).
    Paragraph 18(c)(3) would preserve State review of offerings 
otherwise covered by paragraph 18(c)(1) that involve a person 
subject to a specified disqualification. Certain persons 
associated with the issuer--the issuer itself, its principal 
financial officers, and principal shareholders--must not be 
subject to previous action for misconduct in order for the 
securities offering to be a ``covered security'' and for the 
requisite State preemption to apply. The disqualifying conduct 
consists of statutory disqualifications, as defined in 
subparagraphs (A), (B), (C), and (D) of Section 39(a)(39) of 
the Exchange Act, as well as a range of other specified Federal 
and State offenses, generally relevant to the securities 
business. The paragraph provides that certain of These 
specified State offenses, generally relating to administrative 
or largely technical violations of State law, will give rise to 
disqualification of an offering only in the particular State in 
which the conduct occurred.
    The paragraph also provides that an issuer of securities 
that cease to be ``covered securities'' pursuant to the 
operation of paragraph 18(c)(3) will not be subject to a right 
of rescission under State securities law solely as a result of 
the operation of paragraph 18(c)(3)
    Paragraph 18(c)(4) provides the Commission with 
discretionary authority to exempt a person subject to a 
specified disqualification by rule or order, similar to the 
process currently in effect in connection with Commission 
Regulation A offerings. An issuer may avoid the operation of 
the conduct disqualification provision by taking reasonable 
steps to ascertain where any of its principal officers or 
shareholders is subject to any of the specified disqualifying 
conduct. The paragraph also provides that the limitations of 
paragraph 3(B) may be waived by a securities commission in the 
relevant State that has exempted the affected person from the 
application of the paragraph.
    The paragraph establishes a non-exclusive safe harbor for 
the determination of reasonable steps. An issuer shall be 
conclusively deemed to have taken reasonable steps if it 
searches centralized data bases specified by the Commission to 
ascertain the disciplinary background of its principal officers 
and shareholders and reveals no person subject to the 
disqualification provisions of paragraph 18(c)(4), and receives 
sworn affidavits from such persons stating that they are not 
subject to the conduct disqualifications set forth in paragraph 
(3). Conclusive proof of such reasonable steps shall constitute 
appending the results of such search to the affidavits, or to 
some other duly executed certificate. This safe harbor is not 
subject to any qualification.
    Section 18(d) preserves State authority in certain defined 
areas.
    Paragraph 18(d)(1) preserves specified State authority, 
pursuant to State law, consistent with Section 18. The 
relationship between Section 18(d) and Section 18(a) is 
especially important. The Committee intends to preserve the 
ability of the States to investigate and bring enforcement 
actions under the laws of their own State with respect to fraud 
and deceit (including broker-dealer sales practices) in 
connection with any securities or any securities transactions, 
whether or not such securities or transactions are otherwise 
preempted from State regulation by Section 18. It is the 
Committee's intent that the limitations on State law 
established by Section 18 apply to State law registration and 
regulation of securities offerings, and do not affect existing 
State laws governing broker-dealers, including broker-dealer 
sales practices. In preserving State laws against fraud and 
deceit, (including broker-dealer sales practice abuse), 
however, the Committee intends to prevent the States from 
indirectly doing what they have been prohibited from doing 
directly. The Committee intends that the authority that States 
retain over broker-dealers to allow the States to impose 
conditions on, or otherwise to regulate, offerings of 
securities. The legislation preempts authority that would allow 
the States to employ the regulatory authority they retain to 
reconstruct in a different form the regulatory regime for 
covered securities that Section 18 has preempted.
    Thus, for example, Section 18 precludes State regulators 
from, among other things, citing a State law against fraud or 
deceit or regarding broker-dealer sales practices as its 
justification for prohibiting the circulation of a prospectus 
or other offering document or advertisement for a covered 
security that does not include a legend or disclosure that the 
States believes is necessary or that includes information that 
a State regulator criticizes based on the format or content 
thereof. The Committee intends to eliminate States' authority 
to require or otherwise impose conditions on the disclosure of 
any information for covered securities. If, however, a State 
had undertaken an enforcement action that alleged, for example, 
that the prospectus contained fraudulent financial data or 
failed to disclose that principals in the offering had 
previously been convicted of securities fraud, it is 
conceivable that State laws regarding fraud and deceit could 
serve as the basis of a judgment or remedial order that could 
include a restriction or prohibition on the use of the 
prospectus or other offering document or advertisement within 
that State. The Committee does not intend Section 18 to be 
interpreted in a manner that would prohibit such judgments or 
remedial orders.
    It is also the Committee's intention not to alter, limit, 
expand, or otherwise affect in any way any State statutory or 
common law with respect to fraud or deceit, including broker-
dealer sales practices, in connection with securities or 
securities transactions.
    Paragraph 18(d)(2) retains for the States the authority to 
require notice filings and require and collect fees with 
respect to certain securities offerings. This section is 
intended to accomplish two things: first, it is intended to 
ensure that States can continue to receive filings for notice 
purposes from issuers selling their securities within the 
jurisdiction, notwithstanding the fact that States will no 
longer be permitted to require the issuers' covered securities 
to be registered. Second, it is intended to ensure that States 
can continue to receive fees from issuers selling securities 
within the jurisdiction, notwithstanding the fact that States 
will no longer be permitted to require the issuers' covered 
securities to be registered.
    In this regard, paragraph 18(d)(2)(B) specifies that, until 
otherwise provided by State law, each State may continue to 
collect fees in connection with securities or securities 
transactions in amounts determined pursuant to that State's law 
in effect prior to enactment of the legislation. The Committee 
notes that some commentators expressed concern that the 
legislation's preemption of State registration authority over 
covered securities would prevent a State that links a 
securities issuer's obligation to pay fees to registration of 
those securities from collecting such fees. These commentators 
suggested that, in order to continue to require that a 
securities issuer pay fees to a State notwithstanding the 
preemption of the issuer's obligation to register the 
securities, a State might have to revise its statutes to 
provide for a fee requirement in connection with the notice 
filings the legislation permits States to require. Paragraph 
18(d)(2)(B) permits a State that currently requires securities 
issuers to pay fees in connection with registration to continue 
to receive such fees during any interim period between 
enactment of this legislation and such time as the State may 
revise its statutes. Thus, the preemptive effect of the 
legislation with respect to State registration authority does 
not extend to a State's ability to continue to collect 
registration fees, but does extend to all other aspects of 
State registration authority over covered securities. Paragraph 
18(d)(2)(C) follows the practice under the securities laws of 
most States in not permitting such notice filing or fees in 
connection with securities listed or eligible for listing on 
the New York Stock Exchange, American Stock Exchange, or the 
NASDAQ National Market System, or any securities of the same 
class as or senior to such securities.
    Paragraph 18(d)(3) preserves the authority of the States to 
suspend the offer or sale of securities within a State as a 
result of the failure to submit a filing or fee permitted under 
paragraph 18(d)(2). It is the Committee's intent that the 
States retain authority to take actions permitted under this 
section in order to enforce any filing and fee requirements 
permitted under this section and to calculate accurately any 
applicable fees. In addition, for any State that wishes to 
assess fees based upon the amount of sales within that State 
within a given period of time (e.g., true indefinite 
registration), this section is intended to preserve the State's 
right to receive the sales information necessary to compute the 
amount of the fee. However, the Committee does not intend that 
this provision will allow States to regulate indirectly 
offerings or sales of securities or transactions preempted 
under this title.
    Section 18(e) defines the terms ``principal officer'' and 
``principal shareholder'' for the purpose of Section 18, and 
directs the Commission to define by rule, for the purpose of 
Section 18, the term ``prepared by the issuer.'' In addition, 
Section 18(e) defines the term ``offering document'' for the 
purpose of Section 18 by reference to the definition of 
``prospectus'' contained in Section 2(10) of the Securities 
Act, without regard to exceptions (a) and (b) in Section 2(10). 
Specifically, the term ``offering document'' would include any 
prospectus, notice, circular, advertisement, letter, or 
communication, written or by radio or television, which offers 
any security for sale or confirms the sale of any security. 
Notably, materials that the Commission determines not to be a 
prospectus by Commission rule also are offering documents for 
the purpose of Section 18, as are materials that accompany or 
follow the final prospectus. With respect to securities of 
registered investment companies, the term ``offering document'' 
also is defined to include materials that the Commission has 
defined not to be offers, such as Rule 135a advertisements.
    Section 102(a)(2) requires the Commission to conduct a 
study, within one year of enactment, on the extent to which 
uniformity of State regulatory requirements for securities or 
securities transactions has been achieved for securities that 
are not ``covered securities.'' In conducting the study, the 
Commission shall review the impact of such uniformity or lack 
thereof on the cost of capital, innovation and technological 
development in securities markets, on securities issuers, 
including small businesses, and on the protection of investors.
    Section 102(b)--Broker-Dealer Regulation. This section 
requires the Commission, after consultation with the self-
regulatory organizations (``SROs'') and the States, to conduct 
a study of the effect of disparate state licensing requirements 
on associated persons of registered broker-dealers and methods 
for the States to establish uniform licensing requirements. The 
Commission, within one year, is required to submit to Congress 
a report on the study that includes recommendations for 
establishing uniform requirements. This section amends Section 
15 of the Securities Exchange Act of 1934 by adding a new 
section 15(h).
    Section 15(h) addresses issues of duplicative or 
inconsistent regulation of associated persons of broker-dealers 
by State and Federal government.
    Paragraph 15(h)(1) preempts State laws that impose 
financial responsibility and reporting requirements 
inconsistent with or exceeding requirements established under 
the Exchange Act. This preemption extends to any regulation of 
capital, margin, books and records, bonding, record making and 
record keeping.
    Paragraph 15(h)(2) establishes a uniform national exemption 
for associated persons effecting transactions for existing 
customers. It permits associated persons to effect certain 
transactions with existing customers in States in which they 
are not licensed. For purposes of this provision, a customer is 
an existing customer if he or she maintained an account with 
the broker-dealer for at least 30 days.
    In order to be exempt from a State's licensing 
requirements, the associated person (1) must not be ineligible 
to register in the State for any reason, (2) must be registered 
with the NASD and with at least one State, and (3) must be 
associated with a broker-dealer that is registered in the State 
in which the transaction is effected. In addition, the 
transaction effected in a State in which the associated person 
is not licensed must fall into one of the following categories.
    The first type of permitted transaction is one effected on 
behalf of an existing customer assigned to the associated 
person while that customer is temporarily away from home, for 
example on vacation or business. If, however, the customer is 
present in a State for 30 or more days or permanently changes 
residence, the associated person must file an application for 
registration. This application must be filed within 10 calendar 
days of the later of the date of the transaction or of 
discovering that the customer has been present in the State for 
30 or more days or has permanently changed his or her address.
    The second type of permitted transaction is one effected on 
behalf of an existing customer during the pendency of the 
associated person's application for licensing in the State. The 
associated person, however, must cease effecting transactions 
in the State on the earlier of 60 days after the application is 
filed, or when the State notifies the associated person that it 
has denied the application or stayed the pendency of the 
application for cause.
    Finally, 10 or fewer total transactions with any person are 
permitted in States in which the associated person is not 
licensed. Any transaction that falls within one of the other 
two above categories does not count toward the 10 transactions 
permitted in this category. The Committee intends that these 
provisions be construed so as not to permit cold calling of 
potential customers by unlicensed brokers.

                          section 103--margin

    Section 103 repeals statutory restrictions under section 7 
and section 8(a) of the Exchange Act on the sources from which 
broker-dealers may borrow. It also exempts from Federal margin 
requirements, adopted under section 7, credit extended, 
maintained, or arranged to or for a member of a national 
securities exchange or registered broker or dealer (1) a 
substantial portion of whose business consists of transactions 
with persons other than brokers or dealers, or (2) to finance 
market making or underwriting activities.

                    section 104--prospectus delivery

    Section 104(a). This section requires the Commission to 
report to the Congress on the steps the Commission has taken, 
or anticipates taking, to facilitate the electronic delivery of 
prospectuses to institutional and other investors. Such report 
is to be delivered within 6 months of enactment of the Act.
    Section 104(b). The provision requires the Commission to 
report to the Congress its views and recommendations concerning 
the Advisory Committee on Capital Formation. The Advisory 
Committee is preparing a report to the Commission, which is 
expected to recommend a shift in the traditional Securities Act 
approach of registering offerings to a ``company'' registration 
approach. The report required by section 104(b) should also 
describe any actions taken to implement the recommendations of 
the Advisory Committee and is to be delivered within 1 year of 
the enactment of the Act.
    The Committee notes that an alternative to the existing 
registration approach, such as one that relies on company 
disclosure, could streamline both registration and disclosure 
requirements, while actually enhancing information flow and 
protection to investors. In that context, the Commission should 
consider whether an alternative vehicle to the prospectus can 
more efficiently and effectively delivery information to 
investors.

                    Section 105--Exemptive Authority

    Section 105 provides the Commission with broad and general 
exemptive authority under both the Securities Act and the 
Exchange Act, similar to the authority provided to the 
Commission under other securities statutes. Both the Investment 
Company Act and the Investment Advisers Act provide the 
Commission with authority to exempt any persons, securities, or 
transactions from any provision of the statute or the rules 
thereunder. Moreover, the Trust Indenture Act of 1939 (``Trust 
Indenture Act'') provides the Commission with similar broad 
exemptive authority with respect to the provisions of that Act.
    Section 105(a). This section adds a new Section 28 to the 
Securities Act to provide the Commission with the authority, by 
rule or by regulation, to conditionally or unconditionally 
exempt any person, security, or transaction, or any class of 
the same, from any provision or provisions of the Act or any 
rule or regulation thereunder. Section 28 allows the Commission 
enhanced flexibility to more easily adopt new approaches to 
registration, disclosure, and related issues, such as are being 
considered by the Commission's Advisory Committee on Capital 
Formation. The Committee expects that the Commission will use 
this authority to promote efficiency, competition and capital 
formation in the marketplace, consistent with the public 
interest and investor protection. The Committee also intends 
that the Commission at an early date raise the ceilings on 
various exemptions adopted pursuant to Section 3(b) of the 
Securities Act, the small offering exemption under the 
Securities Act, from $5,000,000 to not less than $10,000,000, 
including increasing the exemption amount of offerings for 
certain employee benefit plans, pursuant to Rule 701 under the 
Securities Act, and small public offerings, pursuant to 
Regulation A under the Securities Act.
    Section 105(b). The legislation adds a new Section 36 to 
the Exchange Act to provide the Commission with authority under 
the Exchange Act similar to that contained in new Section 28 of 
the Securities Act. Unlike its Securities Act counterpart, 
however, Section 36 of the Exchange Act also allows the 
Commission to act by order. To assist the Commission in 
handling individual exemptive requests, Section 36 permits the 
Commission to determine the procedures and circumstances under 
which an exemptive order may be granted. The Committee expects 
that the Commission will use this authority to promote 
efficiency, competition and capital formation in the 
marketplace, consistent with the public interest and investor 
protection.
    The Department of Treasury has authority under Section 15C 
of the Exchange Act to regulate government securities broker-
dealers. The Government Securities Act Amendments of 1993, 
which enacted Section 15C, prescribed a consultative process 
for both Treasury and Commission rulemaking under that section. 
The legislation provides that the broad grant of exemptive 
authority to the Commission in new Section 36 of the Exchange 
Act does not extend to Section 15C of the Exchange Act or to 
the definitions in Sections 3(a)(42) through (45) as used in 
that section.

