[Federal Register Volume 62, Number 69 (Thursday, April 10, 1997)]
[Notices]
[Pages 17653-17659]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-9204]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 33-7413, File No. S7-15-97]


Securities Uniformity; Annual Conference on Uniformity of 
Securities Laws

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 28, 1997, 
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 28, 1997. Written comments 
must be received on or before April 23, 1997 in order to be considered 
by the conference participants.

ADDRESSES: Written comments should be submitted in triplicate by April 
23, 1997 to Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, 450 5th Street, N.W., Washington, D.C. 20549. Comments also 
may be submitted electronically at the following E-mail address: rule-
[email protected]. Comments should refer to File No. S7-15-97; this file 
number should be included on the subject line if E-mail is used. 
Comment letters will be available for public inspection at the 
Commission's Public Reference Room, 450 5th Street, N.W., Washington, 
D.C. 20549. Electronically submitted comment letters will be posted on 
the Commission's internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT:
John D. Reynolds or Richard K. Wulff, Office of Small Business Review, 
Division of Corporation Finance, Securities and Exchange Commission, 
450 5th Street, N.W., Washington, D.C. 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

[[Page 17654]]

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.
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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 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 
1997 meeting will be the fourteenth such conference.
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    \2\ Pub. L. 96-477, 94 Stat. 2275 (October 21, 1980).
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    Recently, Congress has examined the system of dual federal and 
state securities regulation and the effects of such dual regulation on 
the nation's securities markets. During this process, Congress 
considered the need for regulatory changes to promote capital 
formation, eliminate duplicative regulation, decrease the cost of 
capital and encourage competition, while at the same time promoting 
investor protection. These efforts resulted in passage of The National 
Securities Markets Improvement Act of 1996 \3\ (the ``1996 Act''), 
which was signed by President Clinton on October 11, 1996. The 1996 Act 
contains significant provisions that realign the regulatory partnership 
between federal and state regulators. The legislation reallocates 
responsibility for regulation of the nation's securities markets 
between the federal government and the states in order to eliminate 
duplicative costs and burdens and improve efficiency, while preserving 
investor protections. The 1996 Act addresses regulation applicable to 
securities offerings, investment companies and advisers and broker-
dealers.
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    \3\ Pub. L. 104-290, 110 Stat. 3416 (October 11, 1996).
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II. 1997 Conference

    The Commission and the North American Securities Administrators 
Association, Inc. (``NASAA'') \4\ are planning the 1997 Conference on 
Federal-State Securities Regulation (the ``Conference'') to be held 
April 28, 1997 in Washington, D.C. At the Conference, representatives 
from the Commission and NASAA will form into working groups in the 
areas of corporation finance, market regulation and oversight, 
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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    \4\ 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. Uniformity of Regulation
    The 1996 Act amended Section 18 of the Securities Act \5\ to 
preempt state blue-sky registration of securities offerings of 
``covered securities'' \6\ and prohibit state reviews of offerings of 
covered securities.\7\ The definition of covered securities does not 
include the following which, therefore, remain subject to state 
registration requirements:
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    \5\ 15 U.S.C. 77r.
    \6\ 15 U.S.C. 77r(b). ``Covered securities'' are defined in 
Section 18. The term generally includes New York Stock Exchange, 
Inc. (``NYSE''), American Stock Exchange, Inc. (``AMEX'') and Nasdaq 
National Market System (``Nasdaq/NMS'') securities, registered 
investment company securities and specified exempt securities and 
offerings.
    \7\ 15 U.S.C. 77r(a).
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     Securities quoted on the Nasdaq SmallCap market;
     Securities quoted on the Nasdaq over-the-counter 
Electronic Bulletin Board;
     Securities quoted on the over-the-counter ``pink sheets;''
     Securities listed on national securities exchanges other 
than the NYSE or AMEX (unless the Commission determines by rule that 
the listing standards of such exchanges are substantially similar to 
the listing standards of the NYSE, AMEX, or Nasdaq/NMS);
     Various investment grade securities, such as asset-backed 
and mortgage-backed securities, since these securities usually are not 
listed on a national exchange or Nasdaq/NMS;
     Private placements of securities under Section 4(2) of the 
Securities Act that do not meet the requirements of Rule 506 of 
Regulation D; \8\ and
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    \8\ 17 CFR 230.501 through 230.508.
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     Securities offered in reliance upon Commission rules 
adopted under Section 3(b) of the Securities Act, e.g., offerings that 
are exempt from registration with the Commission under Regulation A \9\ 
and Rules 504 and 505 of Regulation D.

