[Federal Register Volume 59, Number 61 (Wednesday, March 30, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-7448]
[[Page Unknown]]
[Federal Register: March 30, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 33-7050, File No. S7-9-94]
Securities Uniformity; Annual Conference on Uniformity of
Securities Law
agency: Securities and Exchange Commission.
action: Publication of release announcing issues to be considered at a
conference on uniformity of securities laws and requesting written
comments.
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summary: In conjunction with a conference to be held on April 18, 1994,
the Commission and the North American Securities Administrators
Association, Inc. today announced a request for comments on the
proposed agenda for the conference. This meeting is intended to carry
out the policies and purposes of section 19(c) of the Securities Act of
1933, adopted as part of the Small Business Investment Incentive Act of
1980, to increase uniformity in matters concerning state and federal
regulation of securities, to maximize the effectiveness of securities
regulation in promoting investor protection, and to reduce burdens on
capital formation through increased cooperation between the Commission
and the state securities regulatory authorities.
dates: The conference will be held on April 18, 1994. Written comments
must be received on or before April 15, 1994 in order to be considered
by the conference participants.
addresses: Written comments should be submitted in triplicate by April
15, 1994 to Jonathan G. Katz, Secretary, Securities and Exchange
Commission, 450 5th Street, NW., Washington, DC 20549. Comments should
refer to File No. S7-9-94 and will be available for public inspection
at the Commission's Public Reference Room, 450 5th Street, NW.,
Washington, DC 20549.
for further information contact: William E. Toomey or Richard K. Wulff,
Office of Small Business Policy, Division of Corporation Finance,
Securities and Exchange Commission, 450 5th Street, NW., Washington, DC
20549, (202) 272-2644.
supplementary information:
I. Discussion
A dual system of federal-state securities regulation has existed
since the adoption of the federal regulatory structure in the
Securities Act of 1933 (the ``Securities Act'').\1\ Issuers attempting
to raise capital through securities offerings, as well as participants
in the secondary trading markets, are responsible for complying with
the federal securities laws as well as all applicable state
regulations. It has long been recognized that there is a need to
increase uniformity between federal and state regulatory systems, and
to improve cooperation among those regulatory bodies so that capital
formation can be made easier while investor protections are retained.
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\1\15 U.S.C. 77a et seq.
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The importance of facilitating greater uniformity in securities
regulation was endorsed by Congress with the enactment of section 19(c)
of the Securities Act in the Small Business Investment Incentive Act of
1980.\2\ Section 19(c) authorizes the Commission to cooperate with any
association of state securities regulators which can assist in carrying
out the declared policy and purposes of section 19(c). The policy of
that section is that there should be greater federal and state
cooperation in securities matters, including: (1) Maximum effectiveness
of regulation; (2) maximum uniformity in federal and state standards;
(3) minimum interference with the business of capital formation; and
(4) a substantial reduction in costs and paperwork to diminish the
burdens of raising investment capital, particularly by small business,
and a reduction in the costs of the administration of the government
programs involved. In order to establish methods to accomplish these
goals, the Commission is required to conduct an annual conference. The
1994 meeting will be the eleventh such conference.
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\2\Public Law 96-477, 94 Stat. 2275 (October 21, 1980).
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II. 1994 Conference
The Commission and the North American Securities Administrators
Association, Inc. (``NASAA'')\3\ are planning the 1994 Conference on
Federal-State Securities Regulation (the ``Conference'') to be held
April 18, 1994 in Washington, DC. At the Conference, representatives
from the Commission and NASAA will form into working groups in the
areas of corporation finance, market regulation, investment management,
and enforcement, to discuss methods of enhancing cooperation in
securities matters in order to improve the efficiency and effectiveness
of federal and state securities regulation. Generally, attendance will
be limited to representatives of the Commission and NASAA in an effort
to promote frank discussion. However, each working group in its
discretion may invite certain self-regulatory organizations to attend
and participate in certain sessions.
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\3\NASAA is an association of securities administrators from
each of the 50 states, the District of Columbia, Puerto Rico, Mexico
and twelve Canadian Provinces and Territories.