    Section 106--Promotion of Efficiency, Competition, and Capital 
                               Formation

    Section 106 requires the Commission to consider efficiency, 
competition, and capital formation when it engages in 
rulemaking or reviews SRO-proposed rules pursuant to the 
Securities Act, the Exchange Act, or the Investment Company Act 
under a ``public interest'' standard. The new section makes 
clear that matters relating to efficiency, competition, and 
capital formation are only part of the public interest 
determination, which also includes, among other things, 
consideration of the protection of investors. For 62 years, the 
foremost mission of the Commission has been investor 
protection, and this section does not alter the Commission's 
mission. In considering efficiency, competition, and capital 
formation, the Commission shall analyze the potential costs and 
benefits of any rulemaking initiative, including, whenever 
practicable, specific analysis of such costs and benefits. The 
Committee expects that the Commission will engage in rigorous 
analysis pursuant to this section. Such analysis will be 
necessary to the Congress in connection with the Congress' 
review of major rules pursuant to the terms of the Small 
Business Regulatory Enforcement Fairness Act of 1996.

                  Section 107--Privatization of EDGAR

    Section 107 requires the Commission to examine proposals 
for the privatization of the EDGAR system in ways that would 
promote competition in the automation and rapid dissemination 
of information. The section also requires the Commission to 
report to Congress regarding its examination of those issues 
within 180 days of enactment of this legislation.

           Section 108--Coordination of Examining Authorities

    Section 108 adds a new subsection to Section 17 of the 
Exchange Act designed to facilitate coordination of examination 
of broker-dealers by self-regulatory organizations (SROs).
    Section 17(i) requires examining authorities (defined as 
SROs with the authority to examine the activities of a 
registered broker-dealer) to determine whether each broker-
dealer subject to examination by more than one SRO requests 
coordination of its regulatory examinations by all SROs. The 
examining authorities are required to prepare an advance 
schedule of all coordinated examinations and to ensure, to the 
maximum extent practicable, that every brokerage firm that so 
requests shall have all requested aspects of its examination 
conducted simultaneously and without duplication of the areas 
covered. Any examining authority that does not participate in a 
scheduled coordinated examination would not be able to conduct 
its own routine examination (other than a coordinated 
examination of that broker or dealer) within nine months of the 
conclusion of the scheduled coordinated exam. The Committee 
notes that, under some circumstances, an SRO primarily 
responsible for the financial and operational examination of a 
broker-dealer might miss a scheduled exam and be precluded from 
routinely examining that broker-dealer for nine months because 
of the operation of subsection (i)(5). The Securities Investor 
Protection Corporation (``SIPC'') expressed concerns to the 
Committee that the imposition of this limitation or penalty 
could leave SIPC, which must rely on the results of Commission 
and SRO examination, without important information on the 
financial condition of its members. The Committee expects that, 
to avoid such a situation, the SROs will attempt to reschedule 
the examination in consultation with the broker, or failing 
that, that other reasonable steps are taken to make sure that 
the financial and operational examination is conducted in a 
timely manner. Such other steps may include designation of a 
participating SRO to conduct the financial and operational 
examination. Examinations ``for cause'' (which are conducted 
when indications of possible wrongdoing exist) may be conducted 
at any time. The Committee expects that SROs that fail to 
coordinate will not use the ``for cause'' exception exclusively 
to conduct a routine exam that was missed.
    Section 17(i) also requires the Commission to create a 
broker-dealer advisory committee comprised of representatives 
of broker-dealers that are subject to examinations by more than 
one SRO. Because the advisory committee created by this 
provision is likely to be involved in discussing examination 
strategies and related matters that may bear on enforcement, 
this committee is specifically exempted from the Federal 
Advisory Committee Act.
    The Commission would be required to report to Congress, 
within one year after enactment of the Act, pursuant to Section 
17(i) on the progress it and the examining authorities have 
made in reducing duplication and improving coordination, on the 
activities of the advisory committee, and on any redundancies 
that have not been addressed by the coordination of examining 
authorities.

                 Section 109--Foreign Press Conferences

    Section 109 requires the Commission to adopt rules under 
the Securities Act concerning the status under the registration 
provisions of the Securities Act of foreign press conferences 
and foreign press releases by persons engaged in the offer and 
sale of securities. The Commission would be required to adopt 
these rules within one year of the enactment of the Act. The 
Committee intends that journalists disseminating information in 
the U.S. be given appropriate access to foreign press 
conferences involving offerings of securities in order to 
ensure that information is made available in the U.S. and 
instructs the Commission to adopt a rule that will achieve this 
goal consistent with the protection of U.S. investors.

           Section 110--Report on Trust Indenture Act of 1939

    Section 110 requires the Commission to report to Congress 
on the benefits of, the continuing need for, and, if necessary, 
options for the modification or elimination of the Trust 
Indenture Act. Such report is to be delivered within six months 
of enactment of the Act.
    The Trust Indenture Act generally requires that all 
publicly issued debt securities be issued pursuant to an 
indenture which contains specified mandatory provisions and 
requires the presence of an independent trustee. The Commission 
shall consult with the Treasury Department on the impact of the 
study's recommendations on the bond market and on insured 
depository institutions.
    In the context of the Subcommittee hearings on H.R. 2131 
(Serial No. 104-50), the Committee notes that three witnesses 
testified on the proposal to repeal the Trust Indenture Act. 
Morey W. McDaniel, Esq., an indenture practitioner, questioned 
the Act's continued utility and supported its repeal, while 
SunTrust Capital Markets President and CEO R. Charles Shufeldt, 
testifying on behalf of the ABA Securities Association, argued 
that the Act still served a useful purpose and opposed repeal. 
Columbia University Professor of Law John C. Coffee, Jr. 
testified that there was a ``plausible case for repealing much 
of the statute'' but cautioned Congress to retain necessary 
protections for bondholders in some form. Finally, the 
Committee notes that it approved legislation in 1990, the Trust 
Indenture Reform Act (P.L. 101-550, Nov. 15, 1990), to 
modernize the Act and streamline its requirements to reflect 
evolving industry practice and market conditions. The Committee 
expects the Commission will consider the issues raised in the 
testimony and the effect of the 1990 Act.

              TITLE II--INVESTMENT COMPANY ACT AMENDMENTS

                        Section 201--Short Title

    Section 201 provides that Title II may be cited as the 
Investment Company Act Amendments of 1996.

                      Section 202--Funds of Funds

    Currently, subject to certain exceptions, Section 12(d)(1) 
of the Investment Company Act of 1940 (the ``Investment Company 
Act'') imposes three restrictions on the ability of one 
investment company to invest in another: (1) an investment 
company may not acquire more than 3% of another investment 
company's voting stock; (2) an investment company may not hold 
more than 5% of its assets in securities of another single 
investment company; and (3) an investment company may not hold 
more than 10% of its assets in securities of all other 
investment companies.
    One of the exceptions to these restrictions is an 
arrangement in which a fund invests solely in the shares of 
another fund. The exemption is often used by so-called 
``master-feeder'' funds, where one or more funds (``feeder 
funds'') invest all of their assets in another fund (``master 
fund''). These arrangements are often used to facilitate the 
master fund's access to alternative distribution channels to 
sell its shares.
    Section 202(1)(A). This section effects a change regarding 
the voting rights of shareholders in ``master-feeder'' 
arrangements. It requires all feeder funds--rather than only 
those that are not registered under the Investment Company Act, 
as is the case under current law--to vote the master fund 
shares that they own proportionately in accordance with the 
votes cast by the feeder fund's own shareholders. This will 
give feeder fund shareholders effectively the same voting 
rights they would have as direct security holders of the master 
fund.
    Current law imposes this voting requirement only on 
unregistered feeder funds because it was enacted to address 
abusive practices of the 1970s involving off-shore (and 
therefore unregistered) funds that invested in U.S. funds. 
Today, the development of master-feeder arrangements has led to 
a proliferation of U.S. feeder funds, which are generally 
registered. In practice, registered feeder funds generally 
comply voluntarily with this voting requirement.
    Section 202(1)(B). This section preserves the statute's 
limitation on the ability of unregistered investment companies 
to substitute securities in their portfolio. It does not effect 
a change in current law. The new language of this section is 
necessary, given the change in Section 202(1)(A) above, to 
preserve the status quo with respect to unregistered investment 
companies.
    Section 202(3). This section creates a new provision, 
subparagraph (G) under Section 12(d)(1) of the Investment 
Company Act, to codify the permissibility of certain ``fund of 
funds'' arrangements if five conditions are met. These 
conditions, which are similar to the conditions generally 
imposed by the SEC on companies that are currently permitted to 
operate funds of funds pursuant to SEC orders, are as follows:

          1. Clause (i) of new subparagraph (G) requires the 
        acquired company and the acquiring company to be part 
        of the same ``group of investment companies.'' The 
        final sentence of subparagraph (G) would define a 
        ``group of investment companies'' as any two or more 
        registered investment companies that hold themselves 
        out to investors as related companies for purposes of 
        investment and investor services.
          2. Clause (ii) of new subparagraph (G) limits the 
        operation of subparagraph (G) to bona fide fund of 
        funds arrangements. The provision limits the acquiring 
        company to investing in securities of the acquired 
        company, securities of other registered open-end 
        investment companies that are part of the same group of 
        investment companies, U.S. government securities, and 
        short-term paper. The provision for U.S. government 
        securities and short-term paper is designed to allow 
        the acquiring company to make short-term investments, 
        including repurchase agreements (which often involve 
        U.S. government securities), that provide sufficient 
        liquidity to meet redemption requests. In the absence 
        of such flexibility, the acquiring company might 
        otherwise be forced to redeem securities of acquired 
        companies to meet redemption requests when it would not 
        otherwise be in the best interests of investors in 
        either the acquiring or acquired company to do so.
          3. Clause (iii) of new subparagraph (G) addresses the 
        assessment of sales loads and other distribution-
        related fees. This clause is intended to prevent the 
        abuses that may be associated with the layering of 
        sales charges. It accomplishes this by providing that 
        any sales loads and other distribution-related fees 
        charged with respect to the acquiring company's 
        securities (such as sales loads or rule 12b-1 fees), 
        when aggregated with any sales load and distribution-
        related fees paid by the acquiring company with respect 
        to securities of the acquired company, cannot be 
        excessive under rules adopted pursuant to either 
        Section 22(b) or Section 22(c) of the Act by a 
        securities association registered under Section 15A of 
        the Exchange Act (i.e., the National Association of 
        Securities Dealers) or the Commission. Thus, sales 
        charges and distribution-related fees could be assessed 
        by both the acquiring company and the acquired company 
        provided that, taken together, such fees are not 
        excessive.
          4. Clause (iv) of new subparagraph (G) requires the 
        acquired company to have a fundamental policy that 
        prohibits it from acquiring any securities of 
        registered open-end investment companies in reliance on 
        new subparagraph (G) or subparagraph (F) of Section 
        12(d)(1) (which contains an additional exception to 
        Section 12(d)(1)). This provision will prevent a fund 
        of funds from investing in other funds of funds. The 
        provision is intended to avoid overly complex inter-
        corporate structures that may present issues that have 
        not been presented in the types of fund of funds 
        arrangements previously considered by the Commission.
          5. Clause (i) of new subparagraph (G) requires that 
        any acquisition of securities under new subparagraph 
        (G) may not be in contravention of such rules and 
        regulations as the Commission may prescribe as 
        necessary and appropriate for the protection of 
        investors. This provision is designed to permit the 
        Commission, based on its experience with the operation 
        of subparagraph (G), to adopt rules to address any 
        perceived problems and abuses. For example, the 
        Commission may conclude that it is necessary to adopt 
        rules that require acquiring companies to implement 
        procedures designed to assure that redemptions of 
        securities of acquired companies be effected in a 
        manner designed to limit disruptions in the portfolio 
        management of the acquired company.
    Section 202(4). This section adds a new subparagraph (J) to 
Section 12(d)(1) that gives the Commission the additional 
authority to exempt any person, security or transaction from 
Section 12(d)(1) of the Investment Company Act. The Commission 
currently has authority under Section 6(c) of the Act to exempt 
investment companies from Section 12(d)(1). The new 
subparagraph makes explicit the authority of the Commission to 
grant exemptions for funds of funds that might not meet the 
conditions of new subparagraph 12(d)(1)(G), for example, fund 
of fund arrangements that involve investment companies that are 
not part of the same group of investment companies, or fund of 
funds arrangements that involve a group of investment companies 
but do not satisfy other conditions of new subpargraph (G). The 
Committee notes that many investment company fund complexes may 
not include a sufficient number or variety of fund types to 
permit the creation of a workable affiliated fund of funds. The 
Committee intends the rulemaking and exemptive authority in new 
Section 12(d)(1)(J) to be used by the Commission so that the 
benefits of funds are not limited only to investors in the 
largest fund complexes, but, in appropriate circumstances, are 
available to investors through a variety of different types and 
sizes of investment company complexes.
    The Committee expects that the Commission will use this 
authority to adopt rules and process exemptive applications in 
the fund of funds area in a progressive way as the fund of 
funds concept continues to evolve over time. In exercising the 
exemptive authority, the Commission shall also consider factors 
that relate to the protection of investors. These factors may 
include the extent to which a proposed arrangement is subject 
to conditions that are designed to address conflicts of 
interest and overreaching by a participant in the arrangement, 
so that the abuses that gave rise to the initial adoption of 
the Act's restrictions against investment companies investing 
in other investment companies are not repeated.
    Section 202 of the legislation redesignates current 
subparagraphs (G) and (H) of Section 12(d)(1) as subparagraphs 
(H) and (1), respectively.

                Section 203--Registration of Securities

    Section 203 of the legislation adds new Section 24(f) to 
the Investment Company Act. The new provision provides that 
upon the effectiveness of the registration statement of an 
investment company, the investment company will be deemed to 
have registered an indefinite quantity of securities. The 
investment company must then pay a fee to the Commission within 
90 days after the end of its fiscal year, based upon the net 
sales of the company for that fiscal year. The amendment 
specifically provides that the fee will be based on the 
aggregate sales price for which the company's securities were 
sold (including securities issued pursuant to a dividend 
reinvestment plan) during the fiscal year, reduced by the 
aggregate redemption or repurchase price of the securities 
during that year and the aggregate redemption or repurchase 
price of the securities during any prior fiscal year ending not 
more than one year before the enactment of this legislation 
that were not used previously by the company to reduce the fees 
payable under the section.
    An investment company that misses the filing deadline must 
pay interest based on the amount due at the rate established by 
the Secretary of Treasury under the Debt Collection Act of 
1982, 31 U.S.C. 3701 et seq. This provision encourages timely 
filing and will compensate the U.S. Treasury for any delay in 
the receipt of revenues by requiring interest to be paid on 
past due amounts. Although the new provision incorporates the 
rate established pursuant to section 11 of the Debt Collection 
Act, the other provision of that section do no apply.
    This section gives the Commission rulemaking authority to 
implement new Section 24(f). it also effects a conforming 
amendment to Section 24(e) of the Investment Company Act to 
eliminate paragraphs (1) and (2) of that section relating to 
the registration of a definite amount of a company's 
securities. Despite the elimination of Section 24(e)(1), open-
end management investment companies and unit investment trusts 
that have registered shares in accordance with Section 24(e) 
(as in effect prior to enactment of this legislation) may sell 
those shares without the payment of any additional registration 
fees. The amendments made by this section will be effective 6 
months after the date of enactment of this legislation or on 
such earlier date as the Commission may specify by rule.