    \9\ 17 CFR 230.251 through 230.263.
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In addition, with respect to offerings of covered securities (other 
than listed securities), the states retain the authority to require 
specified fee payments and/or notice filings. The states' continuing 
authority to regulate certain offerings and to require other filings 
and fees continues the need for uniformity between the federal and 
state registration systems where consistent with investor protection.
    The 1996 Act requires the Commission to conduct a study as to the 
extent to which uniformity of state regulatory requirements for 
securities and securities transactions that are not covered securities 
has been achieved.\10\ The Commission is instructed to consult with the 
states as well as issuers,

[[Page 17655]]

brokers and dealers in conducting this study. The results of the study 
are to be reported to Congress within a year following the enactment of 
the 1996 Act. The Commission and NASAA will discuss the nature and 
extent of uniformity at present and discuss steps to increase 
uniformity in light of the 1996 Act.
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    \10\ Section 102(b) of 1996 Act.
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B. Sales to Qualified Purchasers under the 1996 Act
    Section 18 of the Securities Act, as amended by the 1996 Act, 
excludes from state regulation and review securities offerings to 
purchasers who are defined by Commission rules to be ``qualified 
purchasers.'' \11\ A security sold to a ``qualified purchaser'' is a 
``covered security'' subject to the same new regulatory approach as 
other covered securities as described above. The Commission will be 
undertaking rulemaking to define ``qualified purchaser'' for this 
purpose, and will discuss with NASAA the appropriate criteria for this 
definition.
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    \11\ 15 U.S.C. 77r(b)(3).
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C. Commission Exemptive Authority
    The 1996 Act added new Section 28 to the Securities Act granting 
the Commission extensive general authority to craft exemptions from the 
Securities Act to the extent that such exemptions are necessary or 
appropriate in the public interest and consistent with the protection 
of investors.\12\ This new authority permits the Commission to adopt 
rules which exempt any person, security or transaction, or any classes 
thereof, from one or more of the provisions of the Securities Act. The 
Commission is authorized to adopt conditions for the availability of 
such exemptions or, if deemed appropriate, adopt unconditional 
exemptions. The Commission and NASAA will discuss the nature and extent 
of appropriate exemptions that may be adopted under the Commission's 
new authority and the appropriate criteria of and conditions to such 
exemptions. In this regard, the definition of covered securities does 
not encompass securities issued pursuant to exemptions under new 
Section 28. Accordingly, securities or transactions determined to be 
exempt under Commission rules adopted pursuant to new section 28 may be 
subject to state regulation and review. The conferees will discuss how 
offerings exempted under new Section 28 may be regulated in a uniform 
manner under state securities laws to the greatest possible extent, 
consistent with investor protection.
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    \12\ 15 U.S.C. 77z-3.
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D. Small Business Initiatives
    During 1996 the Commission adopted and revised rules to provide 
additional assistance to small business. On May 1, 1996, the Commission 
adopted Rule 1001, a new Securities Act Section 3(b) exemption from the 
registration requirements of the federal securities laws.\13\ Under the 
exemption, offers and sales of securities, in amounts of up to $5 
million, that satisfy the conditions of a 1994 exemption from 
California state qualification requirements (Section 25102(n) of the 
California Corporations Code) are exempt from federal registration. 
Also on May 1, 1996, the Commission adopted amendments to certain rules 
under the Securities Exchange Act of 1934 \14\ (``Exchange Act'') that 
raised the asset threshold for when a company must become a ``public'' 
reporting company from $5 million to $10 million.\15\
