[Senate Report 104-293]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 468
104th Congress                                                   Report
                                SENATE    

 2d Session                                                     104-293
_______________________________________________________________________



 
              THE SECURITIES INVESTMENT PROMOTION ACT OF 1996

                               __________

                              R E P O R T

                                 OF THE

                     COMMITTEE ON BANKING, HOUSING,
                           AND URBAN AFFAIRS
                          UNITED STATES SENATE

                              to accompany

                                S. 1815

                                     


                                     

                 June 26, 1996.--Ordered to be printed


            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

  ALFONSE M. D'AMATO, New York, 
             Chairman
PAUL S. SARBANES, Maryland           PHIL GRAMM, Texas
CHRISTOPHER J. DODD, Connecticut     RICHARD C. SHELBY, Alabama
JOHN F. KERRY, Massachusetts         CHRISTOPHER S. BOND, Missouri
RICHARD H. BRYAN, Nevada             CONNIE MACK, Florida
BARBARA BOXER, California            LAUCH FAIRCLOTH, North Carolina
CAROL MOSELEY-BRAUN, Illinois        ROBERT F. BENNETT, Utah
PATTY MURRAY, Washington             ROD GRAMS, Minnesota
                                     PETE V. DOMENICI, New Mexico

 Howard A. Menell, Staff Director
  Robert J. Giuffra, Jr., Chief 
              Counsel
 Philip E. Bechtel, Deputy Staff 
             Director
Steven B. Harris, Democratic Staff 
    Director and Chief Counsel
      Laura S. Unger, Counsel
Mitchell Feuer, Democratic Counsel
     George E. Whittle, Editor
                                 ______

                       Subcommittee on Securities

    PHIL GRAMM, Texas, Chairman
CHRISTOPHER J. DODD, Connecticut     ROBERT F. BENNETT, Utah
PATTY MURRAY, Washington             RICHARD C. SHELBY, Alabama
BARBARA BOXER, California            LAUCH FAIRCLOTH, North Carolina
RICHARD H. BRYAN, Nevada             ROD GRAMS, Minnesota

Wayne A. Abernathy, Staff Director
   Andrew Lowenthal, Democratic 
     Professional Staff Member

                                  (ii)


                            C O N T E N T S

                              ----------                              
                                                                   Page
Introduction.....................................................     1
History of the Legislation.......................................     1
Purpose and Summary..............................................     2
    Improved Regulation of Investment Advisers...................     3
        The problem: overlapping responsibilities prevent the 
          best use of resources for adequate supervision.........     3
        The solution: dividing regulatory responsibility.........     4
        Other improvements to investment adviser regulation......     5
    Improving Regulation of and Simplifying Rules for Mutual 
      Funds......................................................     5
        Background...............................................     5
        Registration of mutual funds.............................     6
        Modernizing mutual fund regulation.......................     7
        Additional investor protections: improving books and 
          records and shareholder reporting......................     9
        Expanding ``private'' investment pools...................     9
        Performance fees.........................................    11
    Opening the Capital Markets for Small Business...............    12
        The ``Small Business Incentive Act''.....................    12
    Streamlining Securities Regulation to Reflect the Changing 
      Marketplace................................................    14
        Background...............................................    14
        Facilitating registration of securities..................    14
        Regulatory flexibility...................................    15
        Analysis of economic effects of regulation...............    16
        Eliminating duplicative examinations.....................    16
        Access to foreign business information...................    17
        Church employee pension plans............................    17
        Promoting global preeminence of the U.S. securities 
          market.................................................    17
        Broker-dealer ``de minimis'' exemption...................    17
        SEC studies and reports..................................    19
Section-by-Section Analysis of S. 1815: The ``Securities 
  Investment Promotion Act of 1996''.............................    20
    Section 1. Short title; Table of contents....................    20
    Section 2. Severability......................................    20
Title I--Investment Advisers Supervision Coordination Act........    20
    Section 101. Short title.....................................    20
    Section 102. Funding for enhanced enforcement priority.......    20
    Section 103. Improved supervision through State and Federal 
      cooperation................................................    20
    Section 104. Interstate cooperation..........................    21
    Section 105. Disqualification of convicted felons............    21
    Section 106. Effective date..................................    21
Title II--Facilitating Investment in Mutual Funds................    21
    Section 201. Short title.....................................    21
    Section 202. Fund of funds...................................    22
    Section 203. Flexible registration of securities.............    22
    Section 204. Facilitating the use of current information in 
      advertising................................................    22
    Section 205. Variable insurance contracts....................    22
    Section 206. Prohibition on deceptive investment company 
      names......................................................    22
    Section 207. Excepted investment companies...................    23
    Section 208. Performance fee exemptions......................    25
    Section 209. Reports to the Commission and shareholders......    25
    Section 210. Books, records and inspections..................    25
Title III--Reducing the Cost of Saving and Investment............    26
    Section 301. Exemption for economic, business, and industrial 
      development companies......................................    26
    Section 302. Intrastate closed-end investment company 
      exemption..................................................    27
    Section 303. Definition of eligible portfolio company........    27
    Section 304. Definition of business development company......    27
    Section 305. Acquisition of assets by business development 
      companies..................................................    27
    Section 306. Capital structure amendments....................    27
    Section 307. Filing of written statements....................    27
    Section 308. Facilitating national securities markets........    27
    Section 309. Exemptive authority.............................    28
    Section 310. Analysis of economic effects of regulation......    28
    Section 311. Privatization of EDGAR..........................    29
    Section 312. Improving coordination of supervision...........    29
    Section 313. Increased access to foreign business information    29
    Section 314. Short-form registration.........................    29
    Section 315. Church employee pension plans...................    30
    Section 316. Promoting global preeminence of American 
      securities markets.........................................    31
    Section 317. Broker-dealer exemption from State law for 
      certain de minimis transactions............................    31
    Section 318. Studies and reports.............................    32
Regulatory Impact Statement......................................    32
Changes in Existing Law..........................................    34
Cost of the Legislation..........................................    34


                                                       Calendar No. 468
104th Congress                                                   Report
                                 SENATE

 2d Session                                                     104-293
_______________________________________________________________________


            THE SECURITIES INVESTMENT PROMOTION ACT OF 1996

                                _______
                                

                 June 26, 1996.--Ordered to be printed

_______________________________________________________________________


        Mr. D'Amato, from the Committee on Banking, Housing, and

                 Urban Affairs, submitted the following

                              R E P O R T

                         [To accompany S. 1815]

                              Introduction

    On June 19, 1996, the Senate Committee on Banking, Housing, 
and Urban Affairs met in legislative session and marked up and 
ordered to be reported S. 1815, a bill to improve regulation of 
the securities markets, reduce costs of investing, and for 
other purposes, with a recommendation that the bill do pass, 
with an amendment in the nature of a substitute. The 
Committee's action was taken by a vote of 16 in favor and none 
opposed.

                       History of the Legislation

    The Securities Investment Promotion Act of 1996, S. 1815, 
was introduced on May 23, 1996, by Senators Gramm, D'Amato, 
Dodd, Bryan, and Moseley-Braun. Senators Mack and Bennett were 
added as cosponsors in the days following. The legislation 
builds upon two bills previously introduced in the Senate, one 
of which was adopted by the Senate during the 103rd Congress. 
Title I of the bill is a revised and updated version of S. 148, 
the Investment Advisers Integrity Act, introduced on January 4, 
1995 by Senator Gramm. Sections 301 through 306 of the bill are 
drawn from the Small Business Incentive Act of 1993, S. 479, 
which was introduced on March 2, 1993, by Senators Dodd, 
D'Amato, Kerry, Bryan, Mack, Domenici, and others, approved by 
the Committee on September 21, 1993, and adopted by the Senate 
by a voice vote on November 2, 1993. Section 207 builds upon a 
concept also contained in S. 479.
    The full Committee conducted a legislative hearing on S. 
1815 on June 5, 1996. Testimony was received from the Honorable 
Arthur Levitt, Jr., Chairman of the Securities and Exchange 
Commission (``SEC'' or ``Commission''); Christopher W. Brody, 
Partner, Warburg Pincus & Company, on behalf of the National 
Venture Capital Association; Matthew Fink, President of the 
Investment Company Institute; Dee R. Harris, Director, Division 
of Securities, Arizona Corporation Commission, and President of 
the North American Securities Administrators Association 
(``NASAA''), on behalf of NASAA; A.B. Krongard, Chairman and 
Chief Executive Officer, Alex Brown & Sons, and Chairman of the 
Securities Industry Association (``SIA''), on behalf of the 
SIA; Paul Saltzman, Senior Vice President and General Counsel, 
Public Securities Association; and Mark D. Tomasko, Executive 
Vice President, Investment Counsel Association of America.
    Additional comments, suggestions, and assistance in 
considering and evaluating the legislation were received from 
State regulators, staff of the SEC, trade associations, and 
numerous other private and public individuals. This broad input 
was essential in the Committee's efforts to produce legislation 
that enjoys wide public support and consensus within the 
Committee.

                          Purpose and Summary

    The purpose of this legislation was evidenced by SEC 
Chairman Levitt in his testimony before the Committee: ``The 
current system of dual federal-state regulation is not the 
system that Congress--or the Commission--would create today if 
we were designing a new system * * * An appropriate balance can 
be attained in the federal-state arena that better allocates 
responsibilities, reduces compliance costs and facilitates 
capital formation, while continuing to provide for the 
protection of investors. The bill's approach to the division of 
responsibilities in the investment adviser and investment 
company areas exemplifies such a balance.''
    While the bill makes amendments to four separate federal 
securities statutes (the Securities Act of 1933, the Securities 
Exchange Act of 1934, the Investment Company Act of 1940, and 
the Investment Advisers Act of 1940) its key provisions, taken 
together, focus on the need to delineate more clearly the 
securities law responsibilities of the federal and state 
governments. Currently, that relationship is a confusing, 
conflicting, and involves a degree of overlap that may raise 
costs unnecessarily for American investors and the members of 
the securities industry. The Committee believes that the 
reforms in this bill will enhance investor protection while 
reducing the costs of investing.
    Title I of the bill creates a clear division of labor 
between the states and the federal government for supervision 
of investment advisers. Currently, while investment advisers 
are nominally supervised by the SEC and by most states, both 
are overwhelmed by the size of the task, with more than 22,000 
investment advisers currently registered with the SEC. The 
reality has been that while investment advisers may boast of 
their registration with the SEC, the SEC has been unable to 
conduct active supervision of more than a fraction of the 
advisers registered with the Commission.\1\ State securities 
commissioners have similarly found their resources spread thin. 
Title I would improve supervision by focusing SEC supervision 
on investment advisers most likely to be engaged in interstate 
commerce and focusing state supervision on advisers whose 
activities are most likely to be centered in their home state.
---------------------------------------------------------------------------
    \1\ Testimony of Arthur Levitt, Chairman of the U.S. Securities and 
Exchange Commission concerning S. 1815, the ``Securities Investment 
Promotion Act of 1996,'' before the Committee on Banking, Housing, and 
Urban Affairs, June 5, 1996 at Appendix A, p. 2.
---------------------------------------------------------------------------
    Title II of the bill recognizes the need to reform the 
Investment Company Act in keeping with changing technologies 
and market and investing conditions. Taken together, these 
provisions will reduce the regulatory costs borne by investment 
companies, facilitate the ability of investment companies to 
share timely information with investors, broaden investor 
choices, and have the effect of further promoting saving and 
investing in the economy.
    Title III contains a number of additional provisions to 
reduce the cost of saving and investment. Perhaps most 
significant are provisions that would recognize and strengthen 
the national markets for mutual funds and stocks. Many mutual 
funds are traded in a truly national market, today they are 
still subject to standards set by as many as fifty-two 
different government authorities. The bill would apply one 
national standard for registration of securities that trade in 
a national securities market. At the same time, the bill 
preserves the legitimate role of the states to enforce their 
laws against fraudulent actions. Each of the provisions of this 
Title would remove or reform regulations and regulatory 
practices and conditions that are outmoded or otherwise serve 
neither investors nor the companies that employ capital for the 
creation of jobs and economic growth and opportunity in the 
United States.