         Section 204--Investment company advertising prospectus

    This section adds subsection (g) to Section 24 of the 
Investment Company Act to direct the Commission to permit the 
use of a new ``investment company advertising prospectus'' for 
purposes of Section 5(b)(1) of the Securities Act. Unlike the 
``omitting'' prospectus that is permitted pursuant to rules 
promulgated by the Commission under section 10(b) of the 
Securities Act, the advertising prospectus authorized by new 
Section 24(g) is not restricted to information ``the substance 
of which'' is included in the fund's statutory prospectus (the 
prospectus mandated by Section 10(a) of the Securities Act). 
The investment company advertising prospectus may contain 
performance data, and could be subject to the same standardized 
calculation requirements as Commission rules currently apply to 
performance data used by investment companies.
    The investment company advertising prospectus is deemed to 
be permitted by Section 10(b) of the Securities Act. As a 
result, the advertising prospectus will be subject to 
prospectus liability under Section 12(2) of the Securities Act; 
it need not be filed as part of the registration statement, and 
will not be a part of the registration statement for purposes 
of Section 11 of the Securities Act. In addition, the 
Commission may prevent or suspend the use of an investment 
company advertising prospectus pursuant to the standards and 
procedures set forth in Section 10(b). This is not a new grant 
of authority but rather an incorporation by reference of the 
standards and procedures in section 10(b).

               section 205--variable insurance contracts

    Section 205(a). This section amends the Investment Company 
Act to exempt variable insurance contracts from the charge 
restrictions in Sections 26 and 27, and instead requires 
aggregate charges under variable contracts to be reasonable. 
Currently, insurance companies selling variable insurance are 
treated as periodic payment plan sponsors and are, therefore, 
limited by Section 26 of the Act in the types of fees that may 
be deducted under the contracts and to the assessment of 
``reasonable'' fees for performing administrative services. In 
addition, variable insurance contracts are treated as periodic 
payment plan certificates and, thus, the issuers of the 
contracts must comply with Section 27 of the Act, which limits 
the amount, manner, and timing of sales load deductions and 
prescribes certain refund rights for surrendering contract 
owners. The legislation recognizes that variable insurance 
contracts and periodic payment plan certificates are different 
products that should not be treated identically under the Act, 
and subjects variable insurance separate accounts to more 
general prohibitions against excessive fees, similar to the way 
mutual funds are treated under the Act.
    This section adds a new subsection (e) to Section 26. New 
paragraph (1) of Section 26(e) exempts a registered separate 
account, its sponsor, and its principal underwriter from 
Section 26(a), which limits the types of charges that may be 
deducted from separate account assets and imposes custodial 
requirements. New paragraph (2)(A) of Section 26(e) establishes 
a reasonableness standard for evaluating aggregate contract 
charges and requires insurers to represent that such charges 
are reasonable. Under this new provision, an issuer must 
establish aggregate charges that are reasonable in relation to 
the services rendered under the contract, the expenses expected 
to be incurred, and the risks assumed by the insurance company. 
New paragraph 26(e)(3) explicitly authorizes the Commission to 
adopt rules under subparagraph 26(e)(2)(A). New paragraph (3) 
also clarifies that the aggregate charges covered by paragraph 
(2)(A) include all fees and charges imposed for any purpose and 
in any manner, including, without limitation, marketing, sales, 
and distribution charges, compensation for investment advisory, 
administrative, custodial, transfer agent, or other services; 
insurance charges; and charges related to taxes imposed on the 
sponsoring insurance company; and including, without 
limitation, charges imposed directly on the contract holder or 
on the assets of the registered separate account.
    This section also adds subparagraph (B) to Section 
26(e)(2), in order to codify certain provisions of Commission 
rules that permit an insurance company rather than a bank to 
maintain custody of separate account assets without a trust 
indenture. The legislation does not change current regulation 
of insurance companies or their separate account operations, 
but simply preserves the current custodial provisions in 
conjunction with the exemption provided by Section 26(e)(1). To 
serve as custodian, an insurer must file with its domiciliary 
State an annual statement of financial condition that shows it 
has a combined capital and surplus (if a stock company) or an 
unassigned surplus (if a mutual company) of not less than 
$1,000,000 or such other amount prescribed by the Commission. 
In addition, the company and its separate account operations 
must be supervised and examined periodically by State insurance 
officials.
    Section 205(b). This section amends Section 27 of the 
Investment Company Act by adding a new subsection (i), which 
exempts a registered separate account, its sponsor, and its 
principal underwriter from the sales load restrictions of 
Section 27. In conjunction with this exemption, new 
subparagraph 27(i)(2) requires separate accounts organized as 
management companies to comply with the provisions of new 
subparagraph 26(e). Currently, Section 27(c)(2) links the 
regulation of periodic payment plans to procedures established 
in Section 26 for unit investment trusts even if the issuer is 
organized as a management investment company. New Section 
27(i)(2), in effect, preserves that cross-reference to ensure 
that the charges under variable contracts funded by unit 
investment trusts and managed separate accounts are treated 
alike. New Section 27(i)(2) also makes the provisions of new 
Section 26(e)(2)(B) concerning custody applicable to variable 
contracts funded by managed separate accounts. The new 
subparagraph also preserves the requirement that variable 
contracts be redeemable securities.

        SECTION 206--REPORTS TO THE COMMISSION AND SHAREHOLDERS

    Section 206. This section amends Section 30(b)(1) of the 
Investment Company Act to grant the Commission authority to 
require more frequent filing with the Commission of information 
by investment companies. Specifically, new Section 30(b)(1) 
allows the Commission to require investment companies to file 
such information, documents and reports as the Commission deems 
necessary to keep reasonably current the information and 
documents contained in an investment company's registration 
statement, eliminating the restriction in current law that such 
information need only be filed on a semi-annual or quarterly 
basis. However, in order to limit unnecessary regulatory 
burdens on investment companies, the section adds new Section 
30(c), which requires the Commission, in exercising its 
authority to require that this information be filed more 
frequently than semi-annually or quarterly, to take such steps 
as it deems necessary and appropriate, consistent with the 
public interest and the protection of investors, to avoid 
unnecessary reporting by, and minimize compliance burdens on, 
investment companies and their affiliated persons. These steps 
include considering and requesting public comment on feasible 
alternatives that minimize reporting burdens on investment 
companies and on the utility to the Commission of the 
information included in the reports in relation to the costs to 
investment companies and their affiliated persons of providing 
such information.
    The section also inserts a new Section 30(f), expanding the 
Commission's authority to require additional information to be 
included in an investment company's reports to shareholders. 
Currently, Section 30(d) limits the Commission's authority to 
prescribing the content of financial statements. The new 
subsection gives the Commission authority to require that 
investment companies include in annual and semi-annual reports 
such other information as the Commission deems necessary or 
appropriate in the public interest or for the protection of 
investors. Again, in order to limit unnecessary regulatory 
burdens on investment companies, the section requires the 
Commission, in exercising this new authority, to take such 
steps as it deems necessary and appropriate, consistent with 
the public interest and the protection of investors, to avoid 
unnecessary reporting, and minimize the compliance burdens on, 
investment companies and their affiliated persons. These steps 
include considering and requesting public comment on feasible 
alternatives that minimize reporting burdens on investment 
companies and on the utility to shareholders of the information 
provided in relation to the costs to investment companies and 
their affiliated persons of providing such information.

              SECTION 207--BOOKS, RECORDS AND INSPECTIONS

    Section 207(1). This section expands the Commission's 
recordkeeping authority under the Investment Company Act. 
Currently, Section 31(a) of the Act authorizes the Commission 
to require investment companies to maintain only records that 
relate to the company's financial statement. This section 
amends Section 31(a) to authorize the commission to require 
registered investment companies and certain of their related 
entities to keep any records the Commission prescribes as 
``necessary or appropriate in the public interest or for the 
protection of investors.'' This authority will enable the 
Commission to require investment companies to maintain the 
records necessary for examiners to conduct a thorough 
examination of a company's operations and thereby ensure that 
the investment company and its related entities are in 
compliance with all applicable statues and regulations (whether 
or not records concerning these matters are needed to support 
financial statements). The legislation does not change the 
Commission's recordkeeping authority with respect to investment 
company advisers that are not majority-owned subsidiaries of an 
investment company, depositors for, or principal underwriters 
of registered investment companies. These entities would 
continue to be required to keep only those records necessary to 
record their transactions with investment companies.
    This section also incorporates in Section 31(a) the 
definition of ``records'' contained in Section 3(a)(37) of the 
Exchange Act, which is currently incorporated in section 204 of 
the Investment Advisers Act. Section 3(a)(37) provides that the 
term ``records'' means account, correspondence, memorandums, 
tapes, discs, papers, books, and other documents or transcribed 
information of any type, whether expressed in ordinary or 
machine language. Thus, the inclusion of this definition, which 
encompasses both paper and electronic records, would ensure 
uniformity between the parallel provisions of the two Acts.
    In order to prevent the grant of authority under new 
Section 31(a) from resulting in unnecessarily burdensome 
regulation of investment companies and their affiliates, the 
legislation requires that the Commission, in exercising its 
authority under this new provision, to take such steps as it 
deems necessary and appropriate, consistent with the public 
interest and the protection of investors, to avoid unnecessary 
recordkeeping by, and minimize the compliance burdens on, 
investment companies and their affiliated persons. These steps 
include considering and requesting public comment on (1) 
feasible alternatives that would minimize recordkeeping 
burdens, (2) the necessity of such records in view of the 
public benefits derived from the independent scrutiny of such 
records through the Commission's examinations program, (3) the 
costs to investment companies and their affiliates of 
maintaining the information that would be required, and (4) the 
effects that a proposed recordkeeping requirement would have on 
internal compliance policies and procedures.
    This section also amends Section 31(b) of the Investment 
Company Act, which relates to the Commission's authority to 
inspect the books and records of investment companies. The 
first sentence of amended Section 31(b) would authorize the 
Commission or its representatives to examine records that 
relate to the operations of, or transactions with, a registered 
investment company. This provision refers only to ``records'' 
because, as defined, this term encompasses the ``accounts'' and 
``books'' referred to in the existing statute, as well as other 
forms of non-written records.
    This section expands current Commission authority by 
permitting examiners to inspect records that may not be 
required by Commission rules, but that already exist and are 
relevant to the operations of the investment company and 
transactions between the investment company and other persons 
required to keep records with respect to the investment 
company--the investment company's investment adviser and 
principal underwriters. In addition, as under the current 
provision, the Commission would have the authority to inspect 
such other records as the Commission may require to be 
maintained and preserved in accordance with subsection (a).
    The section also amends Section 31(b) to authorize the 
Commission to request copies of records. The provision differs 
from the current language in Section 31(b) by eliminating the 
requirement for examiners to seek a formal order to obtain 
copies of these records.
    The authority granted to the Commission under the 
amendments may result in its having broader access to, among 
other things, records that a fund may keep related to the 
fund's internal policies and procedures for compliance with 
securities laws. The Committee recognizes the vital 
significance of effective internal compliance systems, which 
are essential to helping investment companies prevent problems 
before they become statutory violations. The Committee believes 
that voluntary compliance efforts by investment companies to 
prevent, detect, and correct violations should be strongly 
encouraged. Internal control systems, in turn, generally 
function most effectively when they operate in an atmosphere of 
openness and candor, which is best fostered when internal audit 
reports are utilized by, and maintained within, the investment 
company organization, and are not routinely made public to 
third parties or requested by regulatory authorities.
    Amended Section 31(b) addresses these issues by requiring 
the Commission, in exercising its authority under that section, 
to give ``due regard'' to the effective implementation, 
operation, and benefits of internal compliance policies and 
procedures. The Commission expects that, in exercising ``due 
regard,'' the Commission would review fund internal audit and 
similar compliance-related reports on a selective basis. 
Specifically, the Committee expects the Commission to request 
and review internal audit and similar reports only insofar as 
necessary to determine whether the internal compliance policies 
of the fund or other examined persons are in place, whether 
procedures to effect and enforce those policies have been 
implemented, and whether the compliance policies and procedures 
are reasonably designed to detect compliance problems and 
address them in an appropriate fashion. Thus, the Committee 
anticipates that, in a routine examination, the Commission 
staff would seek to review a sample of an examined person's 
internal audit reports adequate to form a basis for concluding 
that the compliance policies and procedures are achieving these 
objectives. The Committee believes that the goal of 
examinations effected by the Commission staff should not be 
simply to duplicate the role played by a fund's internal 
compliance staff. If a fund has a well-functioning system of 
internal controls, the Commission's limited resources could be 
directed to other areas of fund operations, or to other funds.
    In addition, recognizing that the information obtained by 
the Commission pursuant to this expanded inspection authority 
may be sensitive, the legislation adds new Section 31(c), which 
provides that the Commission may not be compelled to disclose 
any internal compliance or audit records, or information 
contained therein under amended Section 31. The section 
provides that this limitation on disclosure of information by 
the Commission shall not authorize the Commission to withhold 
information from Congress or prevent the Commission from 
complying with a request for information from a U.S. 
department, agency, or court.
    Finally, the section adds new Section 31(d), defining 
``internal compliance policies and procedures'' as policies and 
procedures designed to promote compliance with the Federal 
securities laws, and defining ``internal compliance and audit 
record'' as any record prepared by an investment company or 
affiliate in accordance with internal compliance policies and 
procedures.

                 section 208--investment company names

    Section 208. This section amends Section 35(d) of the 
Investment Company Act to grant the Commission rulemaking 
authority to define investment company names or the title of 
the securities they issue as materially deceptive or 
misleading. Currently, Section 35(d) requires the Commission to 
find and by order declare the name to be deceptive or 
misleading and then to bring an action in the proper court to 
enjoin use of the name. This process is rarely used and is 
extremely cumbersome. This section would enhance the 
Commission's ability to prevent the use by investment companies 
of materially misleading names.