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    \13\ Securities Act Release No. 7285 (May 1, 1996) [61 FR 
21356].
    \14\ 15 U.S.C. 78a et seq.
    \15\ Securities Exchange Act Release No. 37157 (May 1, 1996) [61 
FR 21354].
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    On February 20, 1997, the Commission adopted amendments to the 
holding period requirements contained in Rule 144 under the Securities 
Act.\16\ Rule 144 provides a Securities Act registration safe harbor 
for resales of securities by persons who hold either ``restricted'' 
securities or securities of a company of which they are affiliates. 
``Restricted'' securities generally include securities issued in 
offerings under certain exemptions from federal registration. The 
amendments permit the resale of limited amounts of restricted 
securities after a one-year, rather than the previous two-year, holding 
period. In addition, the amendments permit unlimited resales of 
restricted securities by non-affiliates after a holding period of two 
years, rather than the previous three-year period. The Commission 
believes that these changes will reduce the cost of private capital 
formation and especially benefit small businesses, without reducing 
investor protections. In a companion release, the Commission proposed 
certain changes to Rule 144 to simplify the rule's operation and 
solicited comments on additional changes to Rule 144.\17\
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    \16\ Securities Act Release No. 7390 (February 20, 1997) [62 FR 
9242].
    \17\ Securities Act Release No. 7391 (February 20, 1997) [62 FR 
9246].
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    Also on February 20, 1997, the Commission proposed amendments to 
Rule 430A to permit certain smaller or less seasoned reporting 
companies to price securities on a delayed basis after effectiveness of 
a registration statement, if they meet specified conditions.\18\ The 
proposals are intended to provide flexibility and efficiency to 
qualified registrants, enabling them to time their offerings to 
advantageous market conditions, consistent with investor protection.
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    \18\ Securities Act Release No. 7393 (February 20, 1997) [62 FR 
9276].
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    The participants will discuss the impact of the recent Commission 
rule changes and the need for any additional exemptive relief in the 
small business area. Conferees will consider the recent proposals and 
discuss the effects of such proposals, if adopted, on small business 
and public investors.
    During the fall of 1996, the Commission began meeting with small 
businesses in town hall meetings conducted throughout the United 
States. These town hall meetings are intended to provide basic 
information to small businesses about fundamental requirements that 
must be addressed when they wish to raise capital through the public 
sale of securities. In addition, the Commission has learned and will 
continue to learn more about the concerns and problems facing small 
businesses in raising capital so that initiatives and programs can be 
designed to meet their needs, consistent with the protection of 
investors. To date, the Commission has held six town hall meetings 
attended by more than 1,000 small business persons. The Commission 
representatives will share information and ideas obtained from these 
meetings with conference participants.
E. Securities Act Concept Release
    The Commission issued a concept release during 1996 to solicit 
comment on the best means of improving the regulation of the capital 
formation process while maintaining or enhancing investor 
protection.\19\ The Commission has been engaged in a broad 
reexamination of the regulatory framework for the offer and sale of 
securities under the Securities Act.
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    \19\ Securities Act Release No. 7314 (July 25, 1996) [61 FR 
40044].
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    The concept release solicited comment on different approaches, such 
as: the recommendation of the Advisory Committee on the Capital 
Formation and Regulatory Processes that a ``company registration'' 
approach be adopted; modifications to the existing shelf registration 
system (many of which were recommended by the Commission's Task Force 
on Disclosure

[[Page 17656]]

