[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