[Federal Register Volume 60, Number 35 (Wednesday, February 22, 1995)]
[Notices]
[Pages 9871-9875]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-4237]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 33-7137, File No. S7-6-95]
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 March 27, 1995,
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 March 27, 1995. Written comments
must be received on or before March 22, 1995 in order to be considered
by the conference participants.
addresses: Written comments should be submitted in triplicate by March
22, 1995 to Jonathan G. Katz, Secretary, Securities and Exchange
Commission, 450 5th Street NW., Washington, DC 20549. Comments should
refer to File No. S7-6-95 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) 942-2950.
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 laws and
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.
\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 [[Page 9872]] 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 purpose 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 1995 meeting will be the twelfth
such conference.
\2\Pub. L. 96-477, 94 Stat. 2275 (October 21, 1980).
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II. 1995 Conference
The Commission and the North American Securities Administrators
Association, Inc. (``NASAA'')\3\ are planning the 1995 Conference on
Federal-State Securities Regulation (the ``Conference'') to be held
March 27, 1995 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.
\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. Forward-looking Information
On October 13, 1994, the Commission issued a concept release\4\
regarding disclosure of forward-looking information and the
effectiveness of the safe harbor provisions for that type of
disclosure.\5\ The concept release requests comment from the public on
various alternatives to the safe harbor provisions that have been
proposed by several people. In addition, the Commission will hold
public hearings in Washington, DC and in San Francisco, California on
February 13 and 16, 1995, respectively, concerning these issues. The
conference participants will discuss and consider the issues regarding
the use of forward-looking information in disclosure documents and the
Commission's safe harbor provisions.
\4\Securities Act Release No. 7101 (October 13, 1994) (59 FR
52723).
\5\See Securities Act Rule 175, 17 CFR 230.175; Securities
Exchange Act Rule 3b-6, 17 CFR 240.3b-6.
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b. 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.
The Commission working with the states toward this goal, developed Rule
505 of Regulation D, the federal exemption for certain limited
offerings, while NASAA crafted the complementary Uniform Limited
Offering Exemption (``ULOE'').
ULOE provides the framework for a uniform exemption from state
registration for certain issues of securities which would be exempt
from federal registration by virtue of Regulation D. 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 universal
adoption. The conferees will discuss the continued usefulness of ULOE,
as well as possible steps to encourage its adoption by the remaining
states. Further, consideration will be given to whether there are
alternative exemptive methods which might be suitable for coordination
among the states and the federal system, either within or outside of
the ULOE framework.
c. Small Business Initiative
On July 30, 1992, the Commission adopted a number of rulemaking
changes, often described as the Small Business Initiative, which were
designed to streamline and simplify the Commission's regulatory system
applicable to the public sale of securities by small businesses, and to
provide new opportunities for investors, consistent with the
Commission's obligations to protect such investors.\6\ 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.
\6\Securities Act Release No. 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
exemptions that might be developed to enhance the ability of small
issuers to raise capital, while protecting legitimate interests of
investors.
d. 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. Commenters are invited to
discuss areas, and particularly whether or not there are particular
industries, where federal-state cooperation in addressing disclosure
standards could be of special significance as well as any ways in which
federal-state cooperation could be improved. Comment is also sought on
the application of plain language principles to disclosure documents
that are becoming increasingly lengthy and complex. [[Page 9873]]
e. Multinational Securities Offerings
The Commission has recently adopted a number of changes to its
rules and forms designed to facilitate access by foreign issuers to the
U.S. capital markets. On April 19, and December 13, 1994, the
Commission adopted amendments designed to streamline the registration
and reporting process for foreign companies accessing the U.S. public
markets by expanding the availability of short-form and shelf
registration and streamlining the reconciliation and reporting
requirements.\7\ Comment is specifically requested on ways to
coordinate federal and state treatment of multinational offerings.
\7\Securities Act Release No. 7053 (April 19, 1994) (59 FR
21644); Securities Act Release Nos. 7117, 1778, 7119 (December 13,
1994) (59 FR 65628, 59 FR 65632, 59 FR 65637).
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f. Debt Market Initiatives
On November 10, 1994, the Commission adopted amendments to Rule
15c2-12 under the Securities Exchange Act of 1934 (``Exchange Act'')
that are intended to improve disclosure in the secondary market for
municipal securities.\8\ The amendments prohibit a municipal securities
dealer from underwriting an issue of municipal securities unless the
issuer undertakes to provide annual financial information and notices
of material events to the market by lodging that information with
informational repositories. The amendments also prohibit the
recommendation of a municipal security unless the dealer has procedures
in place to provide reasonable assurance that it will receive promptly
any event notices with respect to that security.
\8\Securities Exchange Act Release No. 34961 (November 10, 1994)
(59 FR 59390).