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Representatives of the Commission and NASAA currently are
formulating an agenda for the Conference. As part of that process, the
public securities associations, self-regulatory organizations,
agencies, and private organizations are invited to participate through
the submission of written comments on the issues set forth below. In
addition, comment is requested on other appropriate subjects sought to
be included in the Conference agenda. All comments will be considered
by the Conference attendees.
III. Tentative Agenda and Request for Comments
The tentative agenda for the Conference consists of the following
topics in the areas of corporation finance, investment management,
market regulation and oversight, and enforcement.
(1) Corporation Finance Issues
a. Uniform Limited Offering Exemption
Congress specifically acknowledged the need for a uniform limited
offering exemption in enacting section 19(c) of the Securities Act and
authorized the Commission to cooperate with NASAA in its development.
Working with the states, the Commission developed Regulation D, the
federal exemption for limited offerings. To compliment Regulation D,
NASAA has endorsed a Uniform Limited Offering Exemption (``ULOE'') for
adoption by the states.
ULOE provides a uniform exemption from state registration for
certain issuers and, to date, more than half the states have adopted
some form of ULOE. Both the Commission and NASAA continue to make a
concerted effort toward its complete adoption. The conferees will
discuss the continued usefulness of ULOE, as well as possible steps to
encourage its adoption by the remaining states.
b. Small Business Initiative
On July 30, 1992, the Commission adopted a number of rulemaking
changes, often described as the Small Business Initiative, which are
designed to improve the overall capacity to help finance new companies,
and to provide new opportunities for investors.\4\ Among other things,
the ceiling for the Regulation A exemption was raised from $1,500,000
to $5,000,000, and issuers contemplating a Regulation A offering were,
for the first time, permitted to use a written document to ``test the
waters'' for investor interest prior to assuming the expense of an
offering.
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\4\Securities Act Release No. 33-6949 (July 30, 1992) [57 FR
36442].
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The participants will discuss the impact of these changes, and the
need for any additional exemptive relief in the small business area.
The participants will also review their experience with amended
Regulation A and the use of ``test the waters'' documents.
Public comment is invited on the efficacy of the Small Business
Initiative as a whole. Comment is also sought with respect to any other
uniform exemptions that might be developed to enhance the ability of
issuers to raise capital, while protecting legitimate interests of
investors.
c. Disclosure Policy and Standards
The Commission regularly reviews and revises its policies with
regard to the most appropriate methods of ensuring the disclosure of
material information to the public. Coordination of this effort with
the states has been extremely helpful.
The Commission and the states have devoted considerable attention
to issues arising from the so-called ``roll-up'' of limited
partnerships. A roll-up usually involves the combination or
reorganization of one or more partnerships. The conferees will again
consider the special disclosure problems involved in such transactions
with emphasis on the disclosure rules adopted by the Commission to
improve the quality of information provided to investors.\5\
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\5\Securities Act Release No. 6922 (October 30, 1991) [56 FR
57237].
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Commenters are invited to discuss other areas where federal-state
cooperation in the area of disclosure standards could be of particular
significance as well as any ways in which federal-state cooperation
could be improved.
d. Multinational Securities Offerings
The Commission has recently adopted or proposed a number of changes
to its rules designed to facilitate access by foreign issuers to the
U.S. capital markets. On November 3, 1993, the Commission proposed a
number of initiatives and adopted rule amendments designed to
streamline the registration and reporting process for foreign companies
accessing the U.S. public markets.\6\ In 1991, the Commission adopted a
multijurisdictional disclosure system which permits certain Canadian
issuers to offer securities, undertake tender offers, and file periodic
reports using the disclosure requirements of their home
jurisdiction.\7\ Also in 1991, the Commission proposed for comment
exemptive rules and related registration forms which were designed to
facilitate tender and exchange offers, business combinations and rights
offers by foreign issuers in the United States.\8\ Comment is
specifically requested on ways to coordinate federal and state
treatment of multinational offerings. Comment is also sought on the
possible application of plain language principles to disclosure
documents that are becoming increasingly lengthy and complex.
