[Federal Register Volume 63, Number 72 (Wednesday, April 15, 1998)]
[Notices]
[Pages 18470-18477]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9883]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 33-7524, File No. S7-11-98]


Securities Uniformity; Annual Conference on Uniformity of 
Securities Laws

AGENCY: Securities and Exchange Commission.

ACTION: Notice of conference; request for comments.

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SUMMARY: The Commission and the North American Securities 
Administrators Association, Inc. today announced a request for comments 
on the proposed agenda for their annual conference to be held on May 4, 
1998. This meeting is intended to carry out the policies and purposes 
of section 19(c) of the Securities Act of 1933, which are to increase 
cooperation between the Commission and state securities regulatory 
authorities in order to maximize the effectiveness and efficiency of 
securities regulation.

DATES: The conference will be held on May 4, 1998. Written comments 
must be received on or before April 29, 1998 in order to be considered 
by the conference participants.

ADDRESSES: Please send three copies of written comments by April 29, 
1998 to Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, 450 5th Street, NW, Washington, DC 20549. Comments also can 
be sent electronically to the following E-mail address: rule-
[email protected]. Comment letters should refer to File No. S7-11-98; if 
E-mail is used, please include this file number on the subject line. 
Anyone can inspect and copy the comment letters at our Public Reference 
Room, 450 5th Street, NW, Washington, DC 20549. All electronic comment 
letters will be posted on the Commission's internet web site (http://
www.sec.gov).

FOR FURTHER INFORMATION CONTACT: John D. Reynolds, Office of Small 
Business Review, 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 trying 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.
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    \1\ 15 U.S.C. 77a et seq.
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    Congress endorsed greater uniformity in securities regulation 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:
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    \2\ Pub. L. 96-477, 94 Stat. 2275 (October 21, 1980).
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      Maximum effectiveness of regulation;
      Maximum uniformity in federal and state standards;
      Minimum interference with the business of capital 
formation; and
      Substantial reduction in costs and paperwork to decrease 
the burdens of raising investment capital, particularly by small 
business, and reduce the costs of the government programs involved.

In order to establish methods to accomplish these goals, the Commission 
is required to conduct an annual conference. The 1998 meeting will be 
the fifteenth conference.
    During 1996, Congress again examined the system of dual federal and 
state securities regulation and 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''). 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.
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    \3\ Pub. L. 104-290, 110 Stat. 3416 (October 11, 1996).
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II. 1998 Conference

    The Commission and the North American Securities Administrators 
Association, Inc. (``NASAA'') \4\ are planning the 1998 Conference on 
Federal-State Securities Regulation (the ``Conference'') to be held May 
4, 1998 in Washington, D.C. At the Conference, Commission and NASAA 
representatives will form into working groups in the areas of 
corporation finance, market regulation and oversight, investment 
management, and

[[Page 18471]]