Simplification); reforms that would liberalize the treatment of 
unregistered securities; and an approach that would involve 
deregulation of offers. Comment also was requested with regard to any 
other approaches that should be considered. The comment period ended 
October 31, 1996. The participants will discuss the conceptual issues 
raised by the release and the comments received in response to such 
release and consider the changes that should be made in the regulation 
of securities offerings.
F. Report of the Advisory Committee on the Capital Formation and 
Regulatory Processes
    On July 24, 1996, the Advisory Committee on the Capital Formation 
and Regulatory Processes (the ``Advisory Committee'') presented its 
report to the Commission recommending the adoption of a company 
registration system. The Advisory Committee recommended a fundamental 
conceptual change in the scheme of regulation governing offerings by 
public companies. The Advisory Committee advised the Commission to 
shift the focus of the regulatory process for public offerings of 
securities by these companies from a transactional registration system 
to a company registration system, beginning with a pilot program. As a 
part of this new approach, the Advisory Committee recommended 
enhancements to the Exchange Act periodic reporting requirements. The 
participants will consider the recommendations proposed by the Advisory 
Committee, including the impact of such conceptual changes on the 
coordination of federal and state securities regulation.
G. Disclosure Simplification
    On March 5, 1996, the Commission published the Report of the Task 
Force on Disclosure Simplification (the ``Task Force Report''). The 
Task Force Report includes several recommendations intended to reduce 
the costs of raising capital by both smaller and seasoned companies. In 
addition, the Task Force Report includes a discussion on the ongoing 
debate regarding the need to adapt existing Securities Act requirements 
and related concepts to current market conditions. Since publication of 
the Task Force Report, the Commission initiated implementation of 
certain of the recommendations by eliminating 45 rules and four forms 
that were viewed as redundant or otherwise no longer necessary \20\ and 
published proposals to implement additional recommendations to 
eliminate unnecessary requirements and streamline the disclosure 
process.\21\
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    \20\ Securities Act Release No. 7300 (May 31, 1996) [61 FR 
30397].
    \21\ Securities Act Release No. 7301 (May 31, 1996) [61 FR 
30405].
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    The conference participants will discuss the findings and 
recommendations of the Task Force Report and consider the Commission's 
proposals that would implement certain recommendations. Conferees will 
consider how the Commission's proposals, if adopted, would impact the 
system of dual federal and state regulation.
H. Plain English
    One of major concerns of the Task Force on Disclosure 
Simplification was the lack of readability of prospectuses and other 
disclosure documents. The Task Force Report criticized prospectuses for 
their dense writing, legal boilerplate and repetitive disclosures and 
recommended using plain English disclosure to improve the readability 
of prospectuses. The Commission on January 14, 1997 proposed several 
rule amendments that would be a first step in implementing the Task 
Force's recommendation.\22\ The proposals require the use of plain 
English writing principles when drafting the front part of 
prospectuses--the cover page, summary and risk factors sections of 
these documents. Concurrently with the issuance of the plain English 
proposal, the Commission's Office of Investor Education and Assistance 
issued a draft copy of a handbook to help issuers write plain English 
documents.
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    \22\ Securities Act Release No. 7380 (January 14, 1997) [62 FR 
3152].
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    The Division of Corporation Finance is operating a pilot program 
for companies that want to draft their documents in plain English. The 
Division's staff works with volunteers on the techniques for designing 
and writing plain English documents filed under either the Securities 
Act or the Exchange Act. The company participants can draft plain 
English documents and submit them to the staff for suggestions and 
comments in a nonpublic forum.
    Conferees will discuss the Plain English initiative, including 
federal and state coordination needed to facilitate implementation of 
the initiative.
I. Electronic Delivery of Disclosure Documents
    The Commission has issued interpretive releases and rules 
addressing the use of electronic media to deliver or transmit 
information under the federal securities laws.\23\ These initiatives 
reflect the Commission's continuing recognition of the benefits that 
electronic technology provides to the financial markets. These releases 
are premised on the belief that the use of electronic media should be 
at least an equal alternative to the use of paper delivery.
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    \23\ Securities Act Release No. 7233 (October 6, 1995) [60 FR 
53458], Securities Act Release No. 7289 (May 9, 1996) [61 FR 24652].
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    The participants will discuss the impact of electronic technology 
on the capital formation process and consider the nature and extent of 
regulatory changes to accommodate the use of such technology in 
securities offerings. In particular, conferees will consider the 
various approaches that have been taken by states and the Commission 
relative to securities offerings on the Internet.
J. Internationalization of the Securities Markets
    1. Foreign Issuers in the U.S. Market. Foreign companies raising 
funds from the public or having their securities traded on a national 
exchange or the Nasdaq Stock Market are generally subject to the 
registration requirements of the Securities Act and the registration 
and reporting requirements of the Exchange Act. The Commission has 
provided a separate integrated disclosure system for foreign private 
issuers that provides a number of accommodations to foreign practices 
and policies. Foreign companies conducting securities offerings in the 
U.S. continue to be subject to state regulation and review unless the 
securities being offered are ``covered securities'' within the meaning 
of the 1996 Act. The participants will discuss steps to increase 
coordination of federal and state treatment of multinational offerings.
    2. Regulation S. In 1990, the Commission adopted Regulation S \24\ 
to clarify the extraterritorial application of the registration 
requirements of the Securities Act. The Commission intended for 
Regulation S to make clear that registration of an offering of 
securities under the Securities Act would not be required where the 
offering takes place outside the United States and the securities 
offered come to rest offshore. Following the adoption of Regulation S, 
the Commission became aware of certain abusive practices under the 
regulation. The Commission issued a release on February 20, 1997 
proposing revisions to Regulation S to