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\6\Securities Act Release Nos. 7026 and 7029 (November 3, 1993)
[58 FR 60304, 60307].
\7\Securities Act Release No. 6902 (June 21, 1991) [56 FR
30036].
\8\Securities Act Release Nos. 6896 and 6897 (June 5, 1991) [56
FR 27564, 27582].
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e. Municipal Securities
On March 9, 1994, the Commission approved the publication of two
releases relating to municipal securities.\9\ One is an interpretive
release addressing the disclosure obligations of issuers and other
market participants under the antifraud provisions of the federal
securities laws in both the primary and secondary markets for municipal
securities. The interpretive release also expresses the Commission's
support for legislation removing the exemption from the registration
and reporting requirements for certain nongovernmental, private
activity conduit issuers. The second release proposed two rules for
comment. The proposed rules would prohibit a municipal securities
dealer from underwriting an issue of municipal securities unless the
issuer undertakes to provide disclosure to the secondary market on an
annual basis by providing information to repositories. A dealer also
would be prohibited from recommending a security unless it has reviewed
the information the issuer has committed to provide. The conferees will
discuss the provisions of the releases and the area of municipal
securities in general.
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\9\Securities Exchange Act Release Nos. 33742 and 33743 (March
9, 1994) [59 FR 12748, 12750].
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f. Derivatives
Typically, derivative instruments are futures contracts, forwards,
swaps, option contracts or other instruments with similar
characteristics. Investments in derivative instruments expose investors
to potential gains or losses from changes in an underlying market price
that may be an interest rate, equity price, market or defined index,
foreign currency exchange rate, commodity price or other defined
measure of market price.
The increasing complexity and widespread use of derivatives for
trading and risk management purposes has generated widespread interest.
Conferees will discuss the application of federal and state securities
laws to derivative instruments as well as disclosure issues relating to
such issuances and investments.
(2) Market Regulation Issues
a. Central Registration Depository (``CRD'')
The CRD is a computerized filing and data processing system
operated by the NASD that maintains information concerning NASD member
broker-dealers and their registered personnel for access by state
regulators, self-regulatory organizations, and the Commission. The NASD
is currently in the process of implementing a total redesign of the
CRD. The redesign, which is expected to be completed in 1995, will
result in a significantly improved system. Among the improvements
anticipated in the CRD redesign are: (i) User friendly capture of data,
(ii) streamlined and much improved presentation of data, and (iii)
better access to information.
The participants will discuss the status of the CRD rewrite
project, as well as issues relating to ongoing operation of the
existing CRD system.
b. Forms Revision
In connection with the CRD rewrite project, NASAA and the self-
regulatory organizations are in the process of considering revisions to
Form U-4, the uniform form used to register sales personnel in the
securities industry. The revisions are designed to facilitate the
conversion of data from the existing CRD system to the newly designed
CRD. The participants will discuss issues relating to the proposed
revisions and to the appropriate level of disclosure generally
regarding the disciplinary and customer complaint history of registered
sales personnel.
c. Bank Securities Activities
In response to continuing low level of interest rates, banks and
other financial institutions have suffered large outflows of funds from
certificates of deposit and other traditional bank-sponsored savings
vehicles. As a result, financial institutions have sought to offer
mutual funds and other securities services to their customers, either
directly or through bank affiliates or arrangements with unaffiliated
broker-dealers. The participants will discuss these developments, any
concerns raised by sales of securities on the premises of financial
institutions, and possible regulatory, examination or other responses
available to the Commission, the self-regulatory organizations, and the
states. In particular, the participants will focus on issues relating
to advertising of securities products and activities, as well as
ensuring proper sales practices by persons selling securities on bank
premises.
d. Penny Stock Activities
During 1993, the Commission, together with the NASD, the New York
Stock Exchange, and 40 state securities commissions undertook a
nationwide sweep of more than 125 broker-dealers to determine the
effectiveness of the Commissions penny stock rules (Rules 15g-1 through
15g-6 under the Securities Exchange Act of 1934). The sweep was the
largest joint Commission, state and self-regulatory organization
examination effort ever undertaken. The participants will discuss the
results of the examinations and future efforts to combat fraud and
sales practice abuses in the sale of low-priced securities.