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 Commission and NASAA representatives to encourage 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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    The Commission and NASAA 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 by submitting 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 and review of securities offerings 
of ``covered securities.'' \6\ ``Covered securities'' are defined by 
section 18 and include several types of securities, including 
``nationally traded securities,'' i.e., securities traded on the New 
York Stock Exchange, Inc. (``NYSE''), American Stock Exchange, Inc. 
(``AMEX'') or the Nasdaq National Market System (''Nasdaq/NMS''). 
``Covered securities'' also include registered investment company 
securities and certain exempt securities and offerings.
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    \5\ 15 U.S.C. 77r.
    \6\ 15 U.S.C. 77r (a) and (b).
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    Securities that are not ``covered securities'' remain subject to 
state registration requirements. These securities include:
     Securities quoted on the Nasdaq SmallCap market or the 
NASD over-the-counter Bulletin Board (``OTC Bulletin Board'');
     Securities quoted on the over-the-counter ``pink sheets'';
     Securities listed on securities exchanges other than the 
NYSE or AMEX; \7\
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    \7\ The Commission may designate securities listed on other 
exchanges to be covered securities if it determines by rule that the 
listing standards of such exchanges are substantially similar to the 
listing standards of the NYSE, AMEX or Nasdaq/NMS. The Commission 
has adopted Rule 146(b) under the Securities Act which designates 
securities listed on the Chicago Board Options Exchange, Tier I of 
the Pacific Exchange and Tier I of the Philadelphia Stock Exchange 
as covered securities for purposes of section 18. Securities Act 
Release No. 7494 (January 13, 1998) [63 FR 3032].
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     Various securities of non-listed issuers, such as asset-
backed and mortgage-backed securities;
     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 issued in exempt offerings under Regulation A 
\9\ and Rules 504 and 505 of Regulation D.
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    \9\ 17 CFR 230.251 through 230.263.
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    The states retain certain authority in connection with offerings of 
covered securities. With respect to these offerings (other than 
nationally-traded securities), the states have the right to require 
specified fee payments and/or notice filings.\10\ The states' authority 
over securities offerings continues the need for uniformity between the 
federal and state registration systems, where consistent with investor 
protection.
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    \10\ Following the 1996 Act, the states also retain anti-fraud 
authority over all securities offerings, including offerings of 
covered securities.
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    The 1996 Act required the Commission to conduct a study about the 
extent of uniformity among state regulatory requirements for securities 
and securities transactions that are not ``covered securities'' (the 
``Uniformity Study'').\11\ The Commission issued the study results in 
its ``Report on the Uniformity of State Regulatory Requirements for 
Offerings of Securities that are not `Covered Securities' '' in October 
1997 (the ``Uniformity Report''). As part of the Uniformity Study, the 
Commission distributed surveys to state securities administrators, 
various issuers, broker-dealers and law firms requesting information 
concerning the extent of uniformity among state regulatory requirements 
for securities that are not preempted by the 1996 Act. The surveys also 
were posted on the Commission's Internet web site. The Commission 
received 46 responses from state securities regulators and more than 
100 responses from issuers, law firms, broker-dealers, and others, 
including NASAA and the Securities Industry Association.
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    \11\ Section 102(b) of the 1996 Act.
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    The Uniformity Study found that the states have taken significant 
actions to increase uniformity in regulating offerings of securities 
that are not ``covered securities.'' Examples of this progress include, 
among others:
     Coordinated state review of certain offerings registered 
at the federal level;
     A uniform registration statement for offerings exempt at 
the federal level and a regional state review program for this form; 
and,
     Statements of policy on several matters that enhance 
uniformity in review among the states.

Despite this significant progress, certain survey respondents reported 
differences among the states in several areas including, for example, 
the following:
     Standards of merit review;
     Length of comment periods;
     Suitability standards; and
     Notice requirements for exempt offerings.
    The Uniformity Study focused on the degree of uniformity among 
state regulatory requirements for offerings of securities that are not 
``covered securities.'' Despite this focus, some survey respondents 
provided information regarding the effects of preemption of ``covered 
securities.'' While most respondents noted the benefits from 
preemption, some commenters voiced concerns in the areas of Rule 506 
offerings, issuer-dealer registrations and notices for secondary 
trading transactions.
    Conferees will discuss the Uniformity Report, the nature and extent 
of uniformity at present and methods to increase uniformity.
B. Definition of Qualified Purchaser and Accredited Investor; NASAA's 
Model Accredited Investor Exemption
    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's rules to be ``qualified 
purchasers.'' \12\ A security sold to a ``qualified purchaser'' is a 
``covered security'' subject to the same regulatory approach as other 
covered securities. The Commission will be undertaking rulemaking to 
define ``qualified purchaser'' for this purpose. In this process, the 
Commission is considering whether changes should be made to the 
definition of ``accredited investor''\13\ under the Securities Act,

[[Page 18472]]