[[Page 17657]]

prevent those abusive practices.\25\ The proposals include lengthening 
the restricted period during which persons relying on the Regulation S 
safe harbor may not sell equity securities into the United States from 
40 days to two years (absent registration or a valid exemption) and 
classifying equity securities placed offshore pursuant to Regulation S 
as ``restricted securities'' under Rule 144. The proposals would apply 
to offshore sales of equity securities of domestic issuers and of 
foreign issuers where the principal market for those securities is the 
United States.
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    \24\ 17 CFR 230.901 through 230.904 and Preliminary Notes.
    \25\ Securities Act Release No. 7392 (February 20, 1997) [62 FR 
9258].
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    Conferees will discuss the proposed changes to Regulation S, share 
their experiences with Regulation S offerings and discuss steps to 
increase coordination of federal and state regulation of such 
offerings.

(2) Market Regulation Issues

A. National Securities Markets Improvement Act of 1996
    1. State Licensing Requirements. The 1996 Act directed the 
Commission to conduct a study of the impact of disparate state 
licensing requirements on associated persons of registered broker-
dealers and the methods for states to attain uniform licensing 
requirements for such persons. The Commission is required to consult 
with the self-regulatory organizations (``SROs'') and the states, and 
to prepare and submit a report to Congress by October 11, 1997. To this 
end, Commission staff have been consulting with the SROs, NASAA, and 
members of the securities industry. The initial goal is to determine 
the extent to which state licensing requirements differ and the effect 
of different state requirements and procedures upon associated persons 
and broker-dealers. The next phase of the study will be to analyze the 
need for and feasibility of requiring uniform state requirements 
(through legislation or other means). The participants will discuss the 
status of the study at the conference.
    2. State Requirements for Exchange-Listed Securities. As noted 
above, the 1996 Act amended Section 18 of the Securities Act to provide 
an exemption from state blue sky laws and regulations for securities 
that are listed on the NYSE, the AMEX, and the Nasdaq/NMS. The 
amendments to Section 18 also allow the Commission by rule to designate 
securities listed on other national securities exchanges as exempt from 
state blue sky laws and regulations if the applicable listing standards 
are substantially similar to those of the NYSE, AMEX, or Nasdaq/NMS. 
Section 18 allows the Commission to adopt such a rule on its own 
initiative or in response to a rulemaking petition. The Commission has 
received rulemaking petitions from the Pacific Stock Exchange, Inc., 
the Chicago Board Options Exchange, Inc., and the Chicago Stock 
Exchange, Inc. The participants will discuss these proposals and their 
potential impact on NASAA members.
    3. Broker-Dealer Books and Records. Section 103 of the 1996 Act 
prohibits any state from imposing broker-dealer books and records 
requirements that are different from or in addition to the Commission's 
requirements. In addition, the same section directs the Commission to 
consult periodically with state securities authorities concerning the 
adequacy of the Commission's requirements. The Commission's current 
proposal to amend Rules 17a-3 and 17a-4 \26\ originated in discussions 
between NASAA representatives and the Commission about the adequacy of 
the existing broker-dealer books and records requirements.\27\ The 
proposed amendments clarify, modify, and expand the Commission's 
record-keeping requirements with respect to purchase and sale 
