[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
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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.
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\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.
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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\
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\2\ Id.
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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\
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\3\ Id.
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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\
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\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.
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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\
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\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.
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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.
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\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.
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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\
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\7\ The Senate passed the ``Small Business Incentive Act'' (S.
479), which contained a similar ``qualified purchaser'' provision, on
November 2, 1993.
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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.
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\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.
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\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.