and whether the definitions of ``qualified purchaser'' and ``accredited 
investor'' should be similar or different. The appropriate criteria for 
these two definitions will be discussed by Commission and NASAA 
representatives.
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    \12\ 15 U.S.C. 77r(b)(3).
    \13\ The term ``accredited investor,'' as defined by the 
Securities Act and the Commission's rules, is intended to encompass 
those persons whose financial sophistication render the protections 
of the Securities Act registration process unnecessary. Offers and 
sales to these investors are afforded special treatment under the 
federal securities laws.
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    Participants also will discuss NASAA's Model Accredited Investor 
Exemption which was adopted in 1997. Generally, the model rule exempts 
offers and sales of securities from state registration requirements if, 
among other things, the securities are sold only to persons who are, or 
are reasonably believed to be, accredited investors. To date, ten 
states have adopted the exemption. Twelve other states indicate that 
they intend to adopt the exemption in the near future and another six 
are considering adoption. State representatives will share their 
experiences with the exemption, including any issues that have arisen.
C. Small Business Initiatives
    In February 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.\14\ 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. The 
coordination of Rule 430A procedures with state registration and review 
procedures raises certain issues, such as when state registration fees 
become payable and when state reviews will be conducted. Conferees will 
discuss these various issues and ways to increase coordination between 
federal and state procedures.
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    \14\ Securities Act Release No. 7393 (February 20, 1997) (62 FR 
9276).
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    The Commission recently proposed revisions to Rule 701 under the 
Securities Act.\15\ Rule 701 provides an exemption for the offer and 
sale of securities to employees and certain other persons by private 
companies under compensatory benefit plans or written compensation 
agreements. The proposals are designed to expand the ability of issuers 
to use the rule, improve the disclosures provided in offerings under 
the rule and clarify and simplify the rule. For example, the proposals 
would remove the current limitations based on offers and instead focus 
only on the amount of sales permitted each year. Issuers would be 
allowed to sell securities each year up to an amount determined under 
two formulas (i.e., 15% of total assets or 15% of outstanding 
securities) or $1 million, whichever is greater. The present $5 million 
limitation on the aggregate offering amount would be removed from the 
rule. Rule 701 now does not impose any specific disclosure obligations 
on the issuer. The proposed rule revisions would require disclosure of 
risk factors and the unaudited financial statements required in a 
Regulation A offering.
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    \15\ Securities Act Release No. 7511 (February 27, 1998) [63 FR 
10785].
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    The participants will discuss the impact of these proposed rule 
changes, if adopted, and the need for any additional rulemaking in the 
small business area.
    Commission and state representatives will discuss whether changes 
should be made to the Regulation D exemptions. Rule 506 of Regulation D 
provides a ``safe harbor'' for non-public offerings under section 4(2) 
of the Securities Act. An issuer which satisfies the requirements of 
Rule 506 can be assured that its offering will qualify as a non-public 
offering under section 4(2).\16\ As noted above, securities issued in a 
Rule 506 offering are covered securities and therefore preempted from 
state registration requirements. Because Rule 506 offerings are 
preempted from state registration, conferees will consider whether Rule 
506 requirements should be revised.
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    \16\ An offering which does not meet the requirements of Rule 
506 nevertheless may qualify as a section 4(2) non-public offering 
based on the facts and circumstances of the offering.
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    Rule 504 of Regulation D provides an exemption from the Securities 
Act registration requirements for offerings up to $1 million in any 12-
month period, if certain conditions are met. Generally, Rule 504 is 
available only to the smallest companies. Issuers in Rule 504 offerings 
may use general solicitation or advertising, and the securities issued 
in those offerings are freely tradeable. Rule 504 offerings are not 
subject to specific federal disclosure requirements nor are these 
offerings reviewed at the federal level. The Commission is concerned 
that this current federal approach to Rule 504 offerings may be 
contributing to fraudulent offerings by micro-cap issuers, i.e., 
issuers with small amounts of capitalization, or fraudulent aftermarket 
trading in securities of micro-cap issuers on the OTC Bulletin Board or 
in the ``pink sheets.'' Commission and state representatives will 
discuss whether and how Rule 504 should be revised to address these 
fraud concerns while at the same time preserving the ability of small 
companies to raise capital.
    Conferees will discuss several state initiatives designed to 
facilitate offerings by smaller issuers. These initiatives include:
     The Coordinated Equity Review (``CER'') program;
     The Small Company Offering Registration (``SCOR'') form; 
and
     The state regional review program for SCOR and Regulation 
A filings (the ``Regional Review Program'').
    The CER program provides for a coordinated state review process for 
offerings of equity securities registered at the federal level. Under 
CER, the participating states coordinate with each other to produce one 
comment letter to an issuer which addresses both substantive and 
disclosure matters. To date, 38 states (out of 43 states that require 
registration of these offerings) have agreed to participate in the 
program.
    Many states use a similar coordinated program to review state 
registrations using the SCOR form, the ``Regional Review Program.'' The 
SCOR form is a simplified question and answer format used for the 
registration of securities offerings with approximately 40 states. This 
form is used to register securities offerings exempt from registration 
under Rule 504 of Regulation D or Regulation A at the federal level. 
Under the Regional Review Program, states in certain regions of the 
country elect one state to lead the review and issue comments on the 
filing. Three regional programs have been started to date and include 
about half of the states requiring registration of these offerings. The 
SCOR form was adopted by NASAA in 1989. NASAA's Small Business Capital 
Formation and Regional Review Committee is considering certain 
revisions to update and modernize the form.
    NASAA's representatives will discuss their experiences with the 
SCOR form and the state coordinated review programs, including issues 
which have arisen in their use. Participants will consider how these 
programs may be improved to increase uniformity between the federal and 
state levels.
    During 1997 and 1998, the Commission continued to meet with small 
businesses in town hall meetings conducted throughout the United 
States. These town hall meetings are intended to provide basic 
information about the securities offering process to small business 
issuers and educate the Commission about the concerns and problems 
facing small businesses in raising capital. To date, nine town hall