e. Sales Practices
An area of continuing concern to the Commission, the self-
regulatory organizations and the states is responding effectively to
sales practice abuses (such as churning, unsuitable recommendations,
misrepresentations, and unauthorized trading) by securities
professionals. In particular, the participants are concerned about
persons who have a history of customer complaints, arbitration or other
litigation, or disciplinary actions. The participants will discuss the
need for greater cooperation in addressing sales practice abuse--
particularly by recidivists--and possible approaches (such as joint
examination efforts) to identifying and disciplining violators.
f. Market 2000
In January 1994, the Division completed a major study of the
structure of the U.S. equity markets and the regulatory environment in
which our markets operate. The Study, entitled Market 2000, addressed
the challenges presented to the Commission by the rapidly changing
structure of the secondary markets. The Division's basic finding was
that the equity markets are operating efficiently within the existing
regulatory structure. Record amounts of trading activity are processed
smoothly and efficiently. The Division concluded that a major revision
of equity market regulation was not needed and instead, recommended
that the Commission concentrate on the improvements that are needed to
make the markets work better for investors and competition work better
for the markets. Specific recommendations were made in four areas: Fair
treatment of investors, disclosure of market information, fair
competition, and open market access.
The participants will discuss the results of the Market 2000 study,
as well as two Commission rule proposals that have already resulted
from the study: (i) A proposed rule on disclosure regarding the issue
of payment for order flow, and (ii) a proposed rule imposing
recordkeeping and reporting requirements for trading systems operated
by brokers and dealers.
g. Municipal Securities
Over the past year, the Commission has worked with Congress, other
regulators, and industry participants on a number of issues relating to
the municipal securities market. As indicated above, the Commission
recently proposed for public comment amendments to Rule 15c2-12 that
would prohibit a municipal securities dealer from acting as an
underwriter of an issue of municipal securities unless the issuer has
agreed to provide certain disclosure to a central repository. Moreover,
these amendments would require broker-dealers, prior to recommending
transactions in municipal securities, to review the disclosure that the
issuer has agreed to provide. The Commission also proposed for comment
rule 15c2-13 and amendments to rule 10b-10, which would require broker-
dealers to disclose mark-ups in riskless principal transactions of
certain debt securities. These proposals further would require broker-
dealers to disclose when municipal securities are unrated. The
participants will discuss these rule proposals, as well as the recent
Municipal Securities Rulemaking Board rule proposal regarding political
contributions.
h. Additional Issues
The participants will also discuss other issues of mutual interest
relating to the regulation of broker-dealers. Possible discussion
topics include the following: i. Broker-dealer books and records
retention requirements, particularly a recent Commission proposal and
no-action letter relating to the use of electronic storage technology
(such as optical discs);
ii. Supervisory responsibilities of broker-dealers with
``franchised'' branch offices or large numbers of ``independent
contractors;''
iii. Sales practices of broker-dealers with respect to mutual
funds, municipal securities and collateralized mortgage obligations and
derivative products;
iv. Continuing assessment/education requirements for associated
persons of broker-dealers;
v. Disclosure of front-end sales loads on mutual fund
confirmations; and
vi. Payment of commissions to retired registered representatives.
(3) Investment Management Issues
a. Investment Company Disclosure
Over the last decade, investment company assets--particularly
assets invested in open-end investment companies, or ``mutual funds''--
have increased dramatically. A large part of this growth is
attributable to the increasing number of new investors and new
participants in the fund industry, such as banks and defined
contribution plans. The conferees will discuss ways to improve the
quality of information regarding mutual funds available to investors,
particularly newer, or less sophisticated investors, as well as federal
and state efforts toward more uniform federal and state investment
company disclosure requirements.