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The amendments follow upon a March 9, 1994 interpretive release
issued by the Commission that addressed 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.\9\
\9\Securities Exchange Act Release No. 33741 (March 9, 1994) (59
FR 12748).
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The Conference participants will discuss these developments and
other matters with respect to municipal securities. In addition, they
will discuss the Commission's recent proposals concerning disclosure of
security ratings.\10\
\10\Securities Act Release No. 7086 (August 31, 1994) (59 FR
46314).
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g. Derivatives
Derivatives are financial or commodity instruments which derive
their value from an interest rate, equity price, market or other
defined index, foreign currency exchange rate, commodity price of other
identified measure. While derivatives typically are described as
including futures, forwards, swaps and options, other instruments such
as structured notes, interest-only and principal-only strips, inverse
floaters and indexed debt and equity instruments are included in the
broader definition of derivatives because they have similar risk
characteristics. Recently published data indicate that the notional
amount of derivatives worldwide exceeds $12 trillion.
Investments in derivative and similar instruments expose investors
to potential gains or losses linked to the changes in the underlying
variable. The increasing complexity and widespread use of derivatives
for trading and risk management purpose has generated widespread
interest. In 1994 a number of corporate issuers, investment companies
and municipalities experienced significant losses on derivative
instruments and structured instruments. The Commission has undertaken a
number of initiatives to address disclosure, accounting and sales
practices involving derivatives and similar instruments. Conferees will
discuss the application of federal and state securities laws to
derivatives and similar instruments as well as disclosure issues
relating to issuances of and investments in these instruments.
(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 registered
broker-dealers and their associated persons. The NASD is currently in
the process of implementing a comprehensive plan to redesign the CRD.
The redesigned system, which is expected to be fully operational in
1996, will be expanded to enhance its regulatory function for use by
the states, self-regulatory organizations, and the Commission. Among
the improvements anticipated are (1) Streamlined presentation and
capture of data, (2) better access to information (e.g., the ability to
create and retrieve standardized and specialized computer searches),
and (3) electronic filing of uniform Forms U-4, U-5, and BD, discussed
below.
The participants will discuss the status of the CRD redesign
project, as well as issues relating to operation of the existing CRD
system.
b. Forms Revision
In connection with the CRD redesign, NASAA has adopted amendments
to Form U-4,\11\ the uniform form for registration of associated
persons of a broker-dealer. The revisions to Form U-4 respond to
certain recommendations addressed in the CRD redesign and primarily are
designed to facilitate the conversion of data from the existing CRD
system to the newly designed CRD. The Commission recently has proposed
for public comment similar amendments to Form BD, the uniform broker-
dealer registration form under the Exchange Act.\12\ The proposed
revisions to Form BD are intended to facilitate retrieval of
disciplinary information by eliciting more precise information about
broker-dealers and their securities business, and by reorganizing
disclosure items into related categories.
\11\See NASAA Reports (CCH) 4161 (1994).
\12\Securities Exchange Act Release No. 35224 (Jan. 12, 1995),
(60 FR 4040).
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The participants will discuss issues relating to the revisions to
Forms U-4 and BD, including the disclosure of customer complaint
history of registered personnel of broker-dealers and issues raised by
the comment letters on the proposed amendments to Form BD.
c. Bank Securities Activities
The NASD recently has proposed rules that would govern the conduct
of member broker-dealers operating on financial institution
premises.\13\ The proposed rules respond to concerns expressed by NASD
members about the lack of clear guidance with respect to the activities
of bank-affiliated broker-dealers and third-party broker-dealers
operating on the premises of financial institutions pursuant to a
networking arrangement. The NASD Notice to Members states that, as
proposed, the rules adopt investor protection principles similar to
those set forth in a recent no-action letter issued by the staff of the
Commission,\14\ and an interagency statement issued by the four banking
regulators (``Interagency Statement'').\15\ For example, consistent
[[Page 9874]] with the staff no-action letter and the Interagency
Statement, the rules would require members to enter into a written
agreement with the financial institution that describes the
responsibilities of the parties and the conditions of the agreement,
including the physical location of the broker-dealer, customer
disclosures, compensation, supervisory responsibilities, solicitation
of customers, and communications with the public.
\13\See NASD Notice To Members 94-94 (Dec. 1994).
\14\See Letter re: Chubb Securities Corporation (Nov. 24, 1994).
\15\See Interagency Statement On Retail Sales Of Nondeposit
Investment Products, Board of Governors of the Federal Reserve
System, Federal Deposit Insurance Corporation, Office of The
Comptroller of the Currency, and Office of Thrift Supervision, (Feb.
15, 1994).