               section 209--excepted investment companies

    Section 209(a). This section amends Section 3(c)(1) of the 
Investment Company Act, which excepts from the Act's regulation 
investment pools that have no more than 100 investors and do 
not engage in public offerings (``Section 3(c)(1) funds''). 
Section 209(a)(2) of the legislation simplifies the way the 100 
investor limit of Section 3(c)(1) is calculated by no longer 
requiring Section 3(c)(1) funds to count the underlying 
shareholders of their corporate, non-investment company 
investors under any circumstances. As amended, Section 3(c)(1) 
treats beneficial ownership by a company, for purposes of the 
100 investor limit, as beneficial ownership by one person, 
unless the company (i) owns ten percent or more of the Section 
3(c)(1) issuer and (ii) is a registered investment company, a 
Section 3(c)(1) fund, or an excepted investment company relying 
on the exceptions of new Section 3(c)(7) (``Section 3(c)(7) 
fund'').
    Section 209(a)(1) of the legislation applies Section 
12(d)(1)(A)(i) of the Investment Company Act to Section 3(c)(1) 
funds. As a result, Section 3(c)(1) funds may not purchase more 
than three percent of any registered investment company's 
securities. To cover the other side of the transaction 
involving open-end investment companies, registered investment 
companies selling their securities to Section 3(c)(1) funds 
also are subject to the three percent limitation in Section 
12(d)(1)(B)(i).
    Section 209(a)(3) of the legislation amends Section 3(c)(2) 
of the Investment Company Act to add a new type of entity, a 
``market intermediary,'' to those that the section currently 
excepts from the definition of ``investment company'' for 
purposes of the Act. The amendment addresses the type of 
intermediary, commonly referred to as a ``swap dealer,'' that 
is in the business of acting as a counterparty with respect to 
various financial products, such as interest rate and currency 
swaps. Market intermediary is defined as any person that 
regularly holds itself out as being willing contemporaneously 
to engage in, and is regularly engaged in the business of 
entering into, transactions on both sides of the market for 
financial contracts. As defined, ``market intermediary'' may, 
in some instances, encompass persons that are otherwise 
excluded from the definition of investment company, such as 
brokers.
    The term ``financial contract'' has been drafted in a 
manner that is designed to be sufficiently flexible to 
encompass the wide variety of financial contracts that 
currently exist and that will continue to develop in the 
evolving financial markets: it is defined as an individually 
negotiated transaction in respect of securities, commodities, 
currencies, interest rates or other functionally similar 
financial or economic interests, that is entered into and 
structured to accommodate the objectives of the counterparty.
    The amendment to Section 3(c)(2) addresses the status of 
market intermediaries under the Investment Company Act only, 
and not under any other Federal securities laws.
    Section 209(a)(4) of the legislation adds Section 3(c)(7) 
to the Investment Company Act to create a new exception from 
the definition of investment company for investment pools whose 
securities are held exclusively by ``qualified purchasers,'' as 
defined under Section 209(b) of the legislation (``Section 
3(c)(7) funds'').
    Under new subsection 3(c)(7)(A), there is no limit on the 
number of ``qualified purchasers'' participating in a Section 
3(c)(7) fund, but the Section 3(c)(7) fund is prohibited from 
making a public offering of its securities. In addition, this 
section provides that securities that are owned by persons who 
received the securities from a qualified purchaser as a gift or 
bequest, or through legal separation, divorce, death, or other 
involuntary event, shall be deemed to be owned by a qualified 
purchaser for purposes of Section 3(c)(7). The section grants 
the Commission rulemaking authority with respect to such 
transfers.
    This section adds new subsection 3(c)(7)(B) to the Act, 
which provides a ``grandfather clause'' for existing companies 
that currently operate under the 100-person exception of 
Section 3(c)(1) but wish to convert to Section 3(c)(7) status. 
Subsection 3(c)(7)(B) provides that, notwithstanding the 
requirements of subsection 3(c)(7)(A), an issuer shall qualify 
for the Section 3(c)(7) exception if, in addition to qualified 
purchasers, the issuer's outstanding securities are 
beneficially owned by not more than 100 persons who are not 
qualified persons (the ``original investors'') if (1) the 
original investors acquired the securities on or before the 
date of enactment of the legislation, and (2) at the time the 
securities were acquired by the original investors, the issuer 
was excepted under Section 3(c)(1) of the Act (in other words, 
the issuer had 100 or fewer investors), and (3) prior to 
availing itself of the new exception in proposed Section 
3(c)(7), the issuer (a) disclosed to the original investors who 
are not qualified purchasers that future investors will be 
limited to qualified purchasers but will not be limited in 
number, and (b) the issuer provided the original investors who 
are not qualified purchasers with a reasonable opportunity to 
redeem their interests in the company.
    This section also adds new subsection 3(c)(7)(C) to the 
Act, which applies Section 12(d)(1)(A)(i) of the Investment 
Company Act to Section 3(c)(7) issuers (similar to the 
provision in relating to Section 3(c)(1) issuers, discussed 
above). As a result, Section 3(c)(7) issuers may not purchase 
more than three percent of any registered investment company's 
securities. To cover the other side of the transaction 
involving open-end investment companies, registered investment 
companies selling their securities to Section 3(c)(7) issuers 
also are subject to the three percent limitation in Section 
12(d)(1)(B)(i).
    This section also adds new subsection 3(c)(7)(D) to the 
Act, which clarifies that a Section 3(c)(1) fund and a Section 
3(c)(7) fund will not be treated as a single issuer by the 
Commission for purposes of determining whether investors in the 
Section 3(c)(7) fund will be counted toward the 100 investor 
limit of the Section 3(c)(1) fund, or that investors in the 
Section 3(c)(1) fund that are not qualified purchasers will be 
treated as investors in the Section 3(c)(7) fund. This 
provision seeks to clarify that sponsors have the flexibility 
to form Section 3(c)(1) and Section 3(c)(7) funds without 
running afoul of the integration doctrine developed under 
Section 3(c)(1).
    This section also provides that this non-integration 
provision shall not be deemed to establish whether a person is 
a bona fide qualified purchaser for purposes of Section 3(c)(7) 
or a bona fide beneficial owner for purposes of Section 
3(c)(1). For example, a promoter of a Section 3(c)(7) fund 
could not organize a ``sham'' Section 3(c)(1) fund to 
facilitate investment by non-qualified purchasers in the 
Section 3(c)(7) fund.
    Section 209(b). This section amends Section 2(a) of the 
Investment Company Act to add a new paragraph (51), defining 
the term ``qualified purchaser.'' The section creates three 
categories of qualified purchasers. First, under new 
subparagraph 2(a)(51)(A), a qualified purchaser may be a 
natural person who owns at least $10 million in securities (a 
``natural person purchaser''). Securities of an issuer that is 
controlled by the putative qualified purchaser could not be 
used to satisfy the $10 million securities test unless the 
issuer that is controlled by the qualified purchaser is an 
investment company, a Section 3(c)(1) fund or a Section 3(c)(7) 
fund. Under those circumstances, the securities of that issuer 
may be counted toward the $10 million requirement. The purpose 
of this exception to the ``no control'' rule is to ensure that 
purchasers who own or control securities of companies such as 
investment companies or excepted companies under Section 
3(c)(1) of Section 3(c)(7) are not excluded from the definition 
of ``qualified purchasers.''
    Second, under new subparagraph 2(a)(51)(B), a qualified 
purchaser may be a trust, so long as the trustee or other 
person authorized to make decisions with respect to the trust 
and each settlor or other person contributing assets to the 
trust is a ``qualified purchaser'' under subparagraphs 
2(a)(51(A) or 2(a)(51(C).
    Third, under subparagraph 2(a)(51)(C), a qualified 
purchaser may be any person who in the aggregate owns and 
invests on a discretionary basis at least $100 million in 
securities (an ``institutional purchaser''). Securities issued 
by any person that is an affiliated person, as defined in 
Section 2(a)(3(C) of the Investment Company Act, of a putative 
qualified purchaser could not be used to satisfy the $100 
million securities test unless the issuer is affiliated with 
the qualified purchaser but the issuer is an investment 
company, a Section 3(c)(1) fund or a Section 3(c)(7) fund. 
Under those circumstances, the securities of that issuer may be 
counted toward the $100 million requirement. Section 
2(a)(51)(C) would permit the aggregation of an institutional 
purchaser's proprietary securities holdings with those under 
discretionary management for purposes of the $100 million 
securities test. An institutional purchaser, however, could 
invest in a Section 3(c)(7) fund only for its own account or 
for the accounts of other qualified purchasers.
    While new Sections 2(a)(51)(A), (B), and (C) are self-
operative, the legislation gives the Commission the authority 
to adopt additional rules relating to the objective standards. 
This authority would enable the Commission to develop 
reasonable care defenses when an issuer relying on the 
qualified purchaser exception in good faith sells securities to 
a purchaser that does not meet the qualified purchaser 
definition, to develop additional conditions governing 
qualified purchaser trusts, or to develop rules deeming a 
``natural person'' to include a person and his or her spouse, 
for example.
    Section 209(c). This section amends Section 3(a)(3) of the 
Investment Company Act to include within that section's 
definition of investment securities, securities of majority-
owned subsidiaries that would be investment companies but for 
the exclusion under Section 3(c)(1) or Section 3(c)(7). This 
section precludes a company from avoiding regulation under the 
Investment Company Act by establishing a Section 3(c)(1) or 
Section 3(c)(7) subsidiary.
    Section 209(d). This section directs the Commission to 
promulgate certain rules. First, under subsection 209(d)(1) of 
the legislation, the Commission must promulgate rules, within 
one year after the date of enactment of the legislation, to 
implement the requirements of Section 3(c)(1)(B) of the 
Investment Company Act. That section provides that, subject to 
rules adopted by the Commission, ownership of an interest in a 
Section 3(c)(1) fund, where the ownership is the result of an 
involuntary transfer (through legal separation, divorce, death, 
or other involuntary event), is deemed to be ownership by one 
person. This would have the effect of permitting an investor in 
a Section 3(c)(1) fund that is owned by the maximum number of 
investors, 100, to transfer his or her interest to more than 
one person (through a bequeathal, for example), without causing 
the Section 3(c)(1) fund to lose its Section 3(c)(1) exception. 
While Section 3(c)(1)(B) was enacted fifteen years ago, the 
Commission has never issued rules pursuant to its authority.
    Second, under subsection 209(d)(2) of the legislation, the 
Commission must promulgate rules, within one year after the 
date of enactment of the legislation, to permit ownership by 
knowledgeable employees of an issuer (or its affiliate) of the 
securities of that issuer (or affiliate) without loss of the 
issuer's exception under Sections 3(c)(1) or 3(c)(7). Pursuant 
to such a rule, an excepted company under Section 3(c)(1) would 
be permitted to sell its shares to employees deemed 
``knowledgeable'' pursuant to Commission rules even if such 
employees caused the total number of investors in the fund to 
exceed 100. Similarly, pursuant to such a rule, an excepted 
company under Section 3(c)(7) (or an affiliate of such an 
excepted company, such as the company's adviser, for example) 
would be permitted to sell its shares to employees who are not 
``qualified investors'' under Section 3(c)(7) but who are 
deemed ``knowledgeable'' pursuant to Commission rules.

                        Committee Correspondence

                     U.S. House of Representatives,
               Committee on Banking and Financial Services,
                                      Washington, DC, May 22, 1996.
Hon. Thomas J. Bliley, Jr.,
Chairman, Committee on Commerce,
Washington, DC.
    Dear Tom: I am writing concerning H.R. 3005, the Securities 
Amendments of 1996, which was recently marked-up by the House 
Commerce Committee.
    There are two provisions of H.R. 3005, as approved by the 
Commerce Committee, which fall within the jurisdiction of the 
Banking Committee. One of these provisions relates to the 
margin authority of the Federal Reserve Board. In addition, the 
House Banking Committee staff has been discussing with the 
Commerce Committee staff during the past two months the 
potential impact of a provision in H.R. 3005 on the use of 
common names by banks and affiliated mutual funds. The Commerce 
Committee staff has agreed to address the concern of the 
Banking Committee staff by including an amendment that 
eliminates this concern.
    I appreciate your willingness to address this issue. In 
view of your desire to move H.R. 3005 to the Floor in an 
expeditious manner, I do not intend to seek a sequential 
referral of H.R. 3005. I would appreciate, however, your 
commitment that the agreement worked out between our staffs 
will be effected without the need for separate amendments by 
the Banking Committee on the House Floor.
    Please be advised that my agreement not to seek a 
sequential referral is based on an understanding that this 
waiver will be without prejudice to the Banking Committee's 
jurisdictional claims with regard to H.R. 3005 and similar 
bills that may be offered in the future.
    I appreciate your cooperation in this matter and would 
further appreciate the inclusion of this letter in the Commerce 
Committee's report on H.R. 3005.
            Sincerely,
                                          James A. Leach, Chairman.
                     U.S. House of Representatives,
                                     Committee on Commerce,
                                      Washington, DC, June 5, 1996.
Hon. James Leach,
Chairman Committee on Banking and Financial Services, Rayburn House 
        Office Building, Washington, DC.
    Dear Jim: I am writing in response to your letter dated May 
22, 1996, concerning H.R. 3005, the Securities Amendments of 
1996.
    I appreciate your willingness to expedite passage of this 
legislation by agreeing not to seek a sequential referral 
thereof. We have been able to address your concern regarding 
the impact on banks of a provision of the legislation dealing 
with investment company names. It is far more constructive for 
committees to work cooperatively on issues, and in this 
Congress we have a record between our two committees of which 
we can be justifiably proud.
    With respect to your analysis of the bill, I respectfully 
disagree with your assertion that the provision of the 
legislation regarding regulation of investment company names 
falls under the jurisdiction of the Committee on Banking and 
Financial Services. Under Rule X of the Rules of the House, the 
Commerce Committee is vested with jurisdiction over securities 
and exchanges. Under the same rule, the Banking Committee has 
supervisory jurisdiction over the entry by depository 
institutions into securities activities in connection with its 
jurisdiction over the safety and soundness of such 
institutions. It does not have jurisdiction over functional 
regulation of applicable securities laws not involving safety 
and soundness.
    Under the relevant provision of H.R. 3005, the Securities 
and Exchange Commission is given express authority to regulate 
fraudulent or misleading names of investment companies by rule 
or by order pursuant to the Investment Company Act of 1940. 
Such action by the Commission constitutes an example of 
functional regulation of investment companies and the 
securities that they issue. The determination of what 
constitutes a fraudulent or misleading name for an investment 
company is a question of securities regulation, wholly 
independent of what entity may be advising or distributing 
those securities. although you point out that such regulation 
could have an impact on the business practices of banks that 
advise investment companies, such impact is not conceptually 
different from the impact of such regulation on any other 
entity that happens to advise an investment company.
    I thank you again for your consideration.
            Sincerely,
                                   Thomas J. Bliley, Jr., Chairman.

                              Agency Views

                   U.S. Securities and Exchange Commission,
                                      Washington, DC, May 14, 1996.
Hon. Thomas J. Bliley, Jr.,
Chairman, Committee on Commerce, House of Representatives, Rayburn 
        House Office Building, Washington, DC.

Hon. Jack Fields,
Chairman, Subcommittee on Telecommunications and Finance, Committee on 
        Commerce, House of Representatives, Rayburn House Office 
        Building, Washington, DC.
    Dear Chairmen Bliley and Fields: On behalf of the U.S. 
Securities and Exchange Commission, I offer our support and 
endorsement for the Amendment in the Nature of a Substitute to 
H.R. 3005 to be offered by Mr. Bliley, ``Securities Act 
Amendments of 1996.'' You and your colleagues, Congressmen 
Dingell and Markey, have risen above the fray of partisan 
politics to produce a consensus bill that could well provide 
the regulatory framework for our markets as we enter the 
twenty-first century.
    Chairman Fields' introduction of the predecessor bill last 
July challenged the securities industry, its regulators, and 
all market participants to confront serious issues that must be 
addressed in order for the U.S. capital markets to remain 
preeminent. Your leadership inspired a constructive debate on 
issues such as coordination of state and federal securities 
laws and margin requirements. We will shortly forward to you 
the Commission's section-by-section analysis that expresses our 
understanding of the Bliley Amendment and how it would impact 
the Commission's work.
    We commend your efforts on this important initiative. In 
addition, I compliment the superb staff work on both sides of 
the aisle--without which this effort would not have been 
achieved.
            Sincerely,
                                           Arthur Levitt, Chairman.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3 of rule XIII of the Rules of the 
House of Representatives, changes in existing law made by the 
bill, as reported, are shown as follows (existing law proposed 
to be omitted is enclosed in black brackets, new matter is 
printed in italic, existing law in which no change is proposed 
is shown in roman):

                         SECURITIES ACT OF 1933

                                TITLE I

                              short title

  Section 1. This title may be cited as the ``Securities Act of 
1933''.