               IMPROVED REGULATION OF INVESTMENT ADVISERS

The problem: overlapping responsibilities prevent the best use of 
        resources for adequate supervision

    Today there are approximately 22,500 investment advisers 
registered with the Securities and Exchange Commission. The 
number of registered investment advisers has increased by over 
500% since 1980, far outstripping the growth in the 
Commission's examination resources. As a result, smaller 
investment advisers are now examined, on average, once every 44 
years--amounting to virtually no regulation at all.\2\
---------------------------------------------------------------------------
    \2\ Id.
---------------------------------------------------------------------------
    The Committee is concerned about the lack of adequate 
oversight of the growing number of investment advisers and the 
impact inadequate regulation may have on investors and American 
consumers. This is particularly troublesome since many 
investment advisers hold themselves out to the public as 
``REGISTERED WITH THE SEC,'' a statement that may give 
investors a false sense of confidence--particularly if the 
investment adviser has never actually been inspected by the SEC 
and is in little danger of any imminent inspection.
    Recognizing the limited resources of both the Commission 
and the states, the Committee believes that eliminating 
overlapping regulatory responsibilities will allow the 
regulators to make the best use of their scarce resources to 
protect clients of investment advisers. The states should play 
an important and logical role in regulating small investment 
advisers whose activities are likely to be concentrated in 
their home state. Larger advisers, with national businesses, 
should be registered with the Commission and be subject to 
national rules.

The solution: dividing regulatory responsibility

    The legislation allows states to assume the primary role 
with respect to regulating advisers that are small, local 
businesses, managing less than $25 million in client assets, 
while the Commission's role is focused on larger advisers with 
$25 million or more in client assets under management. The 
Commission will continue to supervise all advisers that are 
based in a state that does not register investment advisers.
    Investment advisers registered with the states will no 
longer have to register with the SEC. Investment advisers 
registered with the SEC will no longer have to register with 
the states but will continue to pay fees to the states. State 
regulators will enforce books and records and financial 
responsibility laws for investment advisers registered in their 
state. Both the Commission and the states will be able to 
continue bringing anti-fraud actions against investment 
advisers regardless of whether the investment adviser is 
registered with the state or the SEC.
    Based on data filed with the Commission, this regulatory 
scheme will leave states with primary responsibility for over 
16,000 investment advisers (or almost 72% of Commission 
registrants) and the Commission responsibility for the 
remaining 6,300 or so investment advisers. Significantly, those 
6,300 investment advisers manage assets totaling approximately 
95% of the almost $8 trillion currently overseen by investment 
advisers--allowing the Commission to concentrate its resources 
on investment advisers with a national businesses.\3\
---------------------------------------------------------------------------
    \3\ Id.
---------------------------------------------------------------------------
    The Committee preempts state registration of Commission-
registered advisers as well as advisers that are specifically 
excepted from the definition of investment adviser. Persons who 
are supervised by advisers registered with the Commission are 
also preempted from state registration. A ``supervised person'' 
includes employees or independent contractors of the investment 
adviser who are supervised and controlled by the investment 
adviser and who provide investment advice on its behalf.\4\
---------------------------------------------------------------------------
    \4\ The Internal Revenue Service should not base an indivdual's 
status as an employee or independent contractor solely on an entity's 
requirement to supervise that individual under the federa securities 
laws.
---------------------------------------------------------------------------
    The bill generally exempts investment advisers who manage 
less than $25 million from SEC registration, but provides for 
some flexibility by giving the Commission authority to grant 
exemptions from the prohibition. The SEC may exempt from state 
registration those advisers for whom registration would be 
``unfair'' or a ``burden on interstate commerce.'' The SEC may 
similarly make exemptions from SEC registration.
    The Committee recognizes that the definition of ``assets 
under management'' requires that there be continuous and 
regular supervisory or management services--a standard which 
may, in some cases, exclude firms with a national or multistate 
practice from being able to register with the SEC. The 
Committee intends the Commission to use its exemptive authority 
to permit, where appropriate, the registration of such firms 
with the Commission. The Commission should also use the 
exemptive authority to address circumstances in which an 
adviser temporarily does not have $25 million under management. 
These examples do not serve to limit the SEC's exemptive 
authority, but merely to illustrate situations the SEC should 
address promptly.
    The SEC may also use its exemptive authority under the bill 
to raise the $25 million threshold higher as it deems 
appropriate in keeping with the purposes of the Investment 
Advisers Act. In testimony before the Committee, Dee R. Harris, 
testifying on behalf of the NASAA, suggested that the SEC 
review the appropriateness of that threshold at least every 
three years. The Committee concurs with NASAA's view on this 
and recommends it to the SEC. As guidance in the review 
process, the SEC may want to consider (1) the total number of 
investment advisers; (2) their geographical locations; (3) 
their methods of operation; and (4) their methods of operation. 
The SEC may also want to seek comments from investment 
advisers, financial planners, state regulators, and other 
interested parties.

Other improvements to investment adviser regulation

    The new regulatory approach envisioned should encourage the 
state regulators and the SEC to create a uniform filing system 
for ``one stop'' filings. A uniform filing system would benefit 
investors, reduce regulatory and paperwork burdens for 
registered investment advisers and facilitate supervisory 
coordination between the states and the SEC.
    The Investment Advisers Act now permits the Commission to 
bar certain individuals who have been convicted of specific 
crimes primarily involving financial matters or theft from 
serving as investment advisers. The current limits of the 
statute create a perverse situation where the SEC can bar an 
embezzler from the advisory industry, but not a convicted 
murderer or drug dealer. In a few cases, the Commission has had 
some difficulty in keeping an obviously unfit felon from 
registering as an investment adviser. The Committee believes 
that unfit felons should not be entrusted with the 
responsibility of giving investment advice and managing client 
assets. Therefore, the Committee gives the SEC new authority to 
deny or withdraw the registration of any person convicted of a 
felony (or of any adviser associated with such a person) to 
eliminate this problem.

     IMPROVING REGULATION OF AND SIMPLIFYING RULES FOR MUTUAL FUNDS

Background

    Over 30 million U.S. households--about one in three 
families--now own an aggregate of approximately $2.7 trillion 
in mutual fund assets. In the last year alone, mutual funds 
assets grew by $700 billion. Just ten years ago, the entire 
mutual fund industry assets added up to about $700 billion.\5\
---------------------------------------------------------------------------
    \5\ ``From Security to Self-Reliance: American Investors in the 
1990's,'' Remarks by Arthur Levitt, Chairman of the Securities and 
Exchange Commission, to the Investment Company Institute in Washington, 
D.C., May 22, 1996.
---------------------------------------------------------------------------
    Despite the enormous growth in mutual funds, the law 
governing mutual fund regulation has remained virtually 
untouched for over 25 years. S. 1815 amends the Investment 
Company Act of 1940 and amends the Securities Act of 1933 to 
facilitate the registration and operation of mutual funds.

Registration of mutual funds

    Currently, a mutual fund must register its shares with the 
SEC and comply with registration requirements in each of the 
fifty states where it wishes to publicly offer its securities. 
Although there is some similarity among state's registration 
requirements, according to the Investment Company Industry's 
testimony before the Committee, the fifty states still require 
up to sixteen different approaches to regulation.\6\ For 
example, some states comment on the mutual fund prospectus and 
limit the types of investments certain funds may make. Other 
states require registration, conduct a ``merit review'' of the 
offering, or offer an exemption from registration. This ``crazy 
quilt'' of regulation has made registration of mutual fund 
shares unnecessarily cumbersome--in some cases leading mutual 
funds to restrict their fund offerings to residents of certain 
states.
---------------------------------------------------------------------------
    \6\ Prepared statement of Matthew P. Fink, President, investment 
Company Institute, before the Committee on Banking, Housing, and Urban 
Affairs on S. 1815, the ``Securities Investment Promotion Act of 1996'' 
at Appendix A, p. 3.
---------------------------------------------------------------------------
    The Committee believes that it is appropriate to provide 
for exclusive federal review of mutual fund--and other 
investment company--registration. Exclusive federal review of 
investment company registration would significantly benefit 
mutual funds and investors. State regulation frequently poses 
significant obstacles to investment companies even though they 
engage in business on a national scale and are constantly in 
registration. In addition, the SEC already comprehensively 
regulates investment companies under the disclosure provisions 
of the Securities Act and the substantive regulatory provisions 
of the Investment Company Act.
    The legislation approved by the Committee provides for 
states to continue carrying out their important role of 
policing fraud in connection with investment company offerings. 
The states will also continue to collect registration or 
``appropriate'' fees that may be used to augment existing 
antifraud programs. The Committee also preserves states' 
authority to regulate broker-dealer conduct whether or not the 
offering is preempted from state review. In preserving this 
authority, however, the Committee expects the states only to 
police conduct--not to use this authority as justification to 
continue reviewing investment company registration statements 
or prospectuses.
    The Committee does not intend for the ``policing'' 
authority to provide states with a means to undo the state 
preemption of investment company registration. However, the 
Committee believes that allowing states to continue overseeing 
broker-dealer conduct in connection with preempted offerings 
will maintain added investor protection. The Committee does not 
intend to alter state statutory or common law with respect to 
fraud or deceit, including broker-dealer sales practices, in 
connection with securities or securities transactions.

Modernizing mutual fund regulation

    The Committee's legislation also updates certain aspects of 
mutual fund regulation. It permits a mutual fund to invest in 
other mutual funds in its ``family,'' simplifies the way mutual 
funds register and pay registration fees, enables mutual funds 
to include current information in their advertisements without 
cluttering up the initial prospectus, and prohibits potentially 
misleading fund names.
            ``Fund of funds''
    In 1970, the Investment Company Act was amended to restrict 
fund of funds arrangements--where one investment company 
invests in another investment company--in response to concerns 
at that time that these types of arrangements resulted in 
excessive layering of fees and abuses of control arising from 
the concentration of voting power in the acquiring fund.
    A new type of fund of funds, involving a fund that invests 
in other funds in the same group or ``family'' of funds, has 
become a popular way for investors to diversify a fund 
investment through a single, professionally managed portfolio. 
The SEC has granted individual exemptions from the Investment 
Company Act's restrictions to several similar fund of funds 
arrangements, subject to certain conditions that address the 
concerns underlying the statutory restrictions (such as overly 
complex corporate structures and excessive distribution fees). 
S.1815 enables fund of funds arrangements involving a group of 
investment companies to be offered without obtaining prior 
exemptive relief from the Commission. The bill also gives the 
SEC authority to adopt rules to fill any gaps in investor 
protection or to address any abuses arising in connection with 
this new fund-of-funds exemption.
            Flexible registration of securities
    Mutual funds and certain other types of investment 
companies sell and redeem their shares on a continuous basis. 
Right now, mutual funds may pay registration fees required by 
the Securities Act based on net sales less redemptions. If 
certain filing deadlines are not met, however, mutual funds 
face serious penalties. If a mutual fund pays its registration 
fees more than 60 days late, the fund may not ``net'' its sales 
against its redemptions--resulting in significantly higher 
registration fees. If a mutual fund fails to pay its 
registration fees within 180 days, the fund may be deemed to 
have sold unregistered securities--possibly allowing 
shareholders to rescind their transactions. This payment system 
unduly punishes late filings and the penalties do not further 
investor protection. Accordingly, the bill implements a new, 
simpler system for the payment of registration fees, with an 
incentive to file and pay fees promptly. This system ensures 
that mutual funds will not be deemed to have sold unregistered 
securities or lose the ability to net redemptions against sales 
simply because the registration fee was paid late. Instead, S. 
1815 encourages timely filing and payment by requiring mutual 
funds that file late to pay interest on the amount due to the 
U.S. Treasury.
    The bill accommodates concerns expressed by the SEC by 
extending the effective date for this provision to the earlier 
of one year or the conclusion of SEC rulemaking. This extension 
should be a sufficient amount of time for the Commission to 
review its rules and reprogram its systems to accommodate the 
changes.
            Facilitating mutual fund advertising
    Mutual funds continuously offer and sell their shares to 
the public--making advertising a critical part of their 
operations. Like other public issuers of securities, funds must 
comply with the advertising requirements of the Securities Act. 
However, the Securities Act regulatory scheme has proven to be 
an inappropriate fit for fund advertising.
    Currently, funds may advertise performance data and other 
information, so long as the ``substance of'' that information 
is contained in the fund's prospectus. As a result, funds often 
clutter up their prospectuses with information they may later 
want to include in advertisements. For example, funds could not 
advertise matters of investor interest, including whether it 
will hold derivatives or the effect of economic conditions on 
the fund's investment policies, without having included this 
information in the fund's prospectus.
    The bill improves fund advertising by giving the Commission 
express authority to create a new investment company 
``advertising prospectus.'' Funds would be able to use an 
advertising prospectus to show performance data and other 
information unrestricted by the ``substance of'' requirement. 
The Committee believes the benefits to investors from this 
change will be twofold. First, it will encourage shorter, more 
``investor-friendly'' disclosure documents. Second, it will 
increase the amount of timely information about a fund.
    The advertising prospectus would be subject to the 
liability provisions of the Securities Act applicable to 
prospectuses.
            Prohibiting deceptive or misleading investment company 
                    names
    When making an investment decision, investors may focus on 
fund names to determine the fund's investment objective and 
level of risk. For example, investors may believe that a mutual 
fund name that includes ``government,'' ``guaranteed,'' or 
``insured'' means their investments are guaranteed by state or 
federal governmental authorities.
    The Investment Company Act currently prohibits funds from 
using misleading or deceptive names. Enforcing the Act entails 
a cumbersome process--the Commission must first find, and 
declare by order, that a fund's name is deceptive or 
misleading, and then bring an action in federal court to enjoin 
use of the name. The Committee believes that investor 
protection merits a more streamlined approach to making sure 
mutual funds do not name their funds in a misleading manner. 
S.1815 authorizes the SEC to address these practices by rule. 
The SEC may define by rule names that it finds are ``materially 
deceptive or misleading.''
    This provision should not be construed to be a bar against 
common or similar names between a registered investment company 
and an affiliate organization, such as an insured bank.