documents, customer records, associated person records, customer 
complaints, and certain other matters. In addition, the proposed 
amendments specify certain types of books and records that broker-
dealers must make available in their local offices. In consideration of 
the substantial number of organizations that have expressed interest in 
commenting on the proposed amendments, the Commission extended the 
comment period until March 31, 1997. The participants at the Conference 
will discuss the proposed amendments and the comments received.
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    \26\ 17 CFR 240.17a-3 and 17a-4.
    \27\ Securities Exchange Act Release No. 37850 (October 22, 
1996) [61 FR 55593].
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B. Central Registration Depository (``CRD'') Redesign
    The CRD system is a computer system operated by the National 
Association of Securities Dealers, Inc. (``NASD'') that is used by the 
Commission, the states and the SROs primarily as a means to facilitate 
registration of broker-dealers and their associated persons. The NASD 
is in the process of implementing a comprehensive plan to redesign the 
CRD and to expand its use by federal and state securities regulators as 
a tool for broker-dealer regulation. As a result of the NASD's efforts, 
the redesigned CRD system ultimately is expected to provide the 
Commission, SROs, and state securities regulators with: (i) Streamlined 
capture and display of data; (ii) better access to registration and 
disciplinary information through the use of standardized and 
specialized computer searches; and (iii) electronic filing of uniform 
registration and licensing forms, including Forms U-4, U-5, BD and BDW.
    The NASD has been testing the pilot version of the redesigned CRD 
since mid-1996, and this version is now in use on a trial basis at 
approximately 800 broker-dealers nationwide. Among other things, the 
participants will discuss the status of the CRD implementation process, 
and issues relating to the conversion of existing registration 
information to the redesigned CRD and electronic filing of uniform 
forms.
C. Broker-Dealer Examinations
    In December 1995, regulators responsible for examining broker-
dealers (NASAA on behalf of state regulators, the AMEX, the CBOE, the 
NYSE, the NASD and the Commission) signed a Memorandum of Understanding 
(``MOU'') in which they committed to undertake their regulatory 
responsibilities in the most efficient and effective manner possible by 
sharing information, coordinating examinations and identifying 
regulatory priorities. As part of the MOU, NASAA, the SROs and the 
Commission agreed to meet yearly for a national planning summit and 
each state securities regulator, NASD district office and Commission 
regional office agreed to meet at least annually for a regional 
planning summit, to discuss examination schedules and priorities, 
review broker-dealers' examination histories, and discuss other areas 
of related interest, with the goal of encouraging information-sharing 
to avoid unnecessary duplication of examinations. Common regulatory 
findings and the status of this coordination and of the implementation 
of the MOU will be discussed.
    In March 1996, the Commission, NASAA, the NASD and the NYSE 
released a report on the findings of a joint regulatory effort--``The 
Joint Regulatory Sales Practice Sweep: A Review of the Sales Practice 
Activities of Selected Registered Representatives and the Hiring, 
Retention, and Supervisory Practices of the Brokerage Firms Employing 
Them.'' The objectives of this joint initiative were to identify 
possible problem registered representatives, to review their sales 
practices, and to assess whether adequate hiring, retention, and 
supervisory mechanisms were in place.

[[Page 17658]]