                              definitions

  Sec. 2. (a) Definitions.--When used in this title, unless the 
context otherwise requires--
          (1) * * *
          * * * * * * *
  (b) Consideration of Promotion of Efficiency, Competition, 
and Capital Formation.--Whenever pursuant to this title the 
Commission is engaged in rulemaking and is required to consider 
or determine whether an action is necessary or appropriate in 
the public interest, the Commission shall also consider, in 
addition to the protection of investors, whether the action 
will promote efficiency, competition, and capital formation.
          * * * * * * *

                      [state control of securities

  [Sec. 18. Nothing in this title shall affect the jurisdiction 
of the securities commission (or any agency or office 
performing like functions) of any State or Territory of the 
United States, or the District of Columbia, over any security 
or any person.]

SEC. 18. EXEMPTION FROM STATE REGULATION OF SECURITIES OFFERINGS.

  (a) Scope of Exemption.--Except as otherwise provided in this 
section, no law, rule, regulation, or order, or other 
administrative action of any State or Territory of the United 
States, or the District of Columbia, or any political 
subdivision thereof--
          (1) requiring, or with respect to, registration or 
        qualification of securities, or registration or 
        qualification of securities transactions, shall 
        directly or indirectly apply to a security that--
                  (A) is a covered security; or
                  (B) will be a covered security upon 
                completion of the transaction;
          (2) shall directly or indirectly prohibit, limit, or 
        impose conditions upon the use of--
                  (A) with respect to a covered security 
                described in subsection (b)(1) or (c)(1)--
                          (i) any offering document that is 
                        prepared by the issuer; or
                          (ii) any offering document that is 
                        not prepared by the issuer if such 
                        offering document is required to be and 
                        is filed with the Commission or any 
                        national securities organization 
                        registered under section 15A of the 
                        Securities Exchange Act of 1934 (15 
                        U.S.C. 78o-3);
                  (B) with respect to a covered security 
                described in paragraph (2), (3), or (4) of 
                subsection (b), any offering document; or
                  (C) any proxy statement, report to 
                shareholders, or other disclosure document 
                relating to a covered security or the issuer 
                thereof that is required to be and is filed 
                with the Commission or any national securities 
                organization registered under section 15A of 
                the Securities Exchange Act of 1934 (15 U.S.C. 
                78o-3); or
          (3) shall directly or indirectly prohibit, limit, or 
        impose conditions, based on the merits of such offering 
        or issuer, upon the offer or sale of any security 
        described in paragraph (1).
  (b) Covered Securities.--For purposes of this section, the 
following are covered securities:
          (1) Exclusive federal registration of nationally 
        traded securities.--A security is a covered security if 
        such security is--
                  (A) listed, or authorized for listing, on the 
                New York Stock Exchange or the American Stock 
                Exchange, or included or qualified for 
                inclusion in the National Market System of the 
                National Association of Securities Dealers 
                Automated Quotation System (or any successor to 
                such entities);
                  (B) listed, or authorized for listing, on a 
                national securities exchange (or tier or 
                segment thereof) that has listing standards 
                that the Commission determines by rule (on its 
                own initiative or on the basis of a petition) 
                are substantially similar to the listing 
                standards applicable to securities described in 
                subparagraph (A); or
                  (C) is a security of the same issuer that is 
                equal in seniority or senior to a security 
                described in subparagraph (A) or (B).
          (2) Exclusive federal registration of investment 
        companies.--A security is a covered security if such 
        security is a security issued by an investment company 
        that is registered under the Investment Company Act of 
        1940 (15 U.S.C. 80a et seq.).
          (3) Sales to qualified purchasers.--A security is a 
        covered security with respect to the offer or sale of 
        the security to qualified purchasers, as defined by the 
        Commission by rule. In prescribing such rule, the 
        Commission may define qualified purchaser differently 
        with respect to different categories of securities, 
        consistent with the public interest and the protection 
        of investors.
          (4) Exemption in connection with certain exempt 
        offerings.--A security is a covered security if--
                  (A) the offer or sale of such security is 
                exempt from registration under this title 
                pursuant to section 4(1) or 4(3), and--
                          (i) the issuer of such security files 
                        reports with the Commission pursuant to 
                        section 13 or 15(d) of the Securities 
                        Exchange Act of 1934 (15 U.S.C. 78m, 
                        78o(d)); or
                          (ii) the issuer is exempt from filing 
                        such reports;
                  (B) such security is exempt from registration 
                under this title pursuant to section 4(4);
                  (C) the offer or sale of such security is 
                exempt from registration under this title 
                pursuant to section 3(a), other than the offer 
                or sale of a security that is exempt from such 
                registration pursuant to paragraph (4) or (11) 
                of such section, except that a municipal 
                security that is exempt from such registration 
                pursuant to paragraph (2) of such section is 
                not a covered security with respect to the 
                offer or sale of such security in the State in 
                which such security is issued; or
                  (D) the offer or sale of such security is 
                exempt from registration under this title 
                pursuant to Commission rule or regulation under 
                section 4(2) of this title.
  (c) Conditionally Covered Securities.--
          (1) Federally registered offerings.--Subject to the 
        limitations contained in paragraphs (2) and (3), a 
        security is a covered security if--
                  (A) the issuer of such security has (or will 
                have upon conclusion of the transaction) total 
                assets exceeding $10,000,000;
                  (B) such security is the subject of a 
                registration statement that is filed with the 
                Commission pursuant to this title; and
                  (C) the issuer files with such registration 
                statement audited financial statements for each 
                of the two most recent fiscal years of its 
                operations ending before the filing of the 
                registration statement.
          (2) Limitations for certain offerings.--
        Notwithstanding paragraph (1), a security is not a 
        covered security if such security is--
                  (A) a security of an issuer which is a blank 
                check company (as defined in section 7(b) of 
                this title), a partnership, a limited liability 
                company, or a direct participation investment 
                program;
                  (B) a penny stock (as such term is defined in 
                section 3(a)(51) of the Securities Exchange Act 
                of 1934 (15 U.S.C. 78c(a)(51)); or
                  (C) a security issued in an offering relating 
                to a rollup transaction (as such term is 
                defined in paragraphs (4) and (5) of section 
                14(h) of such Act (15 U.S.C. 78n(h)(4), (5)).
          (3) Limitations based on misconduct.--Notwithstanding 
        paragraph (1), a security is not a covered security--
                  (A) with respect to any State, if the issuer, 
                or a principal officer or principal shareholder 
                thereof--
                          (i) is subject to a statutory 
                        disqualification, as defined in 
                        subparagraph (A), (B), (C), or (D) of 
                        section 3(a)(39) of the Securities 
                        Exchange Act of 1934 (15 U.S.C. 
                        78c(a)(39));
                          (ii) has been convicted within 5 
                        years prior to the offering of any 
                        felony under Federal or State law in 
                        connection with the offer, purchase, or 
                        sale of any security, or any felony 
                        under Federal or State law involving 
                        fraud or deceit; or
                          (iii) is currently named in and 
                        subject to any order, judgment, or 
                        decree of any court of competent 
                        jurisdiction acting pursuant to Federal 
                        or State law temporarily or permanently 
                        restraining or enjoining such issuer, 
                        officer, or shareholder from engaging 
                        in or continuing any conduct or 
                        practice in connection with a security; 
                        or
                  (B) with respect to a particular State, if 
                the issuer, or a principal officer or principal 
                shareholder thereof--
                          (i) has filed a registration 
                        statement which is the subject of a 
                        currently effective stop order entered 
                        pursuant to that State's securities 
                        laws within 5 years prior to the 
                        offering;
                          (ii) is currently named in and 
                        subject to any administrative 
                        enforcement order or judgment of that 
                        State's securities commission (or any 
                        agency or office performing like 
                        functions) entered within 5 years prior 
                        to the offering, or is currently named 
                        in and subject to any other 
                        administrative enforcement order or 
                        judgment of that State entered within 5 
                        years prior to the offering that finds 
                        fraud or deceit; or
                          (iii) is currently named in and 
                        subject to any administrative 
                        enforcement order or judgment of that 
                        State which prohibits or denies 
                        registration, or revokes the use of any 
                        exemption from registration, in 
                        connection with the offer, purchase, or 
                        sale of securities.
          (4) Exceptions to limitations.--
                  (A) Exemptions.--The limitations in paragraph 
                (3)(A) shall not apply if the Commission has 
                exempted the subject person from the 
                application of such paragraph by rule or order, 
                and the limitations in paragraph (3)(B) shall 
                not apply if the securities commission (or any 
                agency or office performing like functions) of 
                the affected State has exempted the subject 
                person from the application of such paragraph 
                by rule or order.
                  (B) Reasonable steps.--The provisions of 
                paragraph (3) shall not apply if the issuer has 
                taken reasonable steps to ascertain whether any 
                principal officer or principal shareholder is 
                subject to such paragraph, and such steps do 
                not reveal a person who is subject to such 
                paragraph. An issuer shall be considered to 
                have taken reasonable steps if such issuer or 
                its agent has conducted a search of any 
                centralized data bases that the Commission may 
                designate by rule, and has received an 
                affidavit under oath by each such principal 
                officer or principal shareholder stating that 
                such officer or shareholder is not subject to 
                the provisions of paragraph (3).
                  (C) Effect of limitations on remedies.--
                Notwithstanding paragraph (3), an issuer shall 
                not be subject to a right of rescission under 
                State securities laws solely as a result of the 
                operation of such paragraph.
          (5) No effect under subsection (b).--No limitation 
        under this subsection shall affect the treatment of a 
        security that qualifies as a covered security under 
        subsection (b).
  (d) Preservation of Authority.--
          (1) Fraud authority.--Consistent with this section, 
        the securities commission (or any agency or office 
        performing like functions) of any State or Territory of 
        the United States, or the District of Columbia, shall 
        retain jurisdiction under the laws of such State, 
        Territory, or District to investigate and bring 
        enforcement actions with respect to fraud or deceit in 
        connection with securities or securities transactions.
          (2) Preservation of filing requirements.--
                  (A) Notice filings permitted.--Nothing 
                contained in this section shall prohibit the 
                securities commission (or any agency or office 
                performing like functions) of any State or 
                Territory of the United States, or the District 
                of Columbia, from requiring the filing of any 
                documents filed with the Commission pursuant to 
                this title solely for notice purposes, together 
                with any required fee.
                  (B) Preservation of fees.--Until otherwise 
                provided by State law enacted after the date of 
                enactment of the Securities Amendments of 1996, 
                filing or registration fees with respect to 
                securities or securities transactions may 
                continue to be collected in amounts determined 
                pursuant to State law as in effect on the day 
                before such date.
                  (C) Fees not permitted on listed 
                securities.--Notwithstanding subparagraphs (A) 
                and (B), no filing or fee may be required with 
                respect to any security that is a covered 
                security pursuant to subsection (b)(1) of this 
                section, or will be such a covered security 
                upon completion of the transaction, or is a 
                security of the same issuer that is equal in 
                seniority or senior to a security that is a 
                covered security pursuant to such subsection.
          (3) Enforcement of requirements.--Nothing in this 
        section shall prohibit the securities commission (or 
        any agency or office performing like functions) of any 
        State or Territory of the United States, or the 
        District of Columbia, from suspending the offer or sale 
        of securities within such State, Territory, or District 
        as a result of the failure to submit any filing or fee 
        required under law and permitted under this section.
  (e) Definitions.--For purposes of this section:
          (1) Principal officer.--The term ``principal 
        officer'' means a director, chief executive officer, or 
        chief financial officer of an issuer, or any other 
        officer performing like functions.
          (2) Principal shareholder.--The term ``principal 
        shareholder'' means any person who is directly or 
        indirectly the beneficial owner of more than 20 percent 
        of any class of equity security of an issuer. When two 
        or more persons act as a partnership, limited 
        partnership, syndicate, or other group for the purpose 
        of acquiring, holding, or disposing of securities of an 
        issuer, such syndicate or group shall be deemed a 
        ``person'' for purposes of this paragraph. In 
        determining, for purposes of this paragraph, any 
        percentage of a class of any security, such class shall 
        be deemed to consist of the amount of the outstanding 
        securities of such class, exclusive of any securities 
        of such class held by or for the account of the issuer 
        or a subsidiary of the issuer.
          (3) Offering document.--The term ``offering 
        document'' has the meaning given the term 
        ``prospectus'' by section 2(10), but without regard to 
        the provisions of clauses (a) and (b) of such section, 
        except that, with respect to a security described in 
        subsection (b)(2) of this section, such term also 
        includes a communication that is not deemed to offer 
        such a security pursuant to a rule of the Commission.
          (4) Prepared by the issuer.--Within 6 months after 
        the date of enactment of the Securities Amendments of 
        1996, the Commission shall, by rule, define the term 
        ``prepared by the issuer'' for purposes of this 
        section.
          * * * * * * *

SEC. 28. GENERAL EXEMPTIVE AUTHORITY.

  The Commission, by rules and regulations, may conditionally 
or unconditionally exempt any person, security, or transaction, 
or any class or classes of persons, securities, or 
transactions, from any provision or provisions of this title or 
of any rule or regulation thereunder, to the extent that such 
exemption is necessary or appropriate in the public interest, 
and is consistent with the protection of investors.
          * * * * * * *
                              ----------                              


                    SECURITIES EXCHANGE ACT OF 1934

              TITLE I--REGULATION OF SECURITIES EXCHANGES

                              short title

  Section 1. This Act may be cited as the ``Securities Exchange 
Act of 1934''.
          * * * * * * *

                  definitions and application of title

  Sec. 3. (a) When used in this title, unless the context 
otherwise requires--
          (1) * * *
          * * * * * * *
          (54) The term ``examining authority'' means any self-
        regulatory organization registered with the Commission 
        under this title (other than registered clearing 
        agencies) with the authority to examine, inspect, and 
        otherwise oversee the activities of a registered broker 
        or dealer.
          * * * * * * *
  (f) Consideration of Promotion of Efficiency, Competition, 
and Capital Formation.--Whenever pursuant to this title the 
Commission is engaged in rulemaking, or in the review of a rule 
of a self-regulatory organization, and is required to consider 
or determine whether an action is necessary or appropriate in 
the public interest, the Commission shall also consider, in 
addition to the protection of investors, whether the action 
will promote efficiency, competition, and capital formation.
          * * * * * * *