[[Page 18473]]

meetings have been held, attended by more than 2,500 small business 
persons. NASAA and Commission representatives will discuss information 
and ideas obtained from these meetings.
D. Securities Act Concept Release
    The Commission has been engaged in a broad reexamination of the 
regulatory framework for the offer and sale of securities under the 
federal securities laws. A concept release was issued during 1996 to 
solicit comment on the best means of improving the regulation of the 
capital formation process while maintaining or enhancing investor 
protection.\17\ The concept release solicited comment on several 
different approaches, such as:
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    \17\ Securities Act Release No. 7314 (July 25, 1996) (61 FR 
40044).
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     The recommendation of the Advisory Committee on the 
Capital Formation and Regulatory Processes that a ``company 
registration'' approach be adopted; \18\
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    \18\ On July 24, 1996, the Advisory Committee on the Capital 
Formation and Regulatory Processes presented its report recommending 
a new approach to regulating securities offerings of public 
companies. This new approach would switch from the current 
transactional registration system to a company registration system.
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     Modifications to the existing shelf registration system;
     Reforms that would liberalize the treatment of 
unregistered securities; and
     An approach that would involve deregulation of offers.

Comment also was requested about any other approaches that should be 
considered.
    The participants will discuss the conceptual issues raised by the 
release and the comments received and consider any changes that should 
be made in the regulation of securities offerings.
E. Plain English; 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.
    One major concern of the Task Force Report 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. On 
January 22, 1998, the Commission adopted rule amendments that require 
the use of plain English writing principles when drafting the front 
part of prospectuses, namely, the cover page, summary and risk factors 
sections of these documents.\19\ These principles include: Active 
voice; short sentences; everyday language; tabular presentation or 
``bullet lists'' for complex material, if possible; no legal jargon or 
highly technical business terms; and, no multiple negatives. This 
change becomes effective October 1, 1998. Conferees will discuss the 
plain English initiative, including federal and state coordination 
needed to facilitate implementation of the initiative.
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    \19\ Securities Act Release No. 7497 (January 28, 1998) (63 FR 
6370).
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F. Electronic Delivery of Disclosure Documents
    With the relatively recent growth in the popularity of the 
Internet, issuers of securities have begun to post securities offering 
materials on the Internet. Both the Commission and NASAA have addressed 
the impact of electronic media on the securities offering process. 
NASAA adopted a resolution concerning Internet communications in 
January 1996 that encouraged the states to exempt Internet offers from 
the registration provisions of their securities laws, if certain 
conditions are met. Based on state responses to the Uniformity Study, 
33 states reported they have adopted NASAA's model exemption while 
three other states are planning to adopt or considering adoption of the 
model exemption. Another eight states said they have their own unique 
exemptions for Internet offers.
    The Commission believes that the use of electronic media to deliver 
or transmit information under the federal securities laws should be at 
least equivalent to paper delivery. The Commission has issued 
interpretive releases and rules addressing the use of electronic 
media.\20\
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    \20\ 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 that technology in 
securities offerings.
G. Registration of Securities on Form S-8
    Form S-8, generally speaking, is an abbreviated registration 
statement form under the Securities Act used to register the securities 
of an issuer to its employees in a primarily compensatory context. Form 
S-8 was expanded in 1990 to make the form available for offers and 
sales of securities to consultants and advisors who render bona fide 
services to the issuer if those services are not rendered in connection 
with offers or sales of securities in a capital-raising transaction. 
Since that change, the Commission has become aware of the improper use 
of the form to distribute securities to the public. To address this 
abuse, the Commission has proposed to expand the form requirements to 
provide that the services rendered by a consultant or advisor must not 
directly or indirectly promote or maintain a market for the issuer's 
securities.\21\ Other changes to the form also were proposed. 
Participants will discuss this proposal and how it will affect 
coordination between the states and the Commission.
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    \21\ Securities Act Release No. 7506 (February 17, 1998) (63 FR 
9648).
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H. Year 2000 Disclosure Issues
    The Commission published Staff Legal Bulletin No. 5 in October 1997 
(revised in January 1998) which addresses the disclosure requirements 
of companies facing electronic problems caused by the Year 2000. The 
statement contains the Commission's views concerning companies' 
disclosure obligations about anticipated costs, problems, and 
uncertainties associated with this issue. Because of the potential 
effects of this matter on future operating results and financial 
condition, companies should consider whether the matter should be 
addressed in their ``Management's Discussion and Analysis'' and 
``Description of Business'' disclosures. The conference participants 
will consider the extent of this issue and discuss how to require and 
review disclosures on this matter in a consistent manner.