Additional investor protections: improving books and records and 
        shareholder reporting

    Although the Investment Company Act requires mutual funds 
to maintain certain books and records and to report current 
information to shareholders, the Committee believes the SEC 
needs additional authority to strengthen those requirements, 
consistent with investor protection. Additional flexibility 
would also allow the SEC to adapt its examination program and 
shareholder reporting requirements to account for changes in 
the marketplace.
    Currently, the SEC can only require mutual funds to 
maintain records relating to the fund's financial statements. 
The SEC is further limited in its inspection program since it 
only has the authority to inspect the records mutual funds are 
required to maintain. S. 1815 enables the SEC to specify, by 
rule, the information that must be included in investment 
company records. The bill gives the SEC significant authority 
to enhance its inspection program--the SEC will have the 
ability both to require more record keeping and to inspect 
those records. The bill uses the same definition of ``records'' 
that broker-dealers must currently maintain to create a more 
uniform standard of record keeping in the securities industry.
    The bill approved by the Committee also expands the SEC's 
authority to prescribe the contents of semi-annual reports to 
shareholders. Right now, the SEC may only dictate the contents 
of a mutual fund's financial statements. Under the newly 
expanded authority, the SEC may also require that mutual funds 
provide more than semi-annual or quarterly reporting. 
Specifically, the SEC may require a fund to file information, 
documents and reports ``to keep reasonably current the 
information and documents contained in the registration 
statement.''
    While the Committee believes that the record keeping and 
shareholder reporting provisions will improve investor 
protection and enhance investor confidence, the Committee does 
not intend to unduly burden investment companies with 
unnecessary regulation. Accordingly, the bill requires the SEC 
to balance investor protection concerns with compliance burdens 
on investment companies to minimize the impact of added 
regulation. All things being equal, however, the Committee 
expects the SEC to take appropriate action to ensure investor 
protection.

Expanding ``private'' investment pools

    The Investment Company Act generally excepts from the 
Investment Company Act's regulation any issuer that has no more 
than 100 investors and does not publicly offer its securities. 
There is no requirement that any of those 100 investors meet 
any test of net worth or financial sophistication.\7\
---------------------------------------------------------------------------
    \7\ The Senate passed the ``Small Business Incentive Act'' (S. 
479), which contained a similar ``qualified purchaser'' provision, on 
November 2, 1993.
---------------------------------------------------------------------------
    The Committee recognizes the important role that these 
pools can play in facilitating capital formation for U.S. 
companies--particularly new ventures or companies in emerging 
industries. Regulatory restrictions on these private pools have 
caused some Americans to invest in unregulated offshore 
markets. The bill expands capital formation opportunities by 
creating a new exception from registration and regulation under 
the Investment Company Act for private investment pools. These 
private pools (``qualified purchaser pools'') could consist of 
an unlimited number of highly sophisticated shareholders who 
are ``qualified purchasers,'' so long as the pool does not 
publicly offer its securities.
    The qualified purchaser pool reflects the Committee's 
recognition that financially sophisticated investors are in a 
position to appreciate the risks associated with investment 
pools that do not have the Investment Company Act's 
protections. Generally, these investors can evaluate on their 
own behalf matters such as the level of a fund's management 
fees, governance provisions, transactions with affiliates, 
investment risk, leverage, and redemption rights.
    A ``qualified purchaser'' refers to (1) any natural person 
(including spouses when the investments are owned jointly) who 
owns at least $5 million in ``investments,'' as defined by the 
SEC; (2) any other person (such as an institutional investor) 
that owns and manages on a discretionary basis at least $25 
million in investments; and (3) any other person the SEC 
determines by rulemaking does not need the protections of the 
Investment Company Act.
    In defining any new class of qualified purchasers by rule, 
the Commission should consider, among other things, factors 
such as the participants' net worth, knowledge and experience 
in financial matters, and amount of assets owned or under 
management. The Committee intends the SEC to deem as qualified 
purchasers only those persons the SEC determines may fend for 
themselves without the protection of the Investment Company 
Act.
    The bill defers to the SEC to define what constitutes an 
``investment'' for purposes of meeting the $5 million and $25 
million thresholds. The Committee expects, however, that the 
SEC would define ``investments'' to include assets held for 
investment purposes. The Committee does not anticipate or 
recommend the inclusion, for example, of a controlling interest 
in a privately-owned family business or a personal residence.
    The legislation also recognizes certain family investment 
vehicles--family trusts and other types of companies--as 
qualified purchasers under certain circumstances. A ``company'' 
that has $5 million in assets and that is owned by an extended 
family would be considered a qualified purchaser.
    Only qualified purchasers may purchase interests in a 
qualified purchaser pool for their account or the account of 
other qualified purchasers. An investment adviser managing 
private accounts would not be permitted to purchase interests 
in a qualified purchaser pool on behalf of a client unless that 
client is also a qualified purchaser.
    As a general rule, qualified purchasers may not purchase an 
interest in a qualified purchaser pool solely to transfer the 
interest to one or more nonqualified purchasers. The Committee 
acknowledges at least two situations where qualified purchaser 
pool interests may legitimately be transferred. First, 
interests in a qualified purchaser pool received through a 
gift, bequest or other involuntary action are deemed to be made 
to qualified purchasers--even if the recipient does not 
otherwise meet the definition of qualified purchaser. Second, 
trusts in which only qualified purchasers have contributed 
assets are also deemed to be qualified purchasers.

Commodity Pools and Commodity Trading Advisers

    The Committee has not included a provision addressing the 
need for exemptive relief under the Investment Company Act and 
the Investment Advisers Act for commodity pools and commodity 
trading advisers.\8\ The Committee understands, however, that 
limited relief exists but has shown to be unduly restrictive. 
The SEC staff has indicated a willingness to consider and take 
action to give commodity pools and commodity trading advisers 
further administrative relief. The Committee expects the SEC 
staff to consider and, where appropriate, to take action to 
effect such administrative relief as soon as practicable 
following enactment of this legislation.
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    \8\ Generally, ``commodity pools'' refer to issuers that primarily 
engaged in the business of operating a commodity pool or investing in 
interests of such pools and ``commodity adviser'' refers to those 
individuals who trade or give trading advice on commodity interests.
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Performance fees

    The Investment Advisers Act generally prohibits a 
registered investment adviser from receiving compensation on 
the basis of a share of capital gains in or capital 
appreciation of a client's account. Commonly referred to as 
performance-based compensation or a ``performance fee,'' this 
type of compensation arrangement can take various forms. For 
example, a fee equaling 10% of an account's gains or a fee of 
20% of all the gains in an account exceeding the performance of 
a designated securities index or other bench mark would be a 
performance fee.
    Originally, performance fees were prohibited out of concern 
that they created incentives for advisers to take undue risks 
in managing a client's account in order to increase advisory 
fees. In 1970, Congress concluded that performance fees were 
not necessarily undesirable in all cases and exempted from the 
performance fee prohibition a type of fee known as a ``fulcrum 
fee.'' Investment advisers may enter into fulcrum fee 
arrangements with registered investment companies or persons 
with at least $1 million in assets. Commission rules also 
provide a limited exemption from the prohibition for advisory 
contracts with clients having at least $500,000 under 
management or a net worth exceeding $1 million.
    The Committee believes that investors in a qualified 
purchaser pool are sophisticated enough to be allowed to enter 
into a fee arrangement that is not a fulcrum fee. In addition, 
advisers should be permitted to enter into performance fee 
contracts with their foreign clients when such arrangements are 
legal and customary in a client's country of residence. S. 1815 
eliminates the competitive disadvantage experienced by U.S. 
investment advisers by allowing them to enter into customary 
performance fee arrangements with foreign clients. The bill 
also gives the SEC greater flexibility to exempt from the 
performance fee prohibition advisory contracts with 
institutional clients that can appreciate the risks and are in 
a position to protect themselves from overreaching by the 
adviser.

             opening the capital markets for small business

The ``Small Business Incentive Act''

    The Committee believes that small business is the engine of 
economic growth and remains interested in finding ways to open 
up the capital markets to small business. The provisions of the 
bill based on the ``Small Business Incentive Act'' enhance 
small business access to credit by making it easier for certain 
types of companies to raise capital and promote investments in 
small business. These provisions were considered and passed by 
the Senate during the 103rd Congress.
            Exemption for economic, business and industrial development 
                    companies
    State-chartered economic, business or industrial 
development companies that provide capital, investment and 
managerial assistance to small projects and businesses will no 
longer have to register with the SEC under the Investment 
Company Act if they meet two conditions. First, the company 
must be limited to promoting economic, business, or industrial 
development in the state in which the company is organized. 
Second, the company could not issue redeemable securities and 
must sell at least 80% of its securities to ``accredited 
investors'' residing in the state where the company is 
organized.
    The Committee believes these companies perform an important 
local function--stimulating local economies by providing direct 
investment and loan financing, as well as managerial 
assistance, to different types of state and local enterprises--
and should be regulated at the state level, not the federal 
level. States have a strong interest in these companies' 
operations. To qualify for the proposed exemption, a company 
would have to be regulated under a specific state statute and 
organized under the laws of that state.\9\ Because some state 
statutes provide comprehensive regulation, while others are 
less substantive, the bill authorizes the SEC to supplement 
state provisions when necessary to respond to investor 
protection concerns.
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    \9\ Forty-four states now have statutes specifically authorizing 
the creation of these companies.
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            Exemption for intrastate closed-end investment company
    The Commission currently may exempt an intrastate closed-
end fund from some or all of the Investment Company Act's 
provisions if the aggregate proceeds of completed and proposed 
offerings do not exceed $100,000. This limit was set in 1940 
and never has been changed. To reflect the capital needs of 
intrastate funds in today's financial market, the bill 
increases the aggregate offering amount to $10 million or such 
other amount as the SEC may set by rule or order.
            Business Development Companies
    Business development companies, or ``BDCs,'' are closed-end 
funds that invest in small and developing businesses. BDCs 
differ significantly from traditional investment companies, in 
that the Investment Company Act requires BDCs to offer 
significant managerial assistance to the company in which the 
BDC invests (the ``portfolio company''). The Committee believes 
that giving BDCs more flexibility will encourage more 
investment in small businesses.
    The SEC regulates BDCs in a manner similar to registered 
investment companies. BDCs, however, are not required to 
register with the Commission as investment companies, and 
generally are permitted greater flexibility in dealing with 
their portfolio companies, issuing and pricing securities, and 
compensating management. Originally intended to serve as a 
public alternative to private venture capital firms, BDCs have 
drawn only limited public investor interest. In 1993, there 
were only about 44 active BDCs with assets of about $2.5 
billion. In 1995, the number of active BDCs increased to 60, 
but the assets under management declined to $2.1 billion.
    The Committee believes that changing BDC regulation to make 
it easier and less costly for BDCs to offer securities and to 
invest in small businesses will make this type of investment 
vehicle more attractive. S. 1815 creates a new class of 
portfolio companies in which BDCs may invest without making 
available ``significant managerial assistance,'' permits BDCs 
to acquire more freely the securities of portfolio companies, 
and allows BDCs greater flexibility in their capital structure.
            New class of small portfolio companies
    The time and expense involved in providing managerial 
assistance to companies having low levels of total assets and 
market capitalization may deter BDCs from investing in them. 
These companies, however, often are most in need of capital. To 
address this problem, the Committee creates a new class of 
portfolio companies in which BDCs could invest without making 
available significant managerial assistance. This new class 
would include any company that has total assets of $4 million 
or less and capital and surplus of more than $2 million, and 
any other company that meets criteria prescribed by SEC rule.
            Acquisitions of securities
    The bill also permits BDCs to acquire more freely the 
securities of portfolio companies. Currently, BDCs must monitor 
their portfolios to assure that at least 70% of their assets 
are invested in cash, securities of financially troubled 
businesses, and securities of ``eligible portfolio companies.'' 
Eligible portfolio companies are companies that the BDC 
controls or companies whose securities do not qualify for 
margin listing under Federal Reserve Board regulations. 
Currently, the securities of portfolio companies that do not 
qualify for margin listing must be acquired directly from the 
companies or their affiliated persons. The bill permits BDCs to 
acquire these securities from any other person, increasing the 
liquidity of such securities.
            Capital structure
    The bill approved by the Committee permits BDCs greater 
flexibility in their capital structure so that BDCs could issue 
multiple classes of debt securities, without restriction. A BDC 
currently may issue more than one class of debt only if all of 
its debt securities are privately held or guaranteed by 
financial institutions, and the BDC has no intent to distribute 
publicly any class of debt securities. The bill permits public 
investors to participate in offerings of multiple classes of 
debt, facilitating the BDCs capital raising process.
    The bill also eases restrictions on a BDC's ability to 
issue warrants, options, or rights. BDCs may now issue only: 
(1) short-term warrants, options, or rights to their security 
holders, or (2) warrants, options, or rights that expire within 
ten years that are accompanied by debt securities. The bill 
permits BDCs to issue warrants, options, or rights that expire 
within ten years if they are accompanied by any other 
securities issued by the BDC and long-term warrants, options, 
or rights on a stand-alone basis, subject to certain 
conditions.
    To make sure investors are aware of any additional risks 
associated with these changes to the BDCs capital structure, 
the legislation authorizes the SEC to require BDCs to supply 
shareholders with an annual written statement describing the 
risk factors associated with their capital structures.