The findings of the report suggested generally that, while many firms 
maintain satisfactory supervisory mechanisms, firms can and should 
improve and strengthen their hiring, retention, and supervisory 
practices. Consequently, the report contained specific recommendations 
aimed at improving brokerage firms' hiring, retention, and supervisory 
practices. The attendees will discuss implementation of the 
recommendations.
D. Arbitration
    The NASD and other members of the Securities Industry Conference on 
Arbitration have been developing new approaches to important issues 
affecting the administration of securities arbitration over the past 
year. Much of their work was prompted by the 1996 report of the NASD's 
Arbitration Policy Task Force. The participants will discuss the status 
of some of the important developments in their area. For example, 
proposed changes related to the variations in administering claims of 
different dollar amounts, the administration of older claims, and 
punitive damages are likely to be discussed.
E. Internet Fraud/Electronic Delivery
    A leadership area of mutual interest to both the Commission staff 
and NASAA is the impact of developments in technology. This year there 
were ongoing discussions concerning a variety of new issues. Areas of 
concern include: industry retention of electronic records and 
communications; computer security; unregistered brokerage, investment 
advisory and other regulated financial business conducted through the 
internet; foreign exchange and foreign financial sector access to the 
U.S. through electronic media; and industry and investor education 
about the use of electronic media for the securities business. In 1996, 
the Division issued no-action or information letters with respect to 
certain financial business activities on the Internet, including 
issuer-based bulletin board services,\28\ non-profit matching 
services,\29\ and activities of on-line service providers (America 
Online, Compuserve, and Microsoft).\30\ The Commission staff and NASAA 
also have ongoing consultations on state securities law issues.
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    \28\ Spring Street Brewing Co. (April 17, 1996); Real Goods 
Trading Corp. (June 24, 1996); PerfectData Corp. (August 5, 1996); 
and Flamemaster Corp. (November 6, 1996).
    \29\ Angel Capital Electronic Network (October 25, 1996).
    \30\ Charles Schwab & Co., Inc. (November 27, 1996).
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    On May 9, 1996, the Commission published an interpretive release 
expressing its views on the electronic delivery of documents that 
broker-dealers, transfer agents, and investment advisers are required 
to send to their customers.\31\ The conference participants will 
discuss these and other matters concerning the Internet and the use of 
electronic media.\32\
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    \31\ Securities Exchange Act Release No. 37182 (May 9, 1996) [61 
FR 24644].
    \32\ See related discussion under Corporation Finance Issues, 
supra page 13.
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F. Regulation M
    On December 18, 1996, the Commission approved Regulation M, 
representing the most sweeping changes in the way the Commission seeks 
to prevent the manipulation of securities offerings since the 
Commission adopted Rules 10b-6, 10b-7, and 10b-8 (also known as the 
``trading practices rules'') over 40 years ago.\33\ Regulation M, which 
became effective March 4, 1997, differs from the former trading 
practices rules by focusing the restrictions on securities that are 
more susceptible to manipulation; using better measures for 
manipulative potential; recognizing the global nature of securities 
markets; assimilating the changes in market transparency and 
surveillance; and codifying a variety of earlier actions by the 
Commission to adapt the former rules to current market conditions. 
Regulation M addresses the concern that persons with a stake in a 
securities offering, such as issuers, selling securityholders and 
underwriters, might artificially influence the market price of the 
security in distribution, thereby boosting its offering price. The 
regulation seeks to prevent this result by restricting the activities 
of these persons. In particular, Regulation M requires offering 
participants to cease their market activities, such as proprietary 
trading, during a restricted period that begins one or five business 
days prior to the offering's pricing and ends when the offering is 
over. A notable change from the trading practices rules, and one which 
reflects the more focused approach of Regulation M, is that 
underwriters of an actively-traded security of a larger issuer would 
not be subject to these restrictions. Participants will discuss issues 
raised by the new regulation.
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    \33\ Securities Exchange Act Release No. 38067 (December 20, 
1996) [62 FR 520].
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G. Order Execution Rules
    In August of 1996, the Commission adopted Rule 11Ac1-4 \34\ 
(``Limit Order Display Rule'') and amendments to Rule 11Ac1-1 \35\ 
(``Quote Rule'') (collectively ``Order Execution Rules'').\36\ The 
Limit Order Display Rule requires, under certain circumstances, the 
public display of customer limit orders priced better than an exchange 
specialist's or market maker's quote. The Limit Order Display Rule also 
requires that specialists and market makers add limit orders priced at 
their quote to the size associated with their quote when the quote 
represents the best market-wide price. The rule establishes standard 
display requirements for limit orders in all markets. The Quote Rule 
was amended to require specialists and market makers to reflect in 
their quote any better priced order that they enter into an electronic 
communication network, or in the alternative, the electronic 
communication network may route the best specialists' or market makers' 
orders entered therein into the public quotation stream. In addition, 
the Quote Rule was amended to require that substantial market makers 
for any security listed on an exchange publish their quotations for 
such security. The Order Execution Rules enhance the quality of public 
quotations for equity securities and improve investor access to the 
best prices available. The new rules also present investors with 
improved execution opportunities and improved access to best prices 
when they buy and sell securities. The participants will discuss the 
new rules and their implementation.
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    \34\ 17 CFR 240.11Ac1-4.
    \35\ 17 CFR 240.11Ac1-1.
    \36\ Securities Exchange Act Release No. 37619A (September 6, 
1996) [61 FR 48290].
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H. Bank Securities Activities
    Last year, the NASD submitted a rule proposal to the Commission 
that would govern the conduct of member broker-dealers operating on the 
premises of financial institutions. The NASD has since substantially 
revised its rule proposal to address a number of issues raised by the 
commenters, and expects to submit a revised rule proposal to the 
Commission shortly. The participants will discuss the proposed rule 
revisions, as well as other developments in this area, including a 
proposal by the federal banking regulators to require bank employees 
that sell securities directly to take certain qualification 
examinations currently required of broker-dealer employees.