(2) Market Regulation Issues

A. 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 original proposal to amend Rules 17a-3 
and 17a-4 \22\ resulted from discussions between NASAA representatives 
and the Commission about the adequacy of the existing broker-dealer 
books and records

[[Page 18474]]

requirements.\23\ The proposed amendments clarified, modified, and 
expanded 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 specified 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 expressed 
interest in commenting on the proposed amendments, the Commission 
extended the comment period through March 31, 1997.
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    \22\ 17 CFR 240.17a-3 and 240.17a-4.
    \23\ Securities Exchange Act Release No. 37850 (October 22, 
1996) [61 FR 55593].
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    The Commission received 175 written comments in response to the 
release proposing the amendments. Broker-dealers, trade associations, 
and law firms representing broker-dealers submitted 110 of the comment 
letters. State securities regulators and NASAA accounted for 33 of the 
comment letters. The majority of these comment letters opposed the 
proposed amendments. The balance of the comment letters received were 
from other individuals or entities interested in the proposed 
amendments and expressed varying degrees of support and opposition for 
the proposed amendments. The Commission staff has been analyzing the 
suggestions made in the comment letters, and will recommend that the 
Commission repropose the amendments. The participants at the Conference 
will discuss these efforts to amend Rules 17a-3 and 17a-4.
B. 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 was 
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. During the latter part of 1996 and in 1997, the 
Commission staff consulted with the SROs, NASAA, the state securities 
authorities, and members of the securities industry to determine the 
extent to which state licensing requirements differed and the effect of 
different state requirements and procedures upon associated persons and 
broker-dealers. The Commission submitted its report to Congress on 
October 10, 1997.\24\
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    \24\ Study of State Licensing Requirements for Associated 
Persons of Broker-Dealers (October 10, 1997).
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    The Commission found that the states have achieved substantial 
uniformity in their licensing requirements and procedures. However, the 
Commission believes that state licensing procedures could be 
streamlined to a greater extent and that the states could attain this 
goal without sacrificing the protection of their citizens. Therefore, 
the Commission recommended in its report that the states work together 
to achieve greater uniformity in their licensing requirements and 
procedures and, in this regard, recommended certain areas that may 
benefit from the implementation of more consistent or uniform 
requirements, or from further study by the states. The participants at 
the Conference will discuss the states' views on achieving greater 
uniformity in their licensing requirements and procedures.
C. Central Registration Depository (``CRD'') Redesign
    The CRD system is a computer system operated by the 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 modernize the CRD and to expand its use by federal and state 
securities authorities as a tool for broker-dealer regulation. As a 
result of the NASD's efforts, the modernized CRD system ultimately is 
expected to provide the Commission, the SROs, and state securities 
authorities 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.
    In the past year, the NASD decided that the Internet should become 
an integral component of the CRD modernization effort. Accordingly, the 
NASD submitted, and the Commission approved, a rule proposal that 
expands the NASD public disclosure program by amending the 
Interpretation of NASD Rule 8310 to include electronic inquiries as 
well as written and telephone inquiries.
    Earlier this year, the NASD and the Commission issued releases 
adopting interim Forms U-4, U-5, and BD that incorporated previously-
adopted language into a format compatible with current CRD technology. 
The NASD's proposed effective date of February 17, 1998, for these 
amended forms was changed to March 16, 1998, due to a request from the 
Securities Industry Association to allow firms more time to prepare 
their systems. The Commission also has made March 16, 1998, the 
effective date for implementation of the interim Form BD. The NASD 
expanded their public disclosure program also to reflect the additional 
disclosure requirements of the interim Forms U-4 and BD.
    The participants at the Conference will discuss the CRD 
modernization process, including the interim Forms U-4, U-5, and BD.
D. Penny Stocks/Micro-cap Fraud
    Rule 15c2-11 under the Securities Exchange Act of 1934 (the 
``Exchange Act'') requires a broker-dealer to review current 
information about an issuer before it publishes a quotation for the 
issuer's security in the non-Nasdaq over-the-counter markets. Because 
of the rule's ``piggyback'' provision, generally only the first broker-
dealer has to review this information. Once the security is quoted 
regularly for 30 days, other broker-dealers can ``piggyback'' off those 
quotes without reviewing any information about the issuer.
    On February 17, 1998, the Commission proposed amendments to Rule 
15c2-11 that would strengthen the rule by: (1) Eliminating the 
piggyback provision, so that all broker-dealers must review issuer 
information before initiating or resuming quotations for OTC securities 
and thus independently evaluate that information; (2) requiring market 
makers publishing priced quotations to review updated issuer 
information annually, so that they are made aware of recent significant 
changes in the issuer's ownership, operations or financial condition; 
(3) requiring broker-dealers to document their compliance with the 
rule; (4) requiring broker-dealers to document information about 
significant relationships involving the issuer and the broker-dealer 
(including any arrangements involving the payment of compensation by 
the issuer or others for the purpose of publishing quotations); (5) 
requiring broker-dealers to review more information than is currently 
required when they publish quotes for non-reporting issuers' 
securities, including information about insiders' and promoters' recent 
disciplinary histories, so that broker-dealers will be alert to 
possible ``red flags'' involving the issuer, and about recent 
significant events involving the issuer, such as a