 STREAMLINING SECURITIES REGULATION TO REFLECT THE CHANGING MARKETPLACE

Background

    The U.S. securities market are the preeminent capital 
markets in the world. In 1995, the U.S. equity market accounted 
for nearly half of the worldwide equity market, or $7.98 
trillion of the total $16.48 trillion. In less than a decade, 
the trading volume of U.S. markets increased 168% from 77.3 
billion shares to 207.4 billion. The market has also become 
increasingly global in the last ten years--U.S. trading in 
foreign stocks increased 622%, from $100.2 billion to $723.6 
billion, and foreign trading in U.S. stocks expanded 216% from 
$277.5 billion to $877.6 billion.\10\
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    \10\ U.S. Securities and Exchange Commission, Budget Estimate, 
Fiscal 1997, at III-3.
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Facilitating registration of securities

    The securities registration structure in the United States 
is one of dual Federal and state regulation. In fact, state 
registration of securities predates the Securities Act of 1933. 
Most states presently exempt from state review certain 
securities offerings that are registered with the SEC and do 
not require state regulatory oversight. In particular, states 
have exempted from their ``blue sky'' regulation securities 
traded on the New York Stock Exchange, the American Stock 
Exchange and the National Market System of Nasdaq. The bill 
codifies these exemptions and gives the SEC authority to expand 
the exemption for securities traded on exchanges that have 
``substantially similar'' listing standards. This flexibility 
reflects the Committee's desire to include in the preemption 
future securities exchanges or trading systems provided their 
listing standards are comparable to those of the exchanges and 
Nasdaq's National Market System.
    The bill also codifies another exemption existing in most 
states--the preemption from state ``blue sky'' registration for 
offers and sales to qualified purchasers. Based on their level 
of wealth and sophistication, investors who come within the 
definition of ``qualified purchasers'' do not require the 
protections of registration. The bill creates a uniform 
standard among the states for the ``qualified purchaser'' 
exemption.
    For both the ``blue chip'' stock and ``qualified 
purchaser'' registrations, the legislation does not create a 
new category of exempt offerings. Instead, S. 1815 makes 
uniform existing preemptions by adopting a single standard.
    In both cases, the bill preserves state fraud authority. 
This preservation of authority makes clear that states would 
continue their role in regulating broker-dealer conduct whether 
or not the offering is subject to state review. The Committee 
believes that allowing the states to oversee broker-dealer 
conduct in connection with preempted offerings will ensure 
continued investor protection. As long as states continue to 
police fraud in these offerings, compliance at the federal 
level will adequately protect investors. In preserving this 
authority, however, the Committee expects the states only to 
police conduct--not to use this authority as justification to 
continue reviewing exempted registration statements or 
prospectuses. The Committee clearly does not intend for the 
``policing'' authority to provide states with a means to undo 
the state registration preemptions. States will continue to 
receive notice filings and fees as specified to facilitate 
their antifraud efforts.
    This provision does not address federal preemption of state 
registration requirements for certain securities offerings or 
securities transactions currently exempt from SEC registration 
under Sections 3(a) and 4 of the Securities Act (for example 
U.S. government and agency securities, bank securities or 
private placements). The Committee does not intend to suggest, 
direct or encourage the states to regulate these offerings and 
transactions simply because the Committee did not preempt these 
securities from state registration requirements.

Regulatory flexibility

    The Committee recognizes that the rapidly changing 
marketplace dictates that effective regulation requires a 
certain amount of flexibility. Accordingly, the bill grants the 
SEC general exemptive authority under both the Securities Act 
and the Securities Exchange Act. This exemptive authority will 
allow the Commission the flexibility to explore and adopt new 
approaches to registration and disclosure. It will also enable 
the Commission to address issues related to the securities 
markets more generally. For example, the SEC could deal with 
the regulatory concerns raised by the recent proliferation of 
electronic trading systems, which do not fit neatly into the 
existing regulatory framework. The exemptive authority would 
make it easier for the Commission to implement certain 
proposals to facilitate capital formation, such as the pending 
``test-the-waters'' proposal to assist small businesses or the 
``company registration'' proposal to assist large businesses.
    In addition to this general grant of exemptive authority, 
the Committee had originally planned to include a provision 
specifically raising the SEC's authority to exempt transactions 
under Section 3(b) of the Securities Act from $5 million to $10 
million. The Committee did not include the provision, however, 
because of concerns that it would confuse the extent of the 
SEC's ability to grant exemptions under the general exemptive 
authority. Further, the Committee did not want to constrain 
unduly the SEC if the Commission determined that the Section 
3(b) exemptive level should be raised higher than $10 million. 
Although the Committee did not raise the Section 3(b) level, 
the Committee expects the SEC to increase the exemption amount 
as soon as practicable.
    The Committee is particularly concerned about the ability 
of certain companies to continue offering employee stock 
options or fund employee benefit plans under Section 3(a)(2) of 
the Securities Act and Regulation F (Rule 701). The $5 million 
cap under Rule 701 has not been adjusted since 1988. Many 
small, employee owned companies rely on company stock 
compensation to attract and retain qualified employees. 
Accordingly, the Committee requests that the SEC examine and 
resolve this issue as soon as possible after enactment of this 
legislation.

Analysis of economic effects of regulation

    The impact of SEC rulemaking on savings, investment, and 
capital formation in the nation cannot be overestimated. 
Although the SEC may be mindful of its impact on the economy, 
the Committee believes that the SEC should provide to the 
public an assessment of the economic impact of its regulations 
and actions. The SEC should consider the benefit of additional 
regulation with the impact of that regulation on the economy, 
the markets, and market participants. As a result, the bill 
strengthens the role of economic analysis in the Commission's 
deliberations in two ways.
    First, the bill authorizes $6 million in annual 
appropriations for the SEC's Economic Analysis Program. This 
funding would particularly apply to the Office of Economic 
Analysis, but it could also embrace funding for economic 
analysis activities in other offices and for other activities 
of the Commission. The Committee notes that, at current funding 
levels, this authorization would still comprise only 2% of the 
SEC's entire budget, but that represents a significant 
improvement from the $3 million appropriated for the Office of 
Economic Analysis in fiscal year 1996.\11\
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    \11\ It should be noted that this is not an authorization for an 
add-on to SEC funding, but rather an earmarking of funds within the SEC 
budget. At current staff levels, the Office of Economic Analysis may 
reach twenty-two by the end of the current fiscal year.
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    Second, the bill requires that the SEC's Chief Economist 
prepare an economic analysis report on each proposed regulation 
of the Commission. This report would be provided to each 
Commissioner and published in the Federal Register before the 
proposed regulation became effective. The Committee hopes that 
this report will demonstrate serious economic analysis 
throughout the process of developing regulations.

Eliminating duplicative examinations

    Duplicative and overlapping examinations impose unnecessary 
burdens on broker-dealers and inefficiently use regulatory 
resources. The SEC and the self-regulatory organizations 
(SRO's) have begun working to encourage cooperation in 
scheduling examinations. The Committee strongly supports 
efforts to eliminate duplication in broker-dealer oversight and 
provides statutory support to further strengthen these efforts. 
The bill provides a mandate for better coordination, and a 
specific authorization for the sharing of information necessary 
to accomplish this goal.

Access to foreign business information

    Current U.S. securities laws governing offshore offerings 
and tender offers involving a foreign issuer are often 
interpreted to exclude journalists who disseminate information 
in the U.S. Foreign issuers involved in non-U.S. offerings, who 
are generally exempt from having to register under U.S. law are 
concerned about losing their exemption by having U.S. press 
included in a press conference about the non-U.S. offering or 
tender offer.
    The bill resolves this unintended consequence by clarifying 
that a company may hold an offshore press conference or public 
meeting and provide press-related materials to journalists who 
disseminate information in the U.S. without triggering U.S. 
registration or tender offer requirements. The Committee 
intends to enhance market transparency and ensure that U.S. 
investors have access to important financial information. The 
Committee does not intend, in any way, to affect or impact any 
antifraud provision, including those antifraud provisions that 
may apply to statements made or materials provided at non U.S. 
press conferences.

Church employee pension plans

    According to testimony provided to the Committee, ``[m]ost 
major religious denominations in the United States have 
established retirement programs for their clergy and lay 
workers.'' \12\ Unlike private sector and government retirement 
plans, however, church employee pension plans are not exempted 
from securities law registration. While the SEC staff has 
indicated to the Committee that the SEC does not regard church 
employee pension plans to be the type of entity that should be 
subject to the Investment Company Act, there is no express 
statutory exemption for these plans.
---------------------------------------------------------------------------
    \12\ Testimony of Barbara A. Boigegrain, General Board of Pension 
and Health Benefits of the United Methodist Church and Dr. Paul W. 
Powell, Annuity Board of the Southern Baptist Convention, on behalf of 
the Church Alliance, before the Committee on Banking, Housing, and 
Urban Affairs, p. 2.
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    The bill puts church pension plans in the same category as 
private sector and government plans by exempting church plans 
from federal and state securities regulation and registration. 
In order to qualify for the exemption, the assets of the church 
pension plan must be used exclusively for the benefit of plan 
participants and beneficiaries.
    To protect plan participants and beneficiaries, the 
Committee opted to tailor very specific exemptions from current 
law. ``Substantially all'' of the activities of an exempt 
company or account must relate to the church plan or its 
administration. In addition, church plans must meet eligibility 
requirements under section 414(e) of the Internal Revenue Code 
and be administered for the exclusive benefit of participants 
and beneficiaries. The antifraud laws continue to apply to the 
plan and those individuals who perform certain functions for 
the plan (who would otherwise have had to register as an 
investment adviser or broker-dealer), notwithstanding the 
exemption.
    The bill requires church plans to notify plan participants 
that the plan is not subject to and the participant not covered 
by state and federal securities laws. The bill also enables the 
SEC to monitor compliance with the new exemptions by giving the 
SEC rulemaking authority to require that exempt church plans 
file a notice with the Commission.

Promoting global preeminence of the U.S. securities market

    Mindful of the increasing internationalization of the 
securities markets, the Committee seeks to ensure that the SEC 
is working to develop a quality set of generally accepted 
international accounting standards to facilitate international 
offerings. The Committee believes that the U.S. should play an 
active role in developing international accounting standards 
that will enhance foreign issuers' access to our markets while 
maintaining adequate investor protections. The Committee 
acknowledges the SEC's progress to date on working towards a 
global marketplace and encourages the SEC to continue its 
vigorous support for developing international accounting 
standards as soon as practicable. Within one year, the SEC must 
report on: (1) the progress of developing international 
accounting standards, and (2) the outlook for successfully 
completing a set of standards acceptable to the SEC for 
offerings and listings by foreign issuers in United States 
markets.