                          margin requirements

  Sec. 7. (a) * * *
          * * * * * * *
  [(c) It shall be unlawful for any member of a national 
securities exchange or any broker or dealer, directly or 
indirectly, to extend or maintain credit or arrange for the 
extension or maintenance of credit to or for any customer--
          [(1) on any security (other than an exempted 
        security), in contravention of the rules and 
        regulations which the Board of Governors of the Federal 
        Reserve System shall prescribe under subsections (a) 
        and (b) of this section;
          [(2) without collateral or on any collateral other 
        than securities, except in accordance with such rules 
        and regulations as the Board of Governors of the 
        Federal Reserve System may prescribe (A) to permit 
        under specified conditions and for a limited period any 
        such member, broker, or dealer to maintain a credit 
        initially extended in conformity with the rules and 
        regulations of the Board of Governors of the Federal 
        Reserve System, and (B) to permit the extension or 
        maintenance of credit in cases where the extension or 
        maintenance of credit is not for the purpose of 
        purchasing or carrying securities or of evading or 
        circumventing the provisions of paragraph (1) of this 
        subsection.
  [(d) It shall be unlawful for any person not subject to 
subsection (c) of this section to extend or maintain credit or 
to arrange for the extension or maintenance of credit for the 
purpose of purchasing or carrying any security, in 
contravention of such rules and regulations as the Federal 
Reserve Board shall prescribe to prevent the excessive use of 
credit for the purchasing or carrying of or trading in 
securities in circumvention of the other provisions of this 
section. Such rules and regulations may impose upon all loans 
made for the purpose of purchasing or carrying securities 
limitations similar to those imposed upon members, brokers, or 
dealers by subsection (c) of this section and the rules and 
regulations thereunder. This subsection and the rules and 
regulations thereunder shall not apply (A) to a loan made by a 
person not in the ordinary course of his business, (B) to a 
loan on an exempted security, (C) to a loan to a dealer to aid 
in the financing of the distribution of securities to customers 
not through the medium of a national securities exchange, (D) 
to a loan by a bank on a security other than an equity 
security, or (E) to such other loans as the Federal Reserve 
Board shall, by such rules and regulations as it may deem 
necessary or appropriate in the public interest or for the 
protection of investors, exempt, either unconditionally or upon 
specified terms and conditions or for stated periods, from the 
operation of this subsection and the rules and regulations 
thereunder.]
  (c) Unlawful Credit Extension to Customers.--
          (1) Prohibition.--It shall be unlawful for any member 
        of a national securities exchange or any broker or 
        dealer, directly or indirectly, to extend or maintain 
        credit or arrange for the extension or maintenance of 
        credit to or for any customer--
                  (A) on any security (other than an exempted 
                security), in contravention of the rules and 
                regulations which the Board of Governors of the 
                Federal Reserve System shall prescribe under 
                subsections (a) and (b) of this section;
                  (B) without collateral or on any collateral 
                other than securities, except in accordance 
                with such rules and regulations as the Board of 
                Governors of the Federal Reserve System may 
                prescribe--
                          (i) to permit under specified 
                        conditions and for a limited period any 
                        such member, broker, or dealer to 
                        maintain a credit initially extended in 
                        conformity with the rules and 
                        regulations of the Board of Governors 
                        of the Federal Reserve System; and
                          (ii) to permit the extension or 
                        maintenance of credit in cases where 
                        the extension or maintenance of credit 
                        is not for the purpose of purchasing or 
                        carrying securities or of evading or 
                        circumventing the provisions of 
                        subparagraph (A) of this paragraph.
          (2) Exception.--This subsection and the rules and 
        regulations thereunder shall not apply to any credit 
        extended, maintained, or arranged by a member of a 
        national securities exchange or a broker or dealer to 
        or for a member of a national securities exchange or a 
        registered broker or dealer--
                  (A) a substantial portion of whose business 
                consists of transactions with persons other 
                than brokers or dealers; or
                  (B) to finance its activities as a market 
                maker or an underwriter;
        except that the Board of Governors of the Federal 
        Reserve System may impose such rules and regulations, 
        in whole or in part, on any credit otherwise exempted 
        by this paragraph if it determines that such action is 
        necessary or appropriate in the public interest or for 
        the protection of investors.
  (d) Unlawful Credit Extension in Violation of Rules and 
Regulations; Exception to Application of Rules, Etc.--
          (1) Prohibition.--It shall be unlawful for any person 
        not subject to subsection (c) of this section to extend 
        or maintain credit or to arrange for the extension or 
        maintenance of credit for the purpose of purchasing or 
        carrying any security, in contravention of such rules 
        and regulations as the Board of Governors of the 
        Federal Reserve System shall prescribe to prevent the 
        excessive use of credit for the purchasing or carrying 
        of or trading in securities in circumvention of the 
        other provisions of this section. Such rules and 
        regulations may impose upon all loans made for the 
        purpose of purchasing or carrying securities 
        limitations similar to those imposed upon members, 
        brokers, or dealers by subsection (c) of this section 
        and the rules and regulations thereunder.
          (2) Exceptions.--This subsection and the rules and 
        regulations thereunder shall not apply to any credit 
        extended, maintained, or arranged--
                  (A) by a person not in the ordinary course of 
                business;
                  (B) on an exempted security;
                  (C) to or for a member of a national 
                securities exchange or a registered broker or 
                dealer--
                          (i) a substantial portion of whose 
                        business consists of transactions with 
                        persons other than brokers or dealers; 
                        or
                          (ii) to finance its activities as a 
                        market maker or an underwriter;
                  (D) by a bank on a security other than an 
                equity security; or
                  (E) as the Board of Governors of the Federal 
                Reserve System shall, by such rules, 
                regulations, or orders as it may deem necessary 
                or appropriate in the public interest or for 
                the protection of investors, exempt, either 
                unconditionally or upon specified terms and 
                conditions or for stated periods, from the 
                operation of this subsection and the rules and 
                regulations thereunder;
        except that the Board of Governors of the Federal 
        Reserve System may impose such rules and regulations, 
        in whole or in part, on any credit otherwise exempted 
        by subparagraph (C) of this paragraph if it determines 
        that such action is necessary or appropriate in the 
        public interest or for the protection of investors.
          * * * * * * *

       restrictions on borrowing by members, brokers, and dealers

  Sec. 8. It shall be unlawful for any registered broker or 
dealer, member of a national securities exchange, or broker or 
dealer who transacts a business in securities through the 
medium of any member of a national securities exchange, 
directly or indirectly--
  [(a) To borrow in the ordinary course of business as a broker 
or dealer on any security (other than an exempted security) 
registered on a national securities exchange except (1) from or 
through a member bank of the Federal Reserve Board, (2) from 
any nonmember bank which shall have filed with the Federal 
Reserve Board an agreement, which is still in force and which 
is in the form prescribed by the Board, undertaking to comply 
with all provisions of this Act, the Federal Reserve Act, as 
amended, and the Banking Act of 1933, which are applicable to 
member banks and which relate to the use of credit to finance 
transactions in securities, and with such rules and regulations 
as may be prescribed pursuant to such provisions of law or for 
the purpose of preventing evasions thereof, or (3) in 
accordance with such rules and regulations as the Federal 
Reserve Board may prescribe to permit loans between such 
members and/or brokers and/or dealers, or to permit loans to 
meet emergency needs. Any such agreement filed with the Board 
of Governors of the Federal Reserve Board shall be subject to 
termination at any time by order of the Board, after 
appropriate notice and opportunity for hearing, because of any 
failure by such bank to comply with the provisions thereof or 
with such provisions of law or rules or regulations; and, for 
any willful violation of such agreement, such bank shall be 
subject to the penalties provided for violations of rules and 
regulations prescribed under this title. The provisions of 
sections 21 and 25 of this title shall apply in the case of any 
such proceeding or order of the Federal Reserve Board in the 
same manner as such provisions apply in the case of proceedings 
and orders of the Commission. Subject to such rules and 
regulations as the Board of Governors of the Federal Reserve 
System adopt in the public interest and for the protection of 
investors, no person shall be deemed to have borrowed within 
the ordinary course of business, within the meaning of this 
subsection, by reason of a bona fide agreement for delayed 
delivery of a mortgage related security or a small business 
related security against full payment of the purchase price 
thereof upon such delivery within one hundred and eighty days 
after the purchase, or within such shorter period as the Board 
of Governors of the Federal Reserve System may prescribe by 
rule or regulation.
  [(b)] (a) In contravention of such rules and regulations as 
the Commission shall prescribe for the protection of investors 
to hypothecate or arrange for the hypothecation of any 
securities carried for the account of any customer under 
circumstances (1) that will permit the commingling of his 
securities without his written consent with the securities of 
any other customer, (2) that will permit such securities to be 
commingled with the securities of any person other than a bona 
fide customer, or (3) that will permit such securities to be 
hypothecated, or subjected to any lien or claim of the pledgee, 
for a sum in excess of the aggregate indebtedness of such 
customers in respect of such securities.
  [(c)] (b) To lend or arrange for the lending of any 
securities carried for the account of any customer without the 
written consent of such customer or in contravention of such 
rules and regulations as the Commission shall prescribe for the 
protection of investors.
          * * * * * * *

           registration and regulation of brokers and dealers

  Sec. 15. (a) * * *
          * * * * * * *
  (h) Limitations on State Law.--
          (1) Capital, margin, books and records, bonding, and 
        reports.--No law, rule, regulation, or order, or other 
        administrative action of any State or political 
        subdivision thereof shall establish capital, custody, 
        margin, financial responsibility, making and keeping 
        records, bonding, or financial or operational reporting 
        requirements for brokers, dealers, municipal securities 
        dealers, government securities brokers, or government 
        securities dealers that differ from, or are in addition 
        to, the requirements in those areas established under 
        this title. The Commission shall consult periodically 
        the securities commissions (or any agency or office 
        performing like functions) of the States concerning the 
        adequacy of such requirements as established under this 
        title.
          (2) Exemption to permit service to customers.--No 
        law, rule, regulation, or order, or other 
        administrative action of any State or political 
        subdivision thereof shall prohibit an associated person 
        from effecting a transaction described in paragraph (3) 
        for a customer in such State if--
                  (A) such associated person is not ineligible 
                to register with such State for any reason 
                other than such a transaction;
                  (B) such associated person is registered with 
                a registered securities association and at 
                least one State; and
                  (C) the broker or dealer with which such 
                person is associated is registered with such 
                State.
          (3) Described transactions.--A transaction is 
        described in this paragraph if--
                  (A) such transaction is effected--
                          (i) on behalf of a customer that, for 
                        30 days prior to the day of the 
                        transaction, maintains an account with 
                        the broker or dealer; and
                          (ii) by an associated person (I) to 
                        which the customer was assigned for 14 
                        days prior to the day of the 
                        transaction, and (II) who is registered 
                        with a State in which the customer was 
                        a resident or was present for at least 
                        30 consecutive days during the one-year 
                        period prior to the transaction;
                except that, if the customer is present in 
                another State for 30 or more consecutive days 
                or has permanently changed his or her residence 
                to another State, such transaction is not 
                described in this subparagraph unless the 
                associated person files with such State an 
                application for registration within 10 business 
                days of the later of the date of the 
                transaction or the date of the discovery of the 
                presence of the customer in the State for 30 or 
                more consecutive days or the change in the 
                customer's residence;
                  (B) the transaction is effected--
                          (i) on behalf of a customer that, for 
                        30 days prior to the day of the 
                        transaction, maintains an account with 
                        the broker or dealer; and
                          (ii) within the period beginning on 
                        the date on which such associated 
                        person files with the State in which 
                        the transaction is effected an 
                        application for registration and ending 
                        on the earlier of (I) 60 days after the 
                        date the application is filed, or (II) 
                        the time at which such State notifies 
                        the associated person that it has 
                        denied the application for registration 
                        or has stayed the pendency of the 
                        application for cause; or
                  (C) the transaction is one of 10 or fewer 
                transactions in a calendar year (excluding any 
                transactions described in subparagraph (A) or 
                (B)) which the associated person effects in the 
                States in which the associated person is not 
                registered.
          (4) Alternate associated persons.--For purposes of 
        paragraph (3)(A)(ii), each of up to 3 associated 
        persons who are designated to effect transactions 
        during the absence or unavailability of the principal 
        associated person for a customer may be treated as an 
        associated person to which such customer is assigned 
        for purposes of such paragraph.
          * * * * * * *

  accounts and records, examinations of exchanges, members, and others

  Sec. 17. (a) * * *
          * * * * * * *
  (i) Coordination of Examining Authorities.--
          (1) Elimination of duplication.--The Commission and 
        the examining authorities, through cooperation and 
        coordination of examination and oversight as required 
        by this subsection, shall eliminate any unnecessary and 
        burdensome duplication in the examination process.
          (2) Planning conferences.--
                  (A) The Commission and the examining 
                authorities shall meet at least annually for a 
                national general planning conference to discuss 
                coordination of examination schedules and 
                priorities and other areas of interest relevant 
                to examination coordination and cooperation.
                  (B) Within each geographic region designated 
                by the Commission, the Commission and the 
                relevant examining authorities shall meet at 
                least annually for a regional planning 
                conference to discuss examination schedules and 
                priorities and other areas of related interest, 
                and to encourage information-sharing and to 
                avoid unnecessary duplication of examinations.
          (3) Coordination tracking system for broker-dealer 
        examinations.--
                  (A) The Commission and the examining 
                authorities shall prepare, on a periodic basis 
                in a uniform computerized format, information 
                on registered broker and dealer examinations 
                and shall submit such information to the 
                Commission.
                  (B) The Commission shall maintain a 
                computerized database of consolidated 
                examination information to be used for 
                examination planning and scheduling and for 
                monitoring coordination of registered broker 
                and dealer examinations under this section.
          (4) Coordination of examinations.--
                  (A) The examining authorities shall share 
                among themselves such information, including 
                reports of examinations, customer complaint 
                information, and other non-public regulatory 
                information, as appropriate to foster a 
                coordinated approach to regulatory oversight of 
                registered brokers and dealers subject to 
                examination by more than one examining 
                authority.
                  (B) To the extent practicable, the examining 
                authorities shall assure that each registered 
                broker and dealer subject to examination by 
                more than one examining authority that requests 
                a coordinated examination shall have all 
                requested aspects of the examination conducted 
                simultaneously and without duplication of the 
                areas covered. The examining authorities shall 
                also prepare an advance schedule of all such 
                coordinated examinations.
          (5) Prohibited non-coordinated examinations.--Any 
        examining authority that does not participate in a 
        coordinated examination pursuant to paragraph (4) of 
        this subsection shall not conduct a routine examination 
        other than a coordinated examination of that broker or 
        dealer within 9 months of the conclusion of a scheduled 
        coordinated examination.
          (6) Examinations for cause.--At any time, any 
        examining authority may conduct an examination for 
        cause of any broker or dealer subject to its 
        jurisdiction.
          (7) Broker-dealer examination evaluation panel.--The 
        Commission shall establish an examination evaluation 
        panel composed of representatives of registered brokers 
        and dealers that are members of more than one self-
        regulatory organization that conducts routine 
        examinations. Prior to each national general planning 
        conference required by paragraph (2)(A) of this 
        subsection, the Commission shall convene the 
        examination evaluation panel to review consolidated and 
        statistical information on the coordination of 
        examinations and information on examinations that are 
        not coordinated, including the findings of Commission 
        examiners on the effectiveness of the examining 
        authorities in achieving coordinated examinations. The 
        Commission shall present any findings and 
        recommendations of the examination evaluation panel to 
        the next meeting of the national general planning 
        conference, and shall report back to the examination 
        evaluation panel on the actions taken by the examining 
        authorities regarding those findings and 
        recommendations. The examination evaluation panel shall 
        not be subject to the Federal Advisory Committee Act (5 
        U.S.C. App.).
          (8) Report to congress.--Within one year after the 
        date of enactment of this Act, the Commission shall 
        report to the Congress on the progress it and the 
        examining authorities have made in reducing duplication 
        and improving coordination in registered broker and 
        dealer examinations, and on the activities of the 
        examination evaluation panel. Such report shall also 
        indicate whether the Commission has identified 
        additional redundancies that have failed to be 
        addressed in the coordination of examining authorities, 
        or any recommendations of the examination evaluation 
        panel established under paragraph (7) of this 
        subsection that have not been addressed by the 
        examining authorities or the Commission.
          * * * * * * *

                         effect on existing law

  Sec. 28. (a) The rights and remedies provided by this title 
shall be in addition to any and all other rights and remedies 
that may exist at law or in equity; but no person permitted to 
maintain a suit for damages under the provisions of this title 
shall recover, through satisfaction of judgment in one or more 
actions, a total amount in excess of his actual damages on 
account of the act complained of. [Nothing] Except as otherwise 
specifically provided elsewhere in this title, nothing in this 
title shall affect the jurisdiction of the securities 
commission (or any agency or officer performing like functions) 
of any State over any security or any person insofar as it does 
not conflict with the provisions of this title or the rules and 
regulations thereunder. No State law which prohibits or 
regulates the making or promoting of wagering or gaming 
contracts, or the operation of ``bucket shops'' or other 
similar or related activities, shall invalidate any put, call, 
straddle, option, privilege, or other security, or apply to any 
activity which is incidental or related to the offer, purchase, 
sale, exercise, settlement, or closeout of any such instrument, 
if such instrument is traded pursuant to rules and regulations 
of a self-regulatory organization that are filed with the 
Commission pursuant to section 19(b) of this Act.
          * * * * * * *

SEC. 36. GENERAL EXEMPTIVE AUTHORITY.