The conferees are also expected to discuss specific topics relating
to mutual fund disclosure and sales practices such as:
(i) Methods to reduce any confusion that exists among bank
customers between insured deposits and uninsured investments in mutual
funds and other securities;
(ii) Simplification of prospectuses for money market mutual funds
relying on rule 2a-7 under the Investment Company Act; and,
(iii) Guidelines proposed for adoption by the North American
Securities Administrators Association for disclosure of investment
companies' investments in high yield, or ``junk'', bonds and the risks
associated with such investments.
The conferees will also discuss the steps they are taking to
examine and to improve the clarity and adequacy of mutual fund
prospectuses generally.
b. ``Off-the-Page'' Prospectuses
On March 19, 1993, the Division of Investment Management proposed
for comment rule 482(g) under the Securities Act of 1933 to permit
advertisements for certain mutual funds to include an order form if
they contain specified disclosure and comply with other
requirements.\10\ The conferees are expected to discuss this proposal
and the roles the Commission, state regulatory authorities and the
National Association of Securities Dealers will play in monitoring the
use of these ``off-the-page'' prospectuses.
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\10\Off-the-Page Prospectuses for Open-End Management Investment
Companies, Securities Act Release No. 6982 (March 19, 1993).
Proposed rule 482 would implement a recommendation made by the
Division of Investment Management in chapter 9 of its report,
Protecting Investors: A Half Century of Investment Company
Regulation (May 1992).
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c. Investment Advisers
The Commission has proposed for comment rule and form amendments
that would specify the information that registered investment advisers
that are sponsors of ``wrap fee'' programs must provide to prospective
clients.\11\ In a wrap fee program an investor receives a bundle of
investment services including portfolio management, custody of funds
and securities, execution of transactions, and monitoring of portfolio
manager performance for a single ``wrap'' fee. The conferees are
expected to discuss this proposal and the comments that the Commission
has received.
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\11\Disclosure by Investment Adviser Regarding Wrap Fee
Programs, Investment Advisers Act Release No. 1401 (January 13,
1994).
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The Senate and the House of Representatives have passed legislation
to amend the Investment Advisers Act of 1940.\12\ On January 24, 1994,
Chairman Levitt sent a letter to Congress indicating that several
provisions in the House bill could be addressed through rulemaking,
including a suitability rule and a rule prohibiting custodian
arrangements under which only the adviser (and not the client) receives
periodic account statements. The letter also suggested the possibility
of a joint federal/state effort to identify investment advisers that
have failed to register under the Investment Advisers Act of 1940. The
conferees will discuss the status of the legislation, the rule
proposals that might result from the legislation, and the joint effort
to identify unregistered investment advisers. The conferees will also
discuss the effect the legislation might have upon proposed joint
Commission and state action, such as revisions to Form ADV and the
establishment by the Commission of a ``one-stop'' filing system
allowing advisers to make one filing that would be transmitted
electronically to the Commission and the states, which the legislation
would authorize. The conferees are also expected to discuss the extent
to which managers of mutual fund portfolios trade for their own
accounts, any abuses that may be associated with that practice, and
whether steps should be taken to curb the practice.
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\12\Investment Adviser Oversight Act of 1993, S. 423, 103rd
Cong., 1st Sess. (November 20, 1993); Investment Adviser Regulatory
Enhancement and Disclosure Act of 1993, H.R. 578, 103rd Cong., 1st
Sess. (May 4, 1993).
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(4) Enforcement Issues
In addition to the above-stated topics, the state and federal
regulators will discuss various enforcement-related issues which are of
mutual interest.
(5) General
There are a number of matters which are applicable to all, or a
number, of the areas noted above. These include Edgar, the Commission's
electronic disclosure system, rulemaking procedures, training and
education of staff examiners and analysts and sharing of information.
In addition, issues of consumer protection and assistance will be
discussed.
The Commission and NASAA request specific public comments and
recommendations on the above-mentioned topics. Commenters should focus
on the agenda but may also discuss or comment on other proposals which
would enhance uniformity in the existing scheme of state and federal
regulation, while helping to maintain high standards of investor
protection.
By the Commission.
Dated: March 23, 1994.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-7448 Filed 3-29-94; 8:45 am]
BILLING CODE 8010-01-M