Broker-dealer ``de minimis'' exemption

    Presently, many states require securities brokers to 
register based on where the investor is located at the time the 
investor initiates a securities transaction. The Chairman of 
the Securities Industry Association testified before the 
Committee that some states require brokers to register if their 
clients place an order while temporarily in the state--even if 
the customer just happens to be in the state because of work or 
vacation.\13\ The penalties for failing to register can be 
onerous. The Uniform Securities Act considers it a criminal 
offense for a broker-dealer or its employees to fail to comply 
with state registration requirements. In some cases a customer 
may rescind a transaction based on a technical nonregistration.
---------------------------------------------------------------------------
    \13\ Testimony of A.B. Krongard, Chairman of the Securities 
Industry Association, before the Senate Committee on Banking, Housing, 
and Urban Affairs, p. 9.
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    The Committee believes that the states play a critical role 
with respect to broker-dealer and broker-dealer associated 
person registration. However, there should be room for some 
flexibility such as for situations involving a vacationing 
client. The bill provides limited flexibility to accommodate a 
broker-dealer associated person in two situations.\14\ The 
first permits an associated person to execute a transaction for 
a client who is away from home for a period of time as long as 
the associated person is registered in the state in which the 
client permanently resides or was present for 30 days or more 
during the previous year. If the client is present in another 
State for 30 days or more or permanently changes his or her 
residence, the associated person must file an application for 
registration.\15\
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    \14\ In both situations, the broker-dealer must be registered in 
the state the transaction occurs and the transaction must be executed 
by the associated person on behalf of an existing client.
    \15\ If either of those events occur, the associated person must 
file an application for registration within 10 days of discovering that 
the client permanently changed its residence or was in another state 
for more than 30 days.
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    The second permits an associated person to execute a 
transaction for an existing customer during the pendency of the 
associated person's registration in another state. The 
associated person may only effect transactions in the state 
where his or her registration application is pending until the 
earlier of 60 days after the application was filed or the date 
the State notifies the applicant that registration has been 
denied or stayed for cause.

SEC studies and reports

            Impact of technological advances
    The Committee understands that the Internet already has the 
potential to provide business (including banks and securities 
firms) with access to approximately 25 million users of online 
services. Consumers and investors can use their personal 
computers now to access about 37,000 Web sites and services, 
including analyst research reports, stock market data, 
brokerage firm and mutual fund products, prospectuses and other 
SEC filings--not to mention other new and innovative financial 
products and services. For example, a number of entrepreneurs 
are creating Web pages that enable investors to purchase 
directly from small issuers. Some commentators say that these 
new electronic networks could lead to small scale ``virtual'' 
stock exchanges and become a major source of funding for 
smaller entities. The Committee believes that the SEC should 
study the Internet and the World Wide Web and its impact on 
regulation of the financial services industry. The bill 
therefore seeks the SEC's views on how to adjust the 
traditional approach to regulating the securities market to 
address fundamental changes in the marketplace brought about by 
technological innovation.
            Shareholder proposals
    In 1992, the staff of the Securities and Exchange 
Commission reversed long-standing Commission policy by allowing 
corporations to exclude from proxy statements shareholder 
proposals regarding corporate employment practices,\16\ even if 
those practices raised broader public policy issues (such as 
discriminatory actions by the corporation.) This change 
generated enormous controversy, and the Commission soon found 
itself involved in lengthy litigation with a coalition of 
shareholder groups, including several large institutional 
investors, who strongly objected to the Commission's abrupt 
change of policy and the fact that the SEC changed its position 
without a formal rulemaking. Although the Commission lost a 
Federal District Court ruling,\17\ the SEC's ``process'' for 
changing the rule was upheld by the Second Circuit Court of 
Appeals.\18\
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    \16\ The SEC announced in a 1992 ``no-action'' letter on a 
resolution to Cracker Barrel that it would regard employment-related 
shareholder proposals as ``ordinary business'' issues, excludable under 
section (c)(7) of Rule 14a-8.
    \17\ New York City Employees Retirement System, 843 F. Supp. 858 
(1994).
    \18\ New York City Employees Retirement System v. SEC, 45 F.3d 7 
(1995).
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    Despite the significant implications of the Commission's 
policy reversal in 1992--and the subsequent legal decisions--
the Committee notes that there has been no formal study on 
shareholder proposals. The bill, therefore, directs the 
Commission to undertake a comprehensive year-long review of 
shareholder proposals, focusing on whether shareholders should 
be able to raise through the proxy process concerns about 
corporate employment practices, or other business practices, 
that raise broader social and public policy issues, such as 
discrimination. The bill further directs the Commission to 
prepare recommendations on how it plans to improve shareholder 
access to proxy statement through the SEC's rulemaking process.
            ``Preferencing''
    Preferencing refers to a trading method for stock exchanges 
that may be inconsistent with the concept of a traditional 
auction market. Preferencing permits a customer's brokerage 
firm to trade directly with its customers rather than interact 
with other customer orders. The brokerage firm acts as a dealer 
with its own customers, capturing the price difference for 
itself. The Committee has concerns about the impact of 
preferencing on retail securities customers. Consequently, the 
bill directs the SEC to determine and report within six months 
on the impact of preferencing on: (1) the execution price 
received by retail securities customers whose orders are 
preferenced; (2) the ability of retail securities customers in 
all markets to obtain execution of limit orders in preferenced 
securities; and (3) the cost of preferencing to retail 
customers.

  Section-by-Section Analysis of S. 1815: The ``Securities Investment 
                        Promotion Act of 1996''

Section 1. Short title; table of contents

    Section 1 provides that S. 1815 may be cited as the 
``Securities Investment Promotion Act of 1996'' (the ``Act'') 
and sets out a table of contents for the Act.

Section 2. Severability

    Section 2 provides that, if some part of the Act is held to 
be unconstitutional, the remainder of the Act will not be 
affected.

       title i--investment advisers supervision coordination act

Section 101. Short title

    Section 101 provides that Title I may be cited as the 
``Investment Advisers Supervision Coordination Act.''

Section 102. Funding for enhanced enforcement priority

    Section 102 authorizes up to $16 million of the SEC's 
budget for fiscal years 1997 and 1998 to be earmarked for 
enforcement of the Investment Advisers Act of 1940.

Section 103. Improved supervision through State and Federal cooperation

    Section 103(a) adds a new section 203A to the Investment 
Advisers Act of 1940 (the ``Advisers Act'') dividing regulatory 
responsibility for investment advisers between the States and 
the SEC.
    New Section 203A provides that investment advisers who 
manage $25 million (or a higher amount set by the Commission) 
or more in client assets or who advise a mutual fund or 
business development company or whose state does not register 
investment advisers will have to register with the SEC. Other 
investment advisers will have to register only with the State 
in which the adviser maintains its principal place of business. 
The SEC will continue to regulate investment advisers located 
in states that do not require investment advisers to register.
    This section defines ``assets under management'' to mean 
securities portfolios over which the adviser provides 
``continuous and regular supervisory or management services.''
    New section 23A(b) prohibits a State from subjecting to 
State registration, licensing or qualification requirements: 
(1) SEC registered investment advisers and their ``supervised 
persons,'' and (2) persons who are specifically excepted from 
the definition of an investment adviser. A ``supervised 
person'' includes an employee or independent contractor of an 
investment adviser who provide investment advice on behalf of 
and is supervised by the investment adviser.
    New section 23A(b) also permits a State to require 
investment advisers to file with it documents required to be 
filed with the SEC or ``notice'' documents relating to an 
investment advisers' employees. This section also makes clear 
that the SEC and the States retain their authority to pursue 
actions against investment advisers for ``fraud or deceit.''
    New section 23A(c) allows the SEC flexibility to determine 
that certain investment advisers should be permitted to 
register with the SEC (even if the adviser does not manage $25 
million or more in client assets) if denying SEC registration 
would be ``unfair, a burden on interstate commerce, or 
otherwise inconsistent with the purposes of this section.''

Section 104. Interstate cooperation

    Section 104 amends section 222 of the Advisers Act, 
establishing that states may only enforce books and records and 
financial responsibility standards, as established the state in 
which the investment adviser maintains its principal place of 
business.

Section 105. Disqualification of convicted felons

    Section 105 amends section 203(e) of the Advisers Act, 
allowing the SEC to deny or withdraw the registration of an 
investment adviser convicted of a felony within the previous 
ten years.

Section 106. Effective date

    This section becomes effective 180 days after enactment of 
the ``Investment Advisers Supervision Coordination Act.''

           TITLE II--facilitating investment in mutual funds

Section 201. Short title

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

Section 202. Fund of funds

     Section 202 amends Section 12(d) of the Investment Company 
Act of 1940 (the ``Investment Company Act''), allowing a 
registered investment company to invest in another registered 
investment company if they are part of the same group or 
``family'' of investment companies. This section also gives the 
SEC exemptive authority in this area in the event new fund of 
funds arrangements develop.
    A ``group'' of investment companies is defined as two or 
more mutual funds or unit investment trusts that hold 
themselves out to investors as related companies for investment 
and investor services.
    Section 202 also amends section 12(d) to clarify that, when 
a fund invests all of its assets in a single acquired fund 
registered with the Commission, under certain circumstances the 
acquired fund must solicit the votes from the shareholders of 
the investing fund.

Section 203. Flexible registration of securities

    Section 203 amends section 24(e) of the Investment Company 
Act, implementing a new system under which mutual funds and 
certain other types of investment companies would pay 
registration fees under the Securities Act.
    Section 203 requires a fund to pay its registration fees to 
the Commission within 90 days after the end of its fiscal year 
based on the net of sales less redemptions for that fiscal 
year. If a fund missed the filing deadline, it would have to 
pay interest on the amount due, calculated at the rate 
established by the Secretary of Treasury under the Debt 
Collection Act of 1982.
    This section becomes effective on the earlier of one year 
from enactment or the effective date of SEC rulemaking for this 
provision.

Section 204. Facilitating the use of current information in advertising

    Section 204 adds a subsection (g) to section 24 of the 
Investment Company Act, authorizing the SEC to permit 
investment companies to use a new type of ``advertising'' 
prospectus that includes updated information not contained in 
the fund's original prospectus for purposes of section 5(b)(1) 
of the Securities Act.

Section 205. Variable insurance contracts

    Section 205 amends sections 26 and 27 of the Investment 
Company Act, replacing the existing specific limits on the 
amount, type, and timing of charges that apply to variable 
insurance contracts. Aggregate charges under variable insurance 
contracts would have to be ``reasonable.'' This section also 
gives the SEC rulemaking authority to address any potential 
abusive practices.

Section 206. Prohibition on deceptive investment company names

    Section 206 amends section 35(d) of the Investment Company 
Act, granting the SEC rulemaking authority to identify 
investment company names, or the title of the securities they 
issue as materially deceptive or misleading. The SEC must make 
a finding that the name or title or any part of the title is 
deceptive or misleading.