  Notwithstanding any other provision of this title, the 
Commission, by rule, regulation, or order, may conditionally or 
unconditionally exempt any person, security, or transaction, or 
any class or classes of persons, securities, or transactions, 
from any provision or provisions of this title or of any rule 
or regulation thereunder, to the extent that such exemption is 
necessary or appropriate in the public interest, and is 
consistent with the protection of investors. The Commission 
shall by rules and regulations determine the procedures under 
which an exemptive order under this section shall be granted 
and may, in its sole discretion, decline to entertain any 
application for an order of exemption under this section.
          * * * * * * *
                              ----------                              


                     INVESTMENT COMPANY ACT OF 1940

                     TITLE I--INVESTMENT COMPANIES

          * * * * * * *

                          general definitions

  Sec. 2. (a) When used in this title, unless the context 
otherwise requires--
          (1) * * *
          * * * * * * *
          (51) ``Qualified purchaser'' means--
                  (A) any natural person who owns at least 
                $10,000,000 in securities of issuers that are 
                not controlled by such person, except that 
                securities of such a controlled issuer may be 
                counted toward such amount if such issuer is, 
                or but for the exception in paragraph (1) or 
                (7) of section 3(c) would be, an investment 
                company;
                  (B) any trust not formed for the specific 
                purpose of acquiring the securities offered, as 
                to which the trustee or other person authorized 
                to make decisions with respect to the trust, 
                and each settlor or other person who has 
                contributed assets to the trust, is a person 
                described in subparagraph (A) or (C); or
                  (C) any person, acting for its own account or 
                the accounts of other qualified purchasers, who 
                in the aggregate owns and invests on a 
                discretionary basis, not less than $100,000,000 
                in securities of issuers that are not 
                affiliated persons (as defined in paragraph 
                (3)(C) of this subsection) of such person, 
                except that securities of such an affiliated 
                person issuer may be counted toward such amount 
                if such issuer is, or but for the exception in 
                paragraph (1) or (7) of section 3(c) would be, 
                an investment company.
        The Commission may adopt such rules and regulations 
        governing the persons and trusts specified in 
        subparagraphs (A), (B), and (C) of this paragraph as it 
        determines are necessary or appropriate in the public 
        interest and for the protection of investors.
          * * * * * * *
  (c) Consideration of Promotion of Efficiency, Competition, 
and Capital Formation.--Whenever pursuant to this title the 
Commission is engaged in rulemaking and is required to consider 
or determine whether an action is consistent with the public 
interest, the Commission shall also consider, in addition to 
the protection of investors, whether the action will promote 
efficiency, competition, and capital formation.

                    definition of investment company

  Sec. 3. (a) When used in this title, ``investment company'' 
means any issuer which--
          (1) * * *
          * * * * * * *
As used in this section, ``investment securities'' includes all 
securities except (A) Government securities, (B) securities 
issued by employees' securities companies, and (C) securities 
issued by majority-owned subsidiaries of the owner (i) which 
are not investment companies, and (ii) which are not relying on 
the exception from the definition of investment company in 
subsection (c)(1) or (c)(7) of this section.
          * * * * * * *
  (c) Notwithstanding subsection (a), none of the following 
persons is an investment company within the meaning of this 
title:
          (1) Any issuer whose outstanding securities (other 
        than short-term paper) are beneficially owned by not 
        more than one hundred persons and which is not making 
        and does not presently propose to make a public 
        offering of its securities. Such issuer nonetheless is 
        deemed to be an investment company for purposes of the 
        limitations set forth in section 12(d)(1)(A)(i) and 
        (B)(i) governing the purchase or other acquisition by 
        such issuer of any security issued by any registered 
        investment company and the sale of any security issued 
        by any registered open-end company to any such issuer. 
        For purposes of this paragraph:
                  (A) Beneficial ownership by a company shall 
                be deemed to be beneficial ownership by one 
                person, except that, if the company owns 10 per 
                centum or more of the outstanding voting 
                securities of the issuer, and is or, but for 
                the exception in this paragraph or paragraph 
                (7), would be an investment company, the 
                beneficial ownership shall be deemed to be that 
                of the holders of such company's outstanding 
                securities (other than short-term paper) 
                [unless, as of the date of the most recent 
                acquisition by such company of securities of 
                that issuer, the value of all securities owned 
                by such company of all issuers which are or 
                would, but for the exception set forth in this 
                subparagraph, be excluded from the definition 
                of investment company solely by this paragraph, 
                does not exceed 10 per centum of the value of 
                the company's total assets. Such issuer 
                nonetheless is deemed to be an investment 
                company for purposes of section 12(d)(1).].
          * * * * * * *
          (2) Any person primarily engaged in the business of 
        underwriting and distributing securities issued by 
        other persons, selling securities to customers, [and 
        acting as broker,] acting as broker, and acting as 
        market intermediary, or any one or more of such 
        activities, whose gross income normally is derived 
        principally from such business and related activities. 
        For the purposes of this paragraph, the term ``market 
        intermediary'' means any person that regularly holds 
        itself out as being willing contemporaneously to engage 
        in, and is regularly engaged in the business of 
        entering into, transactions on both sides of the market 
        for a financial contract or one or more such financial 
        contracts. For purposes of the preceding sentence, the 
        term ``financial contract'' means any arrangement that 
        (A) takes the form of an individually negotiated 
        contract, agreement, or option to buy, sell, lend, 
        swap, or repurchase, or other similar individually 
        negotiated transaction commonly entered into by 
        participants in the financial markets; (B) is in 
        respect of securities, commodities, currencies, 
        interest or other rates, other measures of value, or 
        any other financial or economic interest similar in 
        purpose or function to any of the foregoing; and (C) is 
        entered into in response to a request from a 
        counterparty for a quotation or is otherwise entered 
        into and structured to accommodate the objectives of 
        the counterparty to such arrangement.
          * * * * * * *
          [(7) Reserved.]
          (7)(A) Any issuer (i) whose outstanding securities 
        are owned exclusively by persons who, at the time of 
        acquisition of such securities, are qualified 
        purchasers, and (ii) who is not making and does not 
        presently propose to make a public offering of such 
        securities. Securities that are owned by persons who 
        received the securities from a qualified purchaser as a 
        gift or bequest, or where the transfer was caused by 
        legal separation, divorce, death, or other involuntary 
        event, shall be deemed to be owned by a qualified 
        purchaser, subject to such rules, regulations, and 
        orders as the Commission may prescribe as necessary or 
        appropriate in the public interest or for the 
        protection of investors.
          (B) Notwithstanding subparagraph (A), an issuer is 
        within the exception provided by this paragraph if--
                  (i) in addition to qualified purchasers, its 
                outstanding securities are beneficially owned 
                by not more than 100 persons who are not 
                qualified purchasers if (I) such persons 
                acquired such securities on or before December 
                31, 1995, and (II) at the time such securities 
                were acquired by such persons, the issuer was 
                excepted by paragraph (1) of this subsection; 
                and
                  (ii) prior to availing itself of the 
                exception provided by this paragraph--
                          (I) such issuer has disclosed to such 
                        persons that future investors will be 
                        limited to qualified purchasers, and 
                        that ownership in such issuer is no 
                        longer limited to not more than 100 
                        persons, and
                          (II) concurrently with or after such 
                        disclosure, such issuer has provided 
                        such persons with a reasonable 
                        opportunity to redeem any part or all 
                        of their interests in the issuer for 
                        their proportionate share of the 
                        issuer's current net assets, or the 
                        cash equivalent thereof.
          (C) An issuer that is excepted under this paragraph 
        shall nonetheless be deemed to be an investment company 
        for purposes of the limitations set forth in section 
        12(d)(1)(A)(i) and (B)(i) governing the purchase or 
        other acquisition by such issuer of any security issued 
        by any registered investment company and the sale of 
        any security issued by any registered open-end company 
        to any such issuer.
          (D) For purposes of determining compliance with this 
        paragraph and paragraph (1) of this subsection, an 
        issuer that is otherwise excepted under this paragraph 
        and an issuer that is otherwise excepted under 
        paragraph (1) shall not be treated by the Commission as 
        being a single issuer for purposes of determining 
        whether the outstanding securities of the issuer 
        excepted under paragraph (1) are beneficially owned by 
        not more than 100 persons or whether the outstanding 
        securities of the issuer excepted under this paragraph 
        are owned by persons that are not qualified purchasers. 
        Nothing in this provision shall be deemed to establish 
        that a person is a bona fide qualified purchaser for 
        purposes of this paragraph or a bona fide beneficial 
        owner for purposes of paragraph (1) of this subsection.
          * * * * * * *

            functions and activities of investment companies

  Sec. 12. (a) * * *
          * * * * * * *
  (d)(1)(A) * * *
          * * * * * * *
  (E) The provisions of this paragraph (1) shall not apply to a 
security (or securities) purchased or acquired by an investment 
company if--
          (i) the depositor of, or principal underwriter for, 
        such investment company is a broker or dealer 
        registered under the Securities Exchange Act of 1934, 
        or a person controlled by such a broker or dealer;
          (ii) such security is the only investment security 
        held by such investment company (or such securities are 
        the only investment securities held by such investment 
        company, if such investment company is a registered 
        unit investment trust that issues two or more classes 
        or series of securities, each of which provides for the 
        accumulation of shares of a different investment 
        company); and
          (iii) [in the event such investment company is not a 
        registered investment company,] the purchase or 
        acquisition is made pursuant to an arrangement with the 
        issuer of, or principal underwriter for the issuer of, 
        the security whereby such investment company is 
        obligated--
                  (aa) either to seek instructions from its 
                security holders with regard to the voting of 
                all proxies with respect to such security and 
                to vote such proxies only in accordance with 
                such instructions, or to vote the shares held 
                by it in the same proportion as the vote of all 
                other holders of such security, and
                  (bb) in the event such investment company is 
                not a registered investment company to refrain 
                from substituting such security unless the 
                Commission shall have approved such 
                substitution in the manner provided in section 
                26 of this Act.
          * * * * * * *
  (G) The provisions of this paragraph (1) shall not apply to 
securities of a registered open-end company (the ``acquired 
company'') purchased or otherwise acquired by a registered 
open-end company (the ``acquiring company'') if--
          (i) the acquired company and the acquiring company 
        are part of the same group of investment companies;
          (ii) the securities of the acquired company, 
        securities of other registered open-end companies that 
        are part of the same group of investment companies, 
        Government securities, and short-term paper are the 
        only investments held by the acquiring company;
          (iii)(I) the acquiring company does not pay and is 
        not assessed any charges or fees for distribution-
        related activities with respect to securities of the 
        acquired company unless the acquiring company does not 
        charge a sales load or other fees or charges for 
        distribution-related activities; or
          (II) any sales loads and other distribution-related 
        fees charged with respect to securities of the 
        acquiring company, when aggregated with any sales load 
        and distribution-related fees paid by the acquiring 
        company with respect to securities of the acquired 
        company, are not excessive under rules adopted pursuant 
        to either section 22(b) or section 22(c) of this title 
        by a securities association registered under section 
        15A of the Securities Exchange Act of 1934 or the 
        Commission;
          (iv) the acquired company shall have a fundamental 
        policy that prohibits it from acquiring any securities 
        of registered open-end companies in reliance on this 
        subparagraph or subparagraph (F) of this subsection; 
        and
          (v) such acquisition is not in contravention of such 
        rules and regulations as the Commission may from time 
        to time prescribe with respect to acquisitions in 
        accordance with this subparagraph as necessary and 
        appropriate for the protection of investors.
For purposes of this subparagraph, a ``group of investment 
companies'' shall mean any two or more registered investment 
companies that hold themselves out to investors as related 
companies for purposes of investment and investor services.
  [(G)] (H) For the purposes of this paragraph (1), the value 
of an investment company's total assets shall be computed as of 
the time of a purchase or acquisition or as closely thereto as 
is reasonably possible.
  [(H)] (I) In any action brought to enforce the provisions of 
this paragraph (1), the Commission may join as a party the 
issuer of any security purchased or otherwise acquired in 
violation of this paragraph (1), and the court may issue any 
order with respect to such issuer as may be necessary or 
appropriate for the enforcement of the provisions of this 
paragraph (1).
  (J) The Commission, by rules and regulations upon its own 
motion or by order upon application, may conditionally or 
unconditionally exempt any person, security, or transaction, or 
any class or classes of persons, securities, or transactions 
from any provisions of this subsection, if and to the extent 
such exemption is consistent with the public interest and the 
protection of investors.
          * * * * * * *