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The participants will discuss these proposed rules and other
concerns raised by sales of securities on the premises of financial
institutions, including inspections by banking and securities
regulators and licensing of financial institution salespersons.
d. Municipal Securities
The Commission has been working with Congress, other regulators,
and industry participants on a number of issues relating to the
municipal securities market, including ways of improving dissemination
of disclosure in the primary and secondary markets. As indicated in the
Corporation Finance portion of this tentative agenda, the Commission
recently adopted amendments to Rule 15c2-12 in furtherance of this
goal.\16\
\16\See notes 8 and 9 supra and accompanying text.
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The Commission also adopted amendments to Rule 10b-10,\17\ which
will require brokers-dealers to disclose (1) When a debt security is
not rated by a nationally recognized statistical rating organization;
(2) if they are not members of the Securities Investor Protection
Corporation (except, in limited circumstances, for transactions in
mutual fund shares); (3) the availability of information with respect
to transactions in collateralized debt securities; and (4) the amount
of any mark-ups and mark-downs in certain NASDAQ and regional exchange-
listed securities that are subject to last sale reporting. In a related
release, the Commission adopted Rule 11Ac1-3 and amendments to Rule
10b-10, which, together, will require broker-dealers to disclose on
customer confirmations, account statements, and new accounts documents
whether payment for order flow is received by the broker-dealer for
transactions in certain securities and the fact that the source and
nature of the compensation received will be furnished upon written
request.\18\
\17\Securities Exchange Act Release No. 34962 (Nov. 10, 1994),
(59 FR 59612).
\18\Securities Exchange Act Release No. 34902 (Oct. 27, 1994),
(59 FR 55006).
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The participants will discuss how Rule 11Ac1-3 and amendments to
Rules 10b-10 and 15c2-12 will affect the securities industry. In
addition, the participants will discuss the progress made by the
Municipal Securities Rulemaking Board and the Public Securities
Association toward enhanced price transparency in the municipal
securities market.
e. Sales Practice Activities
In May of last year, the Commission released the findings of the
Large Firm Project. The Project involved a review of the hiring,
supervisory, and retention practices at nine of the country's largest
retail brokerage firms conducted by the Commission, the NYSE and the
NASD. As a result of the Project, the Commission staff proposed a
number of recommendations to strengthen broker-dealer compliance
systems, enhance SRO efforts, and reinforce the Commission's principal
mandate of investor protection. The participants will discuss the
status of those recommendations, as well as other initiatives resulting
from the Large Firm Project, including Commission policy on re-entry
into the securities industry of individuals subject to a Commission
bar.
The Commission is in the process of conducting another joint
regulatory examination sweep in coordination with the NASD, the NYSE
and NASAA. Rather than focus on particular large firms as the staff did
during the Large Firm Project, during this sweep the staff will include
firms of all sizes and will target so-called ``rogue'' or problem
registered representatives throughout the industry. Participants will
report on the status of the current sweep.
f. Cold Calling
Broker-dealers, like all firms engaged in telemarketing, are
subject to the Telephone Consumer Protection Act of 1991 and a Federal
Communications Commission (``FCC'') rule promulgated thereunder.\19\
Pursuant to the FCC rule, telemarketers must establish time-of-day
restrictions, ``do-not-call'' lists, training requirements, supervisory
procedures, and identification requirements. Moreover, in August 1994,
new legislation entitled the Telemarketing and Consumer Fraud and Abuse
Prevention Act was passed that will require the Federal Trade
Commission (``FTC'') to enact cold-calling rules and to direct the SEC
to adopt substantially similar rules within six months of the FTC
rules.
\19\Pub. L. No. 102-243, 105 Stat. 2394 (1991) (codified at 47
U.S.C. 227 (1992)); 47 CFR 64.1200 (1992).
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The Commission has been considering various methods to curtail
abusive cold-calling practices in the securities industry and will
discuss with participants what actions might be taken in advance of the
FTC rules.
g. Continuing Education
The Industry/Regulatory Council on Continuing Education, composed
of representatives from the SROs, a cross-section of firms, and
liaisons from NASAA and the SEC, is developing a continuing education
curriculum to improve practices throughout the industry. Under the
Council's proposed program, every broker-dealer will be required to
provide its registered representatives and first-line supervisors with
annual continuing education relating to products and services. In
addition, the Council proposed that all registered representatives who
have been registered less than ten years or who have been the subject
of serious disciplinary action receive compliance, ethics, and sales
practice training. Two working committees are developing the elements
of the program. The committees have drafted enabling rules and designed
the program structure, content, and delivery mechanisms. The Council
received approval of the rules on February 8, 1995 and expects to
implement the program in July 1995. Participants will discuss issues
involved in implementing the continuing education program.
h. Three Day Settlement
In October 1993, the Commission adopted Rule 15c6-1 which will
become effective June 7, 1995. The rule establishes three business days
as the standard settlement time frame for most broker-dealer
transactions. Since the date of adoption, many broker-dealers have been
encouraging their retail customers to leave securities in street name
and to open up money management accounts in order to meet the three day
settlement requirements. While this practice is acceptable, it is a
misrepresentation to state that the rule requires customers to leave
assets with broker-dealers. The participants will discuss potentially
abusive sales practices used by broker-dealers including
misrepresentation of the requirements of the rule.