Section 207. Excepted investment companies

    Section 207 amends section 3(c) (1) and (2) of the 
Investment Company Act, creating two new exemptions and 
modifying an existing exemption from the Act's regulation.
    Section 207(a)(3) amends section 3(c)(2) of the Investment 
Company Act by including in the exemption from the definition 
of an investment company a person acting as a ``market 
intermediary'' in certain financial transactions. This section 
defines market intermediary as a person who regularly does and 
is willing contemporaneously to enter into transactions on both 
sides of the market for financial contracts.
    ``Financial contracts'' include transactions involving 
securities, commodities, currencies, interest or other rates, 
or other financial or economic interests structured to 
accommodate the objectives of the counterparty. This section 
addresses the status of market intermediaries under the 
Investment Company Act only, and not the status of these 
entities under any of the other federal securities laws.
    Section 207(a)(4) adds a new section (7) to section 3(c) of 
the Investment Company Act, creating a new exemption from the 
definition of investment company for investment pools whose 
securities are held exclusively by ``qualified purchasers,'' as 
defined under new section 2(a)(51). New section 3(c)(7)(A) 
provides for a ``private'' investment pool that may not 
publicly offer its securities and that may have an unlimited 
number of ``qualified investors.'' In the event a qualified 
purchaser transfers securities of a section 3(c)(7) fund as a 
gift or bequest or due to an involuntary event, such as divorce 
or death, the transferee shall be deemed to be a ``qualified 
purchaser.''
    New section 3(c)(7)(B) provides a ``grandfather clause'' 
for existing section 3(c)(1) funds (which are limited to 100 
investors). The grandfather clause enables existing 3(c)(1) 
funds to convert to 3(c)(7) funds, retaining existing investors 
who are not ``qualified purchasers.'' To be eligible to 
transfer from a section 3(c)(1) to 3(c)(7) fund, the section 
3(c)(1) fund shareholders must have acquired the securities of 
the fund on or before April 30, 1996 and the issuer of the 
securities must have come within the section 3(c)(1) exemption. 
Before a transfer may occur, the issuer must disclose that the 
fund will be limited to qualified purchasers and no longer have 
the 100 investor limit.
    New section 3(c)(7)(c) requires that the section 3(c)(1) 
issuer provide ``dissenter's rights'' to fund investors who do 
not want to transfer into a section 3(c)(7) fund. The issuer 
must allow section 3(c)(1) fund owners ``of record'' to redeem 
their interests in the fund in either cash or a proportionate 
share of the fund's assets.
    A fund exempt under section 3(c)(1) will not be 
``integrated'' with a fund exempt under 3(c)(7) for purposes of 
determining whether either fund meets its exemption.
    New section 3(c)(7)(D) imposes the investment restrictions 
of section 12(d)(1) (A)(I) and (B)(I) of the Investment Company 
Act on all section 3(c)(1) and section 3(c)(7) issuers, but 
only in connection with the transactions involving securities 
issued by registered investment companies.
    New section 3(c)(7)(E) treats beneficial ownership by a 
company to be beneficial ownership by one person for purposes 
of determining the number of investors in a section 3(c)(1) 
fund, unless the company (I) owns ten percent or more of the 
voting securities of the section 3(c)(1) issuer, and (ii) is, 
or but for the exception under section 3(c)(1) or 3(c)(7) would 
be, an investment company.
    Section 207(b) adds new paragraph (51) to section 2(a) of 
the Investment Company Act, defining the term ``qualified 
purchaser.'' New section 2(a)(51)(A) creates four categories of 
persons who are eligible to invest in the qualified purchaser 
pools based on minimum standards of financial sophistication 
and gives the Commission authority to define by rule additional 
categories of qualified purchasers.
    New section 2(a)(51) defines a qualified purchaser as 
follows: (1) section 2(a)(51)(A)(I) includes any natural person 
who owns $5 million in ``investments'' and that person's spouse 
if they invest jointly; (2) section 2(a)(51)(A)(ii) defines a 
qualified purchaser to include specified family-owned companies 
with at least $5 million in investments; (3) section 
2(a)(51)(A)(iii) includes certain trusts, not formed for the 
specific purpose of acquiring the securities offered, that are 
established and funded by qualified purchasers for which 
investment decisions are made by a qualified purchaser; and (4) 
section 2(a)(51)(A)(iv) includes any person who in the 
aggregate owns and invests on a discretionary basis for its own 
account or for the accounts of other qualified purchasers not 
less than $25 million in investments.
    New section 2(a)(51)(A)(v) allows the SEC to specify by 
rule additional qualified purchasers who may not meet 
statutorily defined standards of financial sophistication under 
sections 2(a)(51)(A)(I) through (iv), but who do not need the 
protection of the Investment Company Act. This provision 
outlines some of the factors the SEC should consider in 
determining who does not need the protections of the Investment 
Company Act. These factors include the purchaser's high degree 
of financial sophistication, including extensive knowledge of 
and experience in financial matters, a substantial amount of 
assets owned or under management, relationship with an issuer, 
or such other factors as the Commission determines to be 
consistent with the purposes of new subparagraph 2(a)(51). New 
subsection 2(a)(51)(B) gives the Commission the authority to 
carry out this rulemaking.
    New subsection 2(a)(51)(c) excludes an existing private 
investment fund from the definition of ``qualified purchaser'' 
unless all beneficial owners of its securities consent. Consent 
of all trustees, directors or general partners of a trust or 
family company serves as consent of the trust or family company 
and its beneficial owners.
    Section 207(c) amends section 3(a)(3) of the Investment 
Company Act, ensuring that any issuer meeting the definition of 
investment company under section 3(a)(3) of the Investment 
Company Act may not avoid the Investment Company Act's 
regulation by establishing a section 3(c)(7) subsidiary.
    Section 207(d)(1) requires the SEC to adopt rules 
implementing Section 3(c)(1)(B) of the Investment Company Act 
within 12 months of enactment. Section 207(d)(2) requires the 
SEC to adopt rules within 180 days of enactment to define the 
types of investments eligible for consideration in satisfying 
the $5 and $25 million qualified purchaser investment tests. 
The Committee expects, however, that the SEC would define 
``investments'' to include assets held for investment purposes. 
The Committee does not anticipate or recommend the inclusion, 
for example, of a controlling interest in a privately-owned 
family business or a personal residence.
    Section 207(d)(3) requires the SEC to adopt rules within 
one year rules permitting knowledgeable employees of an issuer 
or affiliated person to own securities of a section 3(c)(1) or 
3(c)(7) fund.

Section 208. Performance fee exemptions

    Section 208 amends section 205 of the Investment Advisers 
Act, excepting investment advisory contracts with qualified 
purchaser pools from the Act's prohibition on performance fees. 
Section 208 also amends section 205 to give the SEC explicit 
authority to exempt from the performance fee prohibition 
investment advisory contracts with sophisticated clients and 
clients that are not residents of the United States.

Section 209. Reports to the Commission and shareholders

    Section 209 amends section 30(b)(1) and (c) of the 
Investment Company Act, granting the SEC authority to require 
more frequent reporting of current information. Right now, 
section 30(b)(1) allows the SEC to require investment companies 
to file information and document ``to keep reasonably current 
the information and documents contained in the registration 
statement'' but no more frequently than semi-annually or 
quarterly.
    This provision removes the limitations on how often the SEC 
may require information. In exercising this expanded authority, 
however, the SEC must minimize the compliance burdens on 
registered investment companies and their affiliates as set out 
in new section 30(c)(1) of the Investment Company Act.
    Section 209 also adds a new subsection (f) to section 30 of 
the Investment Company Act, allowing the SEC to require 
investment companies to report additional information in its 
report to shareholders. This provision expands the SEC's 
current authority, which extends only to the contents of 
financial statements. New section 30(f) also requires the SEC 
to minimize the compliance burdens on registered investment 
companies and their affiliates as set out in new section 
30(c)(1) of the Investment Company Act.

Section 210. Books, records and inspections

    Section 210 amends section 31 (a) and (b) and adds a new 
subsection (c) to the Investment Company Act, expanding the 
SEC's record keeping authority under that Act. This provision 
enables the SEC to specify the information that must be 
included in an investment company's records.
    Section 31(a), as amended, authorizes the SEC to require 
registered investment companies and certain of their related 
entities to maintain any records ``necessary or appropriate in 
the public interest or for the protection of investors.'' This 
section references the definition of ``records'' already 
contained in section 3(a)(37) of the Securities Exchange Act of 
1934 (the ``Securities Exchange Act'') to ensure that broker-
dealers and investment companies will have the same standards 
of record keeping.
    Consistent with the SEC's new authority under section 209 
of the ``Securities Investment Promotion Act,'' when exercising 
its new authority under amended section 31(a), the SEC must 
minimize the record keeping and compliance burdens on persons 
required to maintain records as set out in new section 31(a)(2) 
of the Investment Company Act.
    New section 31(b) of the Investment Company Act gives the 
SEC authority to inspect whatever records it requires 
investment companies to maintain under amended section 31(a). 
This provision also authorizes the SEC to request copies of 
records, eliminating the current requirement that the SEC first 
obtain a formal order. The SEC must make ``reasonable'' 
requests for copies or extracts of records under this section, 
that may be prepared without ``undue effort, expense, or 
delay.''
    Section 210 amends section 31 of the Investment Company Act 
by adding a new subsection (c), providing that the SEC may not 
be compelled to disclose any internal compliance or audit 
records, or information contained therein. Of course, the SEC 
may not, under this provision, withhold information from 
Congress or pursuant to a U.S. department, agency or court 
request.
    Finally, section 210 amends section 31 of the Investment 
Company Act by adding a new subsection (d), defining two new 
terms. ``Internal compliance policies and procedures'' refers 
to policies and procedures designed to promote compliance with 
the Federal securities laws. ``Internal compliance and audit 
record'' refers to records prepared pursuant to internal 
compliance policies and procedures.

         TITLE III--reducing the cost of saving and investment

Section 301. Exemption for economic, business, and industrial 
        development companies

    Section 301 amends section 6(a) of the Investment Company 
Act by adding a new paragraph 5(A), creating an exemption for a 
company whose activities are limited to the promotion of 
economic, business, or industrial development of enterprises 
doing business in the state in which the company is organized. 
Under new section 6(a)(5)(A), an economic, business, or 
industrial development company could sell its securities only 
to accredited investors as defined in section 2(15) of the 
Securities Act of 1933 (the ``Securities Act.'') Eighty percent 
of the investors must reside or have substantial business in 
the state where the company is organized. The company could not 
issue redeemable securities and would be subject to certain 
restrictions on the purchase of securities issued by an 
investment company.
    New section 6(a)(5)(B) treats these exempted companies as 
if they were registered investment companies for purposes of 
section 9 of the Investment Company Act (``ineligibility of 
certain affiliated persons and underwriters.'') A company 
relying on the exemption in section 301 must file notification 
with the SEC under new section 6(a)(5)(c) until the SEC 
determines such filing is not in the public interest or 
consistent with the protection of investors under new section 
6(a)(5)(D). New section 6(a)(5)(E) provides the SEC flexibility 
to adjust section 301 by giving the SEC additional rulemaking 
authority in this area.

Section 302. Intrastate closed-end investment company exemption

    Section 302 amends section 6(d)(1) of the Investment 
Company Act, expanding the SEC's authority to exempt from 
Investment Company Act regulation closed-end funds that 
publicly offer their securities solely within a particular 
state. This provision increases the aggregate offering amount 
of securities that could be offered under the exemption from 
$100,000 to $10,000,000.

Section 303. Definition of eligible portfolio company

     Section 303 amends section 2(a)(46) of the Investment 
Company Act, to define a new class of ``eligible portfolio 
company.'' The amended definition includes a new category of 
companies that have total assets of $4 million or less and 
capital and surplus of not less than $2 million. The SEC may 
adjust these amounts to reflect changes in an accepted index or 
indicator for small business.

Section 304. Definition of business development company

    Section 304 amends section 2(a)(48)(B) of the Investment 
Company Act, modifying the definition of ``business development 
company'' to provide that a business development company does 
not have to make available significant managerial assistance to 
any company that falls within the new category of eligible 
portfolio company created by section 303.

Section 305. Acquisition of assets by business development companies

    Section 305 amends section 55(a)(1)(A) of the Investment 
Company Act, permitting business development companies to 
purchase the securities of companies that do not qualify for 
margin listing under Federal Reserve Board regulations, from 
any person, rather than having to acquire these securities 
directly from the portfolio company itself or its affiliated 
persons.

Section 306. Capital structure amendments

    Section 306 amends section 61(a) of the Investment Company 
Act, modifying the current capital structure restrictions on 
business development companies to permit them to issue more 
than one class of debt, to issue short-term warrants, options 
or rights that are accompanied by any other security, and to 
issue long-term warrants, options or rights on a stand-alone 
basis.

Section 307. Filing of written statements

    Section 307 amends section 64(b)(1) of the Investment 
Company Act, authorizing the SEC to require business 
development companies to supply shareholders annually with a 
written statement describing the risk factors associated with 
their capital structures.

Section 308. Facilitating national securities markets

    Section 308 amends section 18 of the Securities Act, 
preempting three categories of securities from state securities 
registration requirements.
    New section 18(a) provides that states may not: (1) require 
registration or qualification of the preempted securities; (2) 
prohibit, limit or impose any conditions on the use of any 
offering document, including an SEC filed prospectus; or (3) 
prohibit, limit or impose any merit-based conditions on the 
offer or sale of the preempted securities.
    Section 308 preempts from state registration all registered 
investment companies. New section 18(b) enumerates the 
exceptions to section 18(a)--certain issuers, such as blank 
check companies or penny stock issuers, or persons associated 
with the offering who are subject to a statutory 
disqualification--who are not eligible for the registration 
exemption provided in this section.
    Section 308 also preempts from state registration 
requirements securities registered under the Securities Act 
that are: (1) listed on the New York Stock Exchange, the 
American Stock Exchange, or the National Association of 
Securities Dealers Automated Quotations (``NASDAQ'') National 
Market System; and (2) categories of securities listed on other 
exchanges or trading systems with substantially similar listing 
standards, as determined by the Commission.
    Finally, new section 18(c) preempts from state registration 
requirements securities offered sold only to ``qualified 
purchasers,'' as defined by the Commission.
    The states would still be able to: (1) require notice 
filings and collect fees with respect to certain securities 
filings under new section 18(d); and (2) enforce anti-fraud 
provisions and police broker-dealer conduct under new section 
18(e).

Section 309. Exemptive authority

    Section 309(a) amends the Securities Act by adding a new 
section 28 and section 309(b) amends the Securities Exchange 
Act by adding a new section 36, providing the SEC with grants 
of general exemptive authority under those Acts. The Securities 
Act exemptive authority could be exercised by rule or 
regulation, while the Exchange Act exemptive authority also 
could be exercised by order. The exemption must be necessary or 
appropriate in the public interest, and consistent with the 
protection of investors. Under the Exchange Act order exemptive 
authority, the Commission must establish procedures under which 
exemptive orders may be granted, and, in its sole discretion, 
may decline to entertain an application for an order under the 
new section.
    The SEC's exemptive authority under this section does not 
extend to any person, security or transaction involving 
government securities under section 15C of the Securities 
Exchange Act or from the definitions involving government 
securities under section 3(a) of that Act.