        registration of securities under securities act of 1933

  Sec. 24. (a) * * *
          * * * * * * *
  [(e)(1) A registration statement under the Securities Act of 
1933 relating to a security issued by a face-amount certificate 
company or a redeemable security issued by an open-end 
management company or unit investment trust may be amended 
after its effective date so as to increase the securities 
specified therein as proposed to be offered. At the time of 
filing such amendment there shall be paid to the Commission a 
fee, calculated in the manner specified in section 6(b) of said 
Act, with respect to the additional securities therein proposed 
to be offered.
  [(2) The filing of such an amendment to a registration 
statement under the Securities Act of 1933 shall not be deemed 
to have taken place unless it is accompanied by a United States 
postal money order or a certified bank check or cash for the 
amount of the fee required under paragraph (1) of this 
subsection.]
  [(3)] (e) For the purposes of section 11 of the Securities 
Act of 1933, as amended, the effective date of the latest 
amendment filed [pursuant to this subsection or otherwise] 
shall be deemed the effective date of the registration 
statement with respect to securities sold after such amendment 
shall have become effective. For the purposes of section 13 of 
the Securities Act of 1933, as amended, no such security shall 
be deemed to have been bona fide offered to the public prior to 
the effective date of the latest amendment filed pursuant to 
this subsection. Except to the extent the Commission otherwise 
provides by rules or regulations as appropriate in the public 
interest or for the protection of investors, no prospectus 
relating to a security issued by a face-amount certificate 
company or a redeemable security issued by an open-end 
management company or unit investment trust which varies for 
the purposes of subsection (a)(3) of section 10 of the 
Securities Act of 1933 from the latest prospectus filed as a 
part of the registration statement shall be deemed to meet the 
requirements of said section 10 unless filed as part of an 
amendment to the registration statement under said Act and such 
amendment has become effective.
  [(f) In the case of securities issued by a face-amount 
certificate company or redeemable securities issued by an open-
end management company or unit investment trust, which are sold 
in an amount in excess of the number of securities included in 
an effective registration statement of any such company, such 
company may, in accordance with such rules and regulations as 
the Commission shall adopt as it deems necessary or appropriate 
in the public interest or for the protection of investors, 
elect to have the registration of such securities deemed 
effective as of the time of their sale, upon payment to the 
Commission, within six months after any such sale, of a 
registration fee of three times the amount of the fee which 
would have otherwise been applicable to such securities. Upon 
any such election and payment, the registration statement of 
such company shall be considered to have been in effect with 
respect to such shares. The Commission may also adopt rules and 
regulations as it deems necessary or appropriate in the public 
interest or for the protection of investors to permit the 
registration of an indefinite number of the securities issued 
by a face-amount certificate company or redeemable securities 
issued by an open-end management company or unit investment 
trust.]
  (f) Registration of Indefinite Amount of Securities.--
          (1) Indefinite registration of securities.--Upon the 
        effectiveness of its registration statement under the 
        Securities Act of 1933, a face-amount certificate 
        company, open-end management company, or unit 
        investment trust shall be deemed to have registered an 
        indefinite amount of securities.
          (2) Payment of registration fees.--Within 90 days 
        after the end of the company's fiscal year, the company 
        shall pay a registration fee to the Commission, 
        calculated in the manner specified in section 6(b) of 
        the Securities Act of 1933, based on the aggregate 
        sales price for which its securities (including, for 
        this purpose, all securities issued pursuant to a 
        dividend reinvestment plan) were sold pursuant to a 
        registration of an indefinite amount of securities 
        under this subsection during the company's previous 
        fiscal year reduced by--
                  (A) the aggregate redemption or repurchase 
                price of the securities of the company during 
                that year, and
                  (B) the aggregate redemption or repurchase 
                price of the securities of the company during 
                any prior fiscal year ending not more than 1 
                year before the date of enactment of the 
                Investment Company Act Amendments of 1996 that 
                were not used previously by the company to 
                reduce fees payable under this section.
          (3) Interest due on late payment.--A company paying 
        the fee or any portion thereof more than 90 days after 
        the end of the company's fiscal year shall pay to the 
        Commission interest on unpaid amounts, compounded 
        daily, at the underpayment rate established by the 
        Secretary of the Treasury pursuant to section 3717(a) 
        of title 31, United States Code. The payment of 
        interest pursuant to the requirement of this paragraph 
        shall not preclude the Commission from bringing an 
        action to enforce the requirements of paragraph (2) of 
        this subsection.
          (4) Rulemaking authority.--The Commission may adopt 
        rules and regulations to implement the provisions of 
        this subsection.
  (g) In addition to the prospectuses permitted or required in 
section 10 of the Securities Act of 1933, the Commission shall 
permit, by rules or regulations deemed necessary or appropriate 
in the public interest or for the protection of investors, the 
use of a prospectus for the purposes of section 5(b)(1) of such 
Act with respect to securities issued by a registered 
investment company. Such a prospectus, which may include 
information the substance of which is not included in the 
prospectus specified in section 10(a) of the Securities Act of 
1933, shall be deemed to be permitted by section 10(b) of such 
Act.
          * * * * * * *

                         unit investment trusts

  Sec. 26. (a) * * *
          * * * * * * *
  (e)(1) Subsection (a) shall not apply to any registered 
separate account funding variable insurance contracts, or to 
the sponsoring insurance company and principal underwriter of 
such account.
  (2) It shall be unlawful for any registered separate account 
funding variable insurance contracts, or for the sponsoring 
insurance company of such account, to sell any such contract, 
unless--
          (A) the fees and charges deducted under the contract 
        in the aggregate are reasonable in relation to the 
        services rendered, the expenses expected to be 
        incurred, and the risks assumed by the insurance 
        company, and the insurance company so represents in the 
        registration statement for the contract; and
          (B) the insurance company (i) complies with all other 
        applicable provisions of this section as if it were a 
        trustee or custodian of the registered separate 
        account; (ii) files with the insurance regulatory 
        authority of a State an annual statement of its 
        financial condition, which most recent statement 
        indicates that it has a combined capital and surplus, 
        if a stock company, or an unassigned surplus, if a 
        mutual company, of not less than $1,000,000, or such 
        other amount as the Commission may from time to time 
        prescribe by rule as necessary or appropriate in the 
        public interest or for the protection of investors; and 
        (iii) together with its registered separate accounts, 
        is supervised and examined periodically by the 
        insurance authority of such State.
  (3) The Commission may adopt such rules and regulations under 
paragraph (2)(A) as it determines are necessary or appropriate 
in the public interest or for the protection of investors. For 
the purposes of such paragraph, the fees and charges deducted 
under the contract shall include all fees and charges imposed 
for any purpose and in any manner.

                         periodic payment plans

  Sec. 27. (a) * * *
          * * * * * * *
  (i)(1) This section shall not apply to any registered 
separate account funding variable insurance contracts, or to 
the sponsoring insurance company and principal underwriter of 
such account, except as provided in paragraph (2).
  (2) It shall be unlawful for any registered separate account 
funding variable insurance contracts, or for the sponsoring 
insurance company of such account, to sell any such contract 
unless (A) such contract is a redeemable security, and (B) the 
insurance company complies with section 26(e) and any rules or 
regulations adopted by the Commission thereunder.
          * * * * * * *

       periodic and other reports; reports of affiliated persons

  Sec. 30. (a) * * *
  (b) Every registered investment company shall file with the 
Commission--
          [(1) such information and documents (other than 
        financial statements) as the Commission may require, on 
        a semi-annual or quarterly basis, to keep reasonably 
        current the information and documents contained in the 
        registration statement of such company filed under this 
        title; and]
          (1) such information, documents, and reports (other 
        than financial statements), as the Commission may 
        require to keep reasonably current the information and 
        documents contained in the registration statement of 
        such company filed under this title; and
          * * * * * * *
  (c) In exercising its authority under subsection (b)(1) to 
require the filing of information, documents, and reports on a 
basis more frequently than semi-annually, the Commission shall 
take such steps as it deems necessary or appropriate, 
consistent with the public interest and the protection of 
investors, to avoid unnecessary reporting by, and minimize the 
compliance burdens on, registered investment companies and 
their affiliated persons. Such steps shall include considering 
and requesting public comment on--
          (1) feasible alternatives that minimize the reporting 
        burdens on registered investment companies; and
          (2) the utility of such information, documents, and 
        reports to the Commission in relation to the costs to 
        registered investment companies and their affiliated 
        persons of providing such information, documents, and 
        reports.
  [(c)] (d) The Commission shall issue rules and regulations 
permitting the filing with the Commission, and with any 
national securities exchange concerned, of copies of periodic 
reports, or of extracts therefrom, filed by any registered 
investment company pursuant to subsections (a) and (b), in lieu 
of any reports and documents required of such company under 
section 13 or 15(d) of the Securities Exchange Act of 1934.
  [(d)] (e) Every registered investment company shall transmit 
to its stockholders, at least semi-annually, reports containing 
such of the following information and financial statements or 
their equivalent, as of a reasonably current date, as the 
Commission may prescribe by rules and regulations for the 
protection of investors, which reports shall not be misleading 
in any material respect in the light of the reports required to 
be filed pursuant to subsections (a) and (b):
          (1) * * *
          * * * * * * *
  (f) The Commission may by rule require that semi-annual 
reports containing the information set forth in subsection (e) 
include such other information as the Commission deems 
necessary or appropriate in the public interest or for the 
protection of investors. In exercising its authority under this 
subsection, the Commission shall take such steps as it deems 
necessary or appropriate, consistent with the public interest 
and the protection of investors, to avoid unnecessary reporting 
by, and minimize the compliance burdens on, registered 
investment companies and their affiliated persons. Such steps 
shall include considering and requesting public comment on--
          (1) feasible alternatives that minimize the reporting 
        burdens on registered investment companies; and
          (2) the utility of such information to shareholders 
        in relation to the costs to registered investment 
        companies and their affiliated persons of providing 
        such information
  [(e)] (g) Financial statements contained in annual reports 
required pursuant to subsections (a) and [(d)] (e), if required 
by the rules and regulations of the Commission, shall be 
accompanied by a certificate of independent public accountants. 
The certificate of such independent public accountants shall be 
based upon an audit not less in scope or procedures followed 
than that which independent public accountants would ordinarily 
make for the purpose of presenting comprehensive and dependable 
financial statements, and shall contain such information as the 
Commission may prescribe, by rules and regulations in the 
public interest or for the protection of investors, as to the 
nature and scope of the audit and the findings and opinion of 
the accountants. Each such report shall state that such 
independent public accountants have verified securities owned, 
either by actual examination, or by receipt of a certificate 
from the custodian, as the Commission may prescribe by rules 
and regulations.
  [(f)] (h) Every person who is directly or indirectly the 
beneficial owner of more than 10 per centum of any class of 
outstanding securities (other than short-term paper) of which a 
registered closed-end company is the issuer or who is an 
officer, director, member of an advisory board, investment 
adviser, or affiliated person of an investment adviser of such 
a company shall in respect of his transactions in any 
securities of such company (other than short-term paper) be 
subject to the same duties and liabilities as those imposed by 
section 16 of the Securities Exchange Act of 1934 upon certain 
beneficial owners, directors, and officers in respect of their 
transactions in certain equity securities.

                          accounts and records

  Sec. 31. [(a) Every registered investment company, and every 
underwriter, broker, dealer, or investment adviser which is a 
majority-owned subsidiary of such a company, shall maintain and 
preserve for such period or periods as the Commission may 
prescribe by rules and regulations, such accounts, books, and 
other documents as constitute the record forming the basis for 
financial statements required to be filed pursuant to section 
30 of this title, and of the auditor's certificates relating 
thereto. Every investment adviser not a majority-owned 
subsidiary of, and every depositor of any registered investment 
company, and every principal underwriter for any registered 
investment company other than a closed-end company, shall 
maintain and preserve for such period or periods as the 
Commission shall prescribe by rules and regulations, such 
accounts, books, and other documents as are necessary or 
appropriate to record such person's transactions with such 
registered company.
  [(b) All accounts, books, and other records, required to be 
maintained and preserved by any person pursuant to subsection 
(a), shall be subject at any time and from time to time to such 
reasonable periodic, special, and other examinations by the 
Commission, or any member or representative thereof, as the 
Commission may prescribe. Any such person shall furnish to the 
Commission, within such reasonable time as the Commission may 
prescribe, copies of or extracts from such records which may be 
prepared without undue effort, expense, or delay, as the 
Commission may by order require.] (a) Every registered 
investment company, and every underwriter, broker, dealer, or 
investment adviser that is a majority-owned subsidiary of such 
a company, shall maintain and preserve such records (as defined 
in section 3(a)(37) of the Securities Exchange Act of 1934) for 
such period or periods as the Commission, by rules and 
regulations, may prescribe as necessary or appropriate in the 
public interest or for the protection of investors. Every 
investment adviser not a majority-owned subsidiary of, and 
every depositor of any registered investment company, and every 
principal underwriter for any registered investment company 
other than a closed-end company, shall maintain and preserve 
for such period or periods as the Commission shall prescribe by 
rules and regulations, such records as are necessary or 
appropriate to record such person's transactions with such 
registered company. In exercising its authority under this 
subsection, the Commission shall take such steps as it deems 
necessary or appropriate, consistent with the public interest 
and for the protection of investors, to avoid unnecessary 
recordkeeping by, and minimize the compliance burden on, 
persons required to maintain records under this subsection 
(hereinafter in this section referred to as ``subject 
persons''). Such steps shall include considering, and 
requesting public comment on--
          (1) feasible alternatives that minimize the 
        recordkeeping burdens on subject persons;
          (2) the necessity of such records in view of the 
        public benefits derived from the independent scrutiny 
        of such records through Commission examination;
          (3) the costs associated with maintaining the 
        information that would be required to be reflected in 
        such records; and
          (4) the effects that a proposed recordkeeping 
        requirement would have on internal compliance policies 
        and procedures.
  (b) All records required to be maintained and preserved in 
accordance with subsection (a) of this section shall be subject 
at any time and from time to time to such reasonable periodic, 
special, and other examinations by the Commission, or any 
member or representative thereof, as the Commission may 
prescribe. For purposes of such examinations, any subject 
person shall make available to the Commission or its 
representatives any copies or extracts from such records as may 
be prepared without undue effort, expense, or delay as the 
Commission or its representatives may reasonably request. The 
Commission shall exercise its authority under this subsection 
with due regard for the benefits of internal compliance 
policies and procedures and the effective implementation and 
operation thereof.
  (c) Notwithstanding any other provision of law, the 
Commission shall not be compelled to disclose any internal 
compliance or audit records, or information contained therein, 
provided to the Commission under this section. Nothing in this 
subsection shall authorize the Commission to withhold 
information from Congress or prevent the Commission from 
complying with a request for information from any other Federal 
department or agency requesting the information for purposes 
within the scope of its jurisdiction, or complying with an 
order of a court of the United States in an action brought by 
the United States or the Commission. For purposes of section 
552 of title 5, United States Code, this section shall be 
considered a statute described in subsection (b)(3)(B) of such 
section 552.
  (d) For purposes of this section--
          (1) ``internal compliance policies and procedures'' 
        means policies and procedures designed by subject 
        persons to promote compliance with the Federal 
        securities laws; and
          (2) ``internal compliance and audit record'' means 
        any record prepared by a subject person in accordance 
        with internal compliance policies and procedures.
  [(c)] (e) The Commission may, in the public interest or for 
the protection of investors, issue rules and regulations 
providing for a reasonable degree of uniformity in the 
accounting policies and principles to be followed by registered 
investment companies in maintaining their accounting records 
and in preparing financial statements required pursuant to this 
title.
  [(d)] (f) The Commission, upon application made by any 
registered investment company, may by order exempt a specific 
transaction or transactions from the provisions of any rule or 
regulation made pursuant to subsection (c), if the Commission 
finds that such rule or regulation should not reasonably be 
applied to such transaction.
          * * * * * * *

                   unlawful representations and names

  Sec. 35. (a) * * *
          * * * * * * *
  [(d) It shall be unlawful for any registered investment 
company hereafter to adopt as a part of the name or title of 
such company, or of any security of which it is the issuer, any 
word or words which the Commission finds and by order declares 
to be deceptive or misleading. The Commission is authorized to 
bring an action in the proper district court of the United 
States or United States court of any Territory or other place 
subject to the jurisdiction of the United States alleging that 
the name or title of any registered investment company, or of 
any security which it has issued, is materially deceptive or 
misleading. If the court finds that the Commission's 
allegations in this respect, taking into consideration the 
history of the investment company and the length of time which 
it may have used any such name or title, are established, the 
court shall enjoin such investment company from continuing to 
use any such name or title.]
  (d) It shall be unlawful for any registered investment 
company to adopt as a part of the name or title of such 
company, or of any securities of which it is the issuer, any 
word or words that the Commission finds are materially 
deceptive or misleading. The Commission is authorized, by rule, 
regulation, or order, to define such names or titles as are 
materially deceptive or misleading.
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