(3) Investment Management Issues
a. Investment Company Disclosure
Over the last decade, investment company assets--particularly
assets [[Page 9875]] invested in open-end investment companies, or
``mutual funds''--have grown steadily. The conferees will discuss a
number of Commission initiatives aimed at improving disclosure to
mutual fund investors.
The conferees will discuss ways to improve the quality of
information regarding mutual funds available to investors, particularly
less experienced investors, as well as federal and state efforts toward
more uniform federal and state investment company disclosure
requirements. The conferees will also discuss the steps they are taking
to examine and to improve the clarity and adequacy of mutual fund
prospectuses.
In response to a request from certain members of Congress, the
Division of Investment Management prepared a study dated September 26,
1994 on the use of derivatives by mutual funds. As part of its study,
the Division recommended that the Commission consider seeking public
comment in early 1995 on alternatives for improving risk disclosure in
mutual fund prospectuses. The conferees are expected to discuss issues
relating to investment company risk disclosure, including the possible
use of quantitative risk measurement. In addition, the conferees will
discuss ways to facilitate investor access to information about
portfolio securities held by funds.
The Commission recently proposed rule and form amendments relating
to the reporting of expenses by investment companies.\20\ The proposed
amendments would require an investment company to reflect as expenses
in its financial statement certain liabilities of the company paid by
broker-dealers in connection with the allocation of the company's
brokerage transactions to the broker-dealers. The amendments are
intended to enhance the information provided to investors so that they
may better assess investment company expenses and performance. The
conferees are expected to discuss this proposal and the comments that
the Commission has received.
\20\Investment Company Act Release No. 20472 (Aug. 11, 1994) (59
FR 42187) (proposing amendments to Rule 6-07 of Regulation S-X).
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In October of 1994, the Commission adopted significant revisions to
the proxy rules applicable to funds.\21\ The amended rules are the
first significant revisions to the fund proxy rules since 1960 and
reflect the Commission's commitment to improved disclosure for fund
shareholders. The conferees are expected to discuss the revised rules.
\21\Investment Company Act Release No. 20614 (Oct. 13, 1994) (59
FR 52689).
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b. Investment Advisers
On March 16, 1994, the Commission proposed two new rules under the
Investment Advisers Act of 1940 (``Advisers Act'').\22\ One of these
rules would expressly prohibit investment advisers from making
unsuitable recommendations to clients; the other proposed rule would
prohibit registered investment advisers from exercising investment
discretion over client accounts unless they reasonably believe that the
custodians of those accounts send account statements to the clients at
least quarterly. The conferees will discuss the status of the proposed
rules.
\22\Investment Advisers Act Release No. 1406 (March 16, 1994)
(59 FR 13464).
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The conferees will also discuss ways in which the Commission and
the states can coordinate their respective investment adviser
inspection programs and efforts to identify investment advisers that
have failed to register as such with the Commission or the appropriate
state authorities.
(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) Investor Education
Recently, the Commission announced a number of initiatives to aid
investors in understanding how to invest wisely and protect themselves
from abusive and fraudulent industry practices. The States and NASAA
have a longstanding commitment to investor education and the Commission
is intent on coordinating and complementing those efforts to the
greatest extent possible. The participants at the conference will
discuss investor education and potential joint projects in each of the
working group sessions. They will specifically consider the results of
recent Commission activities in this area: Information generated at a
series of town meetings and investor forums; public reaction to a new
toll-free information line for investors and a new electronic bulletin
board which provides information about the Commission and its
responsibilities; the usefulness of other explanatory informational
materials, including new pamphlets provided by the Commission to the
public; and the progress of Commission efforts to develop ``plain
English'' instructions for mandatory disclosure items, and guidelines
for simpler summaries of information in required filings. Future
projects to be considered will include the following: (1) Developing an
``Investor Information Kit'' for novice or unsophisticated investors
that includes basic information that every investor should know in an
easy-to-use format; (2) developing a model curriculum for high school
classes and adult seminars on the basics of how to invest wisely and
what to do if a problem arises; and (3) designing a distribution plan
for Commission educational products to assure that information is
provided to investors when they are in the process of making major
investment decisions and most likely to need such information.
(6) 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.
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
regulations, while helping to maintain high standards of investor
protection.
Dated: February 15, 1995.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-4237 Filed 2-21-95; 8:45 am]
BILLING CODE 8010-01-M