Section 310. Analysis of economic effects of regulation

    Section 310(a) authorizes appropriations of $6 million for 
each of fiscal years 1997 and 1998 for the Commission's 
Economic Analysis Program, including the Office of Economic 
Analysis.
    Section 310 (b) requires the SEC's Chief Economist to 
prepare a report on each regulation proposed by the SEC. The 
report would include: (a) an analysis of the likely costs of 
the regulation on the U.S. economy, particularly the securities 
markets and the participants in those markets; and (b) the 
estimated impact of the rule on economic and market behavior, 
including any impact on market liquidity, the costs of 
investment, and the financial risks of investment. The SEC must 
give each of its Commissioners a copy of the Chief Economist's 
report and have the report printed in the Federal Register 
before the regulation could become effective.

Section 311. Privatization of EDGAR

    Section 311 directs the SEC to submit a report to Congress 
within 180 days on the SEC's plans for promoting competition 
and innovation of the Electronic Data Gathering Analysis and 
Retrieval System, or ``EDGAR,'' through privatization of all or 
any part of the system.

Section 312. Improving coordination of supervision

    Section 312 amends section 17 of the Securities Exchange 
Act by adding a new subsection (I), requiring the SEC and 
examining authorities for broker-dealers (defined as registered 
SROs) to eliminate unnecessary and burdensome duplication in 
the examination process through coordination and cooperation. 
This provision directs that the Commission and the examining 
authorities share information, including non-public regulatory 
information, as appropriate, to foster a coordinated approach 
to regulatory oversight of broker-dealers that are subject to 
examination by more than one SRO.

Section 313. Increased access to foreign business information

    Section 313 amends the Securities Act and the Securities 
Exchange Act, clarifying the status of offshore press 
conferences and press related materials.
    Section 313(a) amends the definition of ``offer'' (of 
securities) in section 2(3) of the Securities Act to exclude 
specifically press conferences held outside of the United 
States, public meetings with issuer representatives conducted 
outside of the United States, or press related materials 
released outside of the United States in which an offshore 
offering is discussed. This exclusion applies only for purposes 
of section 5 of the Securities Act.
    Section 313(b) amends section 14 of the Securities Exchange 
Act to provide that a ``foreign issuer'' engaged in a tender 
offer may grant United States journalists access to such press 
contacts and press related materials in connection with the 
tender offer, without triggering the application of the 
Williams Act procedural provisions that relate to tender offers 
or requests or invitations for tender. For purposes of this 
section, a ``foreign issuer'' is defined to include any 
corporation or other organization (1) that is incorporated or 
organized under the laws of any foreign country; or (2) the 
principal place of business of which is located in a foreign 
country.

Section 314. Short-form registration

    Section 314 requires the SEC to amend the eligibility 
criteria for short-form securities registration within 180 days 
of enactment. This provision directs the SEC to include non-
voting stock (and such other securities as the Commission shall 
determine) in the calculation of the minimum market 
capitalization necessary to qualify to use the form for a 
primary offering.

Section 315. Church employee pension plans

    Section 315 exempts from most federal securities regulation 
any church employee pension plan described in section 414(e) of 
the Internal Revenue Code of 1986 (the ``Code'') if, under the 
plan, no part of the assets may be diverted to purposes other 
than the exclusive benefit of employees.
    Section 315(a) amends section 3(c) of the Investment 
Company Act by adding a new paragraph 14, excepting church 
employee pension plans (``Church Plans'') from the 
registration, reporting and other regulatory requirements of 
that Act.
    Section 315(b) amends section 3(a) of the Securities Act by 
adding a new paragraph 13, exempting interests in Church Plans 
from registration under that Act.
    Section 315(c) amends section 3 of the Securities Exchange 
Act to include within the definition of exempted securities 
(but only for purposes of sections 12, 13, 14 and 16 of the 
Securities Exchange Act) any securities issued by, or interests 
in, Church Plans. As a result, Section 315(c) exempts church 
plans and the person associated with such plans, from the 
requirements of the Securities Exchange Act that directly 
impact them. This section also adds a new subsection (f) to 
section 3 of the Securities Exchange Act, specifically 
providing that church plans, and the trustees, directors, 
officers, employees or volunteers for such plans, would not be 
deemed ``broker-dealers'' if their only securities activities 
are on behalf of such plans and they do not receive any 
commission or other transaction-related compensation. The 
antifraud provisions of the federal securities laws would 
continue to apply to interests in church plans.
    Section 315(d) amends section 203(b) of the Investment 
Adviser Act by adding a new paragraph 5, exempting churches, 
church pension boards, and their internal personnel from 
registration as investment advisers under the Investment 
Advisers Act. This section also exempts from regulation any 
company or account that is established by a person eligible to 
establish a Church Plan if substantially all of its activities 
relate to managing the assets of, or providing benefits under, 
exempt Church Plans.
    Section 315(e) amends section 304(a)(4)(A) of the Trust 
Indenture Act to include the securities exempted from the 
provisions of the Trust Indenture Act any security issued by, 
or any interest or participation in, any exempt Church Plan.
    Section 315(f) exempts Church plans from certain State 
securities laws relating to: (1) registration and qualification 
of securities; (2) investment company registration and 
regulation; and (3) broker-dealer registration and regulation.
    This section establishes certain notice provisions to 
ensure that plan participants and the SEC are aware of a plan's 
existence and its exempt status. Section 315(g) amends the 
Investment Company Act by adding new subsection (g) to section 
30, requiring Church plans to notify the exempt plan 
participants that the plan is not subject to and the 
participants are not covered by registration, regulation or 
reporting requirements under the Investment Company Act, the 
Investment Adviser Act, the Securities Act, the Securities 
Exchange Act, or the State securities laws. Section 315(h) adds 
a new subsection (h) to section 30 of the Investment Company 
Act, authorizing the SEC to require exempt Church plans to file 
notice with the SEC as ``necessary or appropriate in the public 
interest or consistent with the protection of investors.''

Section 316. Promoting global preeminence of American securities 
        markets

    Section 316 expresses the sense of the Congress regarding 
the increasing internationalization of the securities markets 
and the importance of establishing a high-quality comprehensive 
set of generally accepted international accounting standards to 
facilitate international offerings and enhance the ability of 
foreign issuers to access and list in United States markets. 
This section expresses the sense that, in addition to the 
efforts made to date to respond to this growing 
internationalization, the SEC should enhance its vigorous 
support for the development of such accounting standards as 
soon as practicable and report within one year from the date of 
enactment on: (1) the progress of developing international 
accounting standards and, (2) the outlook for successfully 
completing a set of standards acceptable to the SEC for 
offerings and listings by foreign issuers in United States 
markets.

Section 317. Broker-dealer exemption from state law for certain de 
        minimis transactions

    Section 317 amends section 15 of the Securities Exchange 
Act by adding a new subsection (h), exempting from state 
licensing requirements certain ``de minimis'' transactions by 
broker-dealer associated persons.
    New section 15(h)(1) provides that, to be eligible for the 
exemption, a broker-dealer associated person must: (a) not be 
ineligible to register in the State where the transaction 
occurs; (b) be registered with at least one state and the 
National Association of Securities Dealers (the ``NASD''); and 
(c) be associated with a broker-dealer registered with the 
state where the transaction occurs.
    New section 15(h)(2) describes the transactions that an 
associated person may execute under the ``de minimis'' 
exemption. A transaction is ``covered'' in two instances. The 
first occurs when an existing customer assigned to an 
associated person (at least fourteen days before the 
transaction) is away from home for a period of time. If, 
however, that customer is present in another State for 30 days 
or more, or permanently changes residence, the associated 
person must file an application for registration. The 
associated person must file the application within 10 days from 
either the date of the transaction or the date of discovering 
the customer has been present in another state for more than 30 
days or has permanently changed residence.
    The second ``covered'' transaction occurs when the 
associated person executes a transaction for an existing 
customer in a state in which the associated person's 
application for registration is pending. The associated person 
may only effect transactions for the shorter period of (a) 60 
days from the date the application was filed; or (b) until the 
date the State notifies the associated person that the 
application has been denied or stayed for cause.

Section 318. Studies and reports

    Section 318 requires the SEC to conduct a study and submit 
a report to Congress on three separate issues.
    The first study and report, required by section 318(a), 
concerns the impact of technological advances on how the 
securities markets operate and steps taken by the SEC to 
address those changes. Section 318(a) sets out factors the SEC 
should consider in formulating the study, such as how the SEC 
has adapted its enforcement policies and practices with respect 
to disclosure regulations, intermediaries and exchanges, issuer 
reporting and its relationship and coordination efforts with 
national regulatory authorities and State authorities. The SEC 
must submit its report on this study to Congress within one 
year of enactment.
    The second study and report, required by section 318(b), 
involves the current status of shareholder access to proxy 
statements under section 14 of the Securities Exchange Act. 
Section 318(b) directs the SEC to consider the impact recent 
statutory, judicial, or regulatory changes have had on 
shareholders' ability to include in proxy statements proposals 
relating to corporate practices and social issues. The SEC must 
submit its report to Congress on this study within one year of 
enactment.
    The third study and report, required by section 318(c), 
addresses the issue of a trading practice referred to as 
``preferencing'' and the impact of preferencing on investors 
and the national market system. The SEC must consider how 
preferencing impacts the execution price of transactions and 
limit orders and the cost of preferencing to retail customers. 
Section 318(c) defines ``preferencing'' as the practice of a 
broker acting as a dealer on a national securities exchange 
directing the orders of customers to buy or sell securities to 
itself for execution under rules that permit the broker to take 
priority over same-priced orders or quotations entered prior in 
time. The SEC must submit its report on preferencing to 
Congress within six months of enactment.

                      Regulatory Impact Statement

    The bill makes several important changes in law that 
significantly reduce regulatory burdens and associated costs on 
private individuals and businesses.
    Title I of the legislation removes an entire layer of 
regulation from investment advisers. Under the terms of the 
legislation, an investment adviser is required to register only 
with the appropriate state securities regulator or the SEC, but 
not with both as is currently the case. Moreover, another 
significant cost borne by investment advisers under current law 
is the difficulty in complying with differing requirements 
among the states regarding capital, bonding, and the keeping of 
books and records. The bill reduces those compliance costs by 
providing for uniform application of home state requirements in 
each of these areas.
    Title II also contains several provisions that reduces 
regulatory burden faced by investment companies and their 
investors. Section 202 makes it easier for investment companies 
to invest in other investment companies. Section 203 reduces 
SEC registration costs for investment companies by simplifying 
their ability to deduct redemptions of their securities from 
new securities registered. Section 204 clears the way for 
investment companies to include more up-to-date information in 
advertising material. Section 205 eliminates onerous fee 
restrictions on variable insurance contracts, putting in their 
place the more flexible standard that applies to mutual funds. 
Section 207 broadens the field of potential investors in 
private investment companies. Section 208 allows the SEC to 
make certain limited exemptions from restrictions on 
performance fees under the Investment Adviser Act of 1934.
    Title III contains provisions that reduce regulatory burden 
in a variety of statutes. Sections 301 through 306 make 
adjustments to the laws governing business development 
companies, facilitating their role in providing investment to 
small businesses. Section 308 reduces regulatory and paperwork 
burdens on mutual funds by providing for a national uniform 
standard for registration of their securities, eliminating 
state registration requirements. By some estimates, this change 
will save mutual funds and their investors $50 million or more 
each year in compliance and paperwork costs, while at the same 
time improving the opportunities for people to invest in mutual 
funds. Section 308 puts into law the practice of most states to 
exempt nationally traded securities from state registration. 
Section 309 grants the SEC broad authority to make exemptions 
from regulation under the Securities Act of 1933 and the 
Securities Exchange Act of 1934. Section 310 requires the SEC 
to conduct an economic analysis of new regulations before they 
can enter into effect, potentially reducing the impact of 
future SEC regulations on the economy. Section 312 requires 
that securities regulators coordinate examination activities, 
thereby reducing the disruptive effects that examinations can 
have on business operations. Section 313 serves to eliminate 
some unintended consequences of provisions of the Securities 
Act of 1933 and the Securities Exchange Act of 1934, 
interpretations of which have often led to U.S. press being 
excluded from foreign business press conferences and briefings. 
Section 314 makes it easier for some companies to make use of 
SEC short-form filing procedures. Section 315 exempts church 
employee pension plans from a variety of securities statutes. 
Section 317 exempts broker-dealers from state laws for certain 
de minimis transactions.
    While these provisions and the overall effect of the bill 
would significantly reduce regulatory burden, a few provisions 
present new regulatory requirements. Section 206 increases SEC 
supervision of investment company names for the sole express 
purpose of eliminating deception. All investment companies are 
currently subject to prohibition of deceptive use of fund 
names, so the provision does not impose a new standard, but it 
would allow the SEC to undertake actions through rule-making or 
otherwise without seeking redress in court. This provision 
should not impose any routine or general paperwork burdens and 
should not impose any economic impact.
    Section 209 broadens the authority for the SEC to require 
reports under the Investment Company Act of 1940. The 
requirement potentially could apply to any or all of the 
approximately 6,000 investment companies in the United States, 
with approximately 40 million shareholders. Because this is 
permissive authority, the Committee is unable to estimate what 
reporting requirements the SEC might impose or the compliance 
burden of such regulation, although the provision includes 
requirements that the authority granted be exercised with the 
least possible regulatory impact.
    Section 210 gives the SEC authority to require the 
maintenance of certain books and records by investment 
companies and to make such records available to the SEC for 
periodic, special, or other examinations. Since investment 
companies already maintain books and records, there may be 
little or no paperwork impact from this provision were the SEC 
to require no addition to the books and records traditionally 
kept by investment companies. The Committee is unable to 
estimate the regulatory impact of any additional record-keeping 
requirements the SEC might impose nor the impact of an 
inspection program that the Commission might institute, 
although a regular, periodic inspection program would have a 
greater regulatory impact than would a program of special or 
``for-cause'' inspections. The Committee notes that the 
provision includes requirements that the authority granted be 
exercised with the least possible regulatory impact.