[[Page 17659]]

(3) Investment Management Issues

    Title III of the 1996 Act (the ``Investment Advisers Supervision 
Coordination Act'' (``Coordination Act'')) made several amendments to 
the Investment Advisers Act of 1940, \37\ the most significant of which 
reallocates federal and state responsibilities over investment 
advisers. Under the new scheme larger advisers will principally be 
regulated by the Commission, while smaller advisers the businesses of 
which tend to be more local will be primarily regulated by the states.
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    \37\ 15 U.S.C. 80b-1 et seq.
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    Upon the effective date of the Coordination Act, an investment 
adviser that is regulated or required to be regulated as an investment 
adviser in a state in which it maintains its principal office and place 
of business is prohibited from registering with the Commission unless 
the adviser (i) has assets under management of not less than $25 
million (or such higher amount as the Commission may, by rule, deem 
appropriate), or (ii) is an adviser to an investment company registered 
under the Investment Company Act of 1940. \38\ The Commission is 
authorized to deny registration to any applicant that does not meet the 
criteria for Commission registration and is directed to cancel the 
registration of any adviser that no longer meets the criteria for 
registration.
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    \38\ 15 U.S.C. 80a-1 et seq.
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    The Coordination Act preempts state investment adviser statutes as 
they apply to investment advisers registered with the Commission. The 
Coordination Act preserves, however, the ability of state regulators 
to: (i) Investigate and bring enforcement actions against Commission-
registered advisers with respect to fraud and deceit, (ii) require 
Commission-registered advisers to file notice documents with the state, 
and (iii) require Commission-registered advisers to pay state 
registration and other fees. State law is also preempted as to certain 
``supervised persons'' of Commission-registered advisers, except that a 
state retains the authority to register an investment adviser 
representative that has a place of business in the state.
    On December 20, 1996 the Commission proposed rules designed to 
implement the provisions of the Coordination Act.\39\ The proposed 
rules: (i) Address the procedures by which advisers not eligible to 
register will identify themselves to the Commission and withdraw from 
registration, (ii) exempt certain advisers that do not meet the 
criteria from Commission registration from the new prohibition, and 
(iii) define certain terms used in the statute. The comment period on 
the proposed rules closed on February 10, 1997.
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    \39\ Investment Advisers Act Release No. 1601 (December 20, 
1996) [61 FR 68480].
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    The conferees will discuss the Commission's rules as they affect 
the allocation of regulatory responsibilities between the states and 
the Commission. In addition, the conferees will discuss mutual concerns 
regarding the implementation of the Coordination Act, including the 
transition to the new regulatory scheme, the sharing of information 
regarding the status of registrants, and arrangements for the provision 
of technical assistance by the Commission including training, 
conducting joint exams and sharing of information with respect to 
investment advisers. In addition, state and federal regulators will 
discuss the coordination of regulatory, examination and enforcement 
activities subsequent to the effective date of the Coordination Act. 
The conferees will also discuss progress with regards to the 
development of a one-stop electronic filing system for investment 
advisers, and the development of a system for investors to obtain 
information regarding the disciplinary history of investment advisers.

(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

    The Commission is pursuing a number of programs for investors on 
how to invest wisely and to protect themselves from fraud and abuse. 
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 some of the working group sessions.

(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 
regulation, while helping to maintain high standards of investor 
protection.

    Dated: April 4, 1997.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-9204 Filed 4-9-97; 8:45 am]
BILLING CODE 8010-01-M