                        Changes in Existing Law

    In the opinion of the Committee, it is necessary to 
dispense with the requirements of paragraph or subsection 12 of 
rule XXVI of the Standing Rules of the Senate in order to 
expedite the business of the Senate.

                          Cost of Legislation

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 26, 1996.
Hon. Alfonse M. D'Amato,
Chairman, Committee on Banking, Housing, and Urban Affairs, U.S. 
        Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 1815, the Securities 
Investment Promotion Act of 1996.
    Enactment of S. 1815 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.
    Enclosure.

               congressional budget office cost estimate

    1. Bill number: S. 1815.
    2. Bill title: Securities Investment Promotion Act of 1996.
    3. Bill status: As ordered reported by the Senate Committee 
on Banking, Housing, and Urban Affairs on June 19, 1996.
    4. Bill purpose: S. 1815 would amend federal laws that 
regulate securities. The bill would streamline the securities 
markets and decrease the regulation of certain products offered 
by the capital markets.
    Title I of S. 1815 would ease registration and bookkeeping 
requirements for certain investment advisors. The bill would 
exempt investment advisors already regulated by a state from 
registering with the Securities and Exchange Commission (SEC) 
unless the investment advisor manages assets greater than $25 
million or acts as an adviser to an investment or business 
development company. The bill would restrict the ability of a 
state to impose certain requirements on investment advisors who 
conduct business in the state but maintain their principal 
place of business elsewhere. The bill also would prohibit the 
SEC from licensing convicted felons as investment advisors.
    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's 
prospectus and would exempt certain types of investment 
companies from the securities laws. The bill also would case 
regulations on the amount of fees that insurance companies can 
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 by the investment companies. Title II also 
would require the SEC to promulgate 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 the company's fiscal 
year, the firm must pay a registration fee to the SEC based 
upon the net number of shares sold. S. 1815 would simplify the 
calculations needed to determine the amount owed to the SEC and 
would extend the window during which an investment company must 
pay the registration fee from 60 days to 90 days after the end 
of its fiscal year.
    Title III of S. 1815 would preempt state registration 
requirements for securities (1) listed on the New York Stock 
Exchange (NYSE), the American Stock Exchange (AMEX) or the 
National Association of Securities Dealers Automated Quotation 
System (NASDAQ), (2) sold to qualified investors, as defined by 
the SEC in a later rulemaking, or (3) issued by investment 
companies. The bill would preserve the ability of states to 
require certain filings and fees and would allow states to 
pursue instances of fraud. In addition, Title III would:
          Modify the Investment Company Act to expand the range 
        of companies in which business development companies 
        may invest,
          Exempt from most SEC regulation certain business 
        development companies that invest in the state in which 
        they are organized,
          Require the SEC to prepare a report analyzing the 
        effect of each proposed regulation on the U.S. economy,
          Direct the SEC and other examining authorities to 
        coordinate examinations of brokers and dealers and to 
        eliminate duplication in the examination process,
          Exempt church employee pension plans from most of the 
        federal securities laws, and
          Require the SEC to conduct studies on the 
        privatization of the Electronic Data Gathering Analysis 
        and Retrieval System (EDGAR), the impact of 
        technological advances on the securities markets, the 
        ability of shareholders to access proxy statements, and 
        the effect of certain trading practices on the national 
        exchanges.
    Finally, S. 1815 would authorize appropriations in each of 
fiscal years 1997 and 1998 of up to $16 million for enforcement 
of the Investment Advisors Act and $6 million to carry out the 
Economic Analysis Program.
    5. Estimated cost to the Federal Government: CBO estimates 
that enacting S. 1815 would result in new discretionary 
spending totaling about $49 million over the 1997-2002 period, 
assuming appropriations of the necessary amounts. The bill also 
would reduce governmental receipts by $9 million in fiscal year 
1998 and by less than $500,000 in other fiscal years. The 
estimated budgetary impact of the bill is summarized in the 
following table.

----------------------------------------------------------------------------------------------------------------
                                                              1997     1998     1999     2000     2001     2002 
----------------------------------------------------------------------------------------------------------------
                                       SPENDING SUBJECT TO APPROPRIATIONS                                       
                                                                                                                
Estimated authorization level.............................       23       22        1        1        1        1
Estimated outlays.........................................       20       22        4        1        1        1
                                                                                                                
                                               CHANGES IN REVENUES                                              
                                                                                                                
Estimated revenues........................................    (\1\)       -9    (\1\)    (\1\)    (\1\)    (\1\)
----------------------------------------------------------------------------------------------------------------
\1\ Less than $500,000                                                                                          

    The costs of this bill fall within budget function 370.
    6. Basis of estimate:

Spending Subject to appropriations

    CBO estimates that enacting S. 1815 would result in 
additional discretionary spending of about $20 million in 
fiscal year 1997 and $49 million over the 1997-2002 period, 
assuming appropriations of the authorized amounts. S. 1815 
would specifically authorize appropriations of $22 million in 
each of fiscal years 1997 and 1998. Those authorizations would 
cover only a portion of the SEC's responsibilities. For fiscal 
year 1996, the agency received an appropriation of $103 
million.
    In addition to the above amounts, CBO estimates that the 
SEC would spend about $1 million to conduct the rulemakings and 
studies required by the bill in fiscal year 1997. Further costs 
would result from the bill's requirement that the SEC prepare a 
report analyzing the effect of each proposed regulation on the 
U.S. economy. Based on information from the agency, CBO 
estimates that preparation of an estimated 50 reports in each 
fiscal year would cost the agency about $1 million annually. 
For fiscal years 1997 and 1998, the cost of preparing such 
reports would be covered by the authorization of appropriations 
of $6 million for the Economic Analysis Program. In each of 
fiscal years 1999 to 2002, CBO estimates additional 
discretionary spending of $1 million to cover the costs of 
reports.

Revenues

    Investment Advisor's Fee. Under current law, investment 
advisors are subject to SEC regulations and required to pay a 
one-time $150 fee to register with the SEC. The SEC estimates 
that 1,000 to 2,000 investment advisors register each year, for 
total annual fees of about $225,000. Title I of the bill would 
exempt investment advisors who manage less than $25 million in 
client funds from SEC regulation. According to the SEC, about 
75 percent of the investment advisors who currently register 
manage less than $25 million in client funds. Therefore, CBO 
estimates that enacting Title I of the bill would reduce SEC 
collections by about $170,000 annually.
    Registration Fee. S. 1815 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 1998, because it would shift payments by some 
companies from fiscal year 1998 into 1999. (CBO estimates that 
the bill would not affect 1997 receipts because this provision 
would not take effect until one year after enactment.) 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 1998.
    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 S. 1815 would affect receipts by extending the due date for 
certain registration fees and by reducing the number of 
investment advisors who must register with the SEC and thus pay 
the requisite fee. Therefore, pay-as-you-go procedures would 
apply to the bill. The following table summarizes the estimated 
pay-as-you-go impact of S. 1815.

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

    8. Estimated impact on State, local, and tribal 
governments: S. 1815 contains mandates on state governments 
that CBO estimates would impose direct costs that do not exceed 
the $50 million annual threshold established by the Unfunded 
Mandates Reform Act of 1995 (Public Law 104-4). 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 
mandate 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 salespersons--would prohibit states from 
collecting fees totaling less than $15 million annually that 
they otherwise would collect.
    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 on 
the NYSE, the AMEX, and the NASDAQ. While most states currently 
exempt these securities from any state requirements, CBO 
identified six 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 less 
than $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 S. 1815 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 for 
Securities. 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 S. 1815. 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 S. 
1815 is enacted. The North American Securities Administrators 
Association (NASAA) and several state securities regulators 
have expressed concern that if S. 1815 were enacted some 
states, because of the construction of their own statutes, 
would not be above to withstand legal challenges to their right 
to collect current fees. However, CBO believes that because the 
scope of the federal preemption in S. 1815 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 
offerings 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 to those tasks. Therefore, we estimate that the 
administrative savings to states would not significantly offset 
revenue losses from other mandates in the bill.
    Partial Preemption of State Requirements for Investment 
Advisers. S. 1815 would partially preempt state laws requiring 
the registration, licensing, or qualification of investment 
adviser firms and their employees. Firms that manage more than 
$25 million in client assets or who advise an investment 
company or business development company would have to register 
with the SEC but would be exempt from similar state 
requirements. These firms' employees or independent contractors 
would also be exempt from state registration, licensing, and 
qualification requirements. According to NASAA, 46 states 
currently register investment adviser firms and 30 states 
license or register these firms' employees.
    As with registration fees for securities, the bill provides 
that states may require the filing of documents filed with the 
SEC together with any required fee, and further provides that 
states may continue to collect filing or registration fees 
pursuant to state laws in effect prior to the enactment of S. 
1815. There is some uncertainty as to whether these fee 
collections would continue uninterrupted in all states if S. 
1815 is enacted. Again, CBO believes that because the scope of 
this federal preemption is limited, any loss of revenues would 
not be a direct cost of a federal mandate as defined in Public 
Law 104-4.
    9. Estimated impact on the private sector: CBO has 
identified four private-sector mandates in this bill. We expect 
that these mandates would not impose any significant costs on 
the private sector. One mandate would impose requirements on 
examining authorities, also referred to as self-regulating 
organizations (SROs), such as the New York Stock Exchange and 
the American Stock Exchange, while the remaining three would 
impose requirements on investment advisors, investment 
companies, and certain related entities.
    To eliminate duplicate and overlapping examinations, the 
first mandate would require that the SROs and the SEC 
coordinate the examination process for the brokers and dealers 
that are subject to more than one examining authority. Based on 
information provided by the SEC and the SROs, CBO concludes 
that the SROs would not incur any additional costs because they 
are already coordinating the examination process with the SEC.
    The other mandates affect larger investment advisors, 
investment companies, and certain related entities. The bill 
would allow the SEC to require larger investment advisors to 
file fees, applications, reports or notices through a SEC-
designated entity. Based on information from the SEC and 
industry representatives, CBO concludes that the SEC would 
require that the larger investment advisors file reports 
electronically that they currently file in paper form. This 
information would then be sent to the SEC and the appropriate 
states. The investment advisors expect to incur only marginal 
costs and to experience some savings as a result of electronic 
filing.
    The bill would also give the SEC the authority to require 
investment companies to file information, documents, and 
reports more frequently, to include additional information in 
their semi-annual reports, and to maintain other records that 
are similar to those that the SEC 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: On June 6, 1996, CBO prepared 
cost estimates for H.R. 3005, the Securities Amendments of 
1996, as ordered reported by the House Committee on Commerce on 
May 15, 1996. On June 12, 1996, CBO provided a revised 
intergovernmental mandates cost estimate for H.R. 3005 to 
reflect a technical and conforming change to the base text of 
H.R. 3005 regarding the scope of the preemption of state 
registration requirements. The impact on the federal budget of 
the two bills differs primarily because S. 1815 authorizes 
appropriations for fiscal years 1997 and 1998.
    11. Estimate prepared by: Federal Cost Estimate: Rachel 
Forward and Stephanie Weiner. State and Local Government 
Impact: Pepper Santalucia. Private-Sector Impact: Jean Wooster.
    12. Estimate approved by: Robert A. Sunshine for Paul N. 
Van de Water, Assistant Director for Budget Analysis.

                                
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