[[Page 18475]]

change in control, merger or acquisition, bankruptcy proceedings, or 
the delisting from an exchange or Nasdaq; (6) eliminating the 
requirement to obtain financial statements for prior years for those 
issuers that are emerging from bankruptcy; (7) allowing broker-dealers 
to review and retain issuer information electronically for information 
available on EDGAR; and (8) promoting greater availability of Rule 
15c2-11 information by requiring broker-dealers to provide the 
information to anyone who requests it and by encouraging the 
development of central repositories for this information.\25\
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    \25\ Securities Exchange Act Release No. 39670 (February 17, 
1998) (63 FR 9661).
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    The goals of the amendments are to deter fraudulent or manipulative 
quotations for OTC securities, improve the integrity of quotations for 
OTC securities, enhance broker-dealer responsibility for quotations for 
OTC securities, and provide market professionals, investors, and others 
with greater access to issuer information. The participants will 
discuss the recent proposals and the effects of such proposals, if 
adopted, and other ways to promote investor protection in the OTC 
market arena.
E. Arbitration
    The NASD submitted to the Commission rule filings that focus on the 
eligibility rule, whether punitive damages should be capped in 
arbitration, whether fees should be increased, and whether employees 
should be required under NASD rules to submit statutory employment 
discrimination disputes to arbitration. In May 1997, the Commission 
approved a proposal by the NASD that: (1) Raises the ceiling for 
disputes to be eligible for resolution by a single arbitrator under 
simplified arbitration procedures to $25,000, and (2) raises the 
ceiling for disputes eligible for resolution by a single arbitrator 
under standard arbitration procedures to $50,000.\26\
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    \26\ Securities Exchange Act Release No. 38635 (May 14, 1997) 
(62 FR 27819).
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    The NASD filings resulted in part from its work with the Securities 
Industry Conference on Arbitration (``SICA''). The SICA continues its 
efforts to develop, among other things, a ``list selection'' method for 
appointing arbitrators.
    The participants at the Conference are likely to address some or 
all of the above approaches for strengthening the securities 
arbitration process.
F. NASD Proposals
    The NASD has undertaken several regulatory initiatives in the past 
year. A new proposed rule would require a member firm to tape record 
conversations between its customers and registered representatives if 
it hired a significant percentage of individuals from Disciplined 
Firms. Disciplined Firms are defined as firms that have been expelled 
by a self-regulatory organization or that have had their registrations 
revoked by the Commission.\27\
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    \27\ Securities Exchange Act Release No. 39361 (November 26, 
1997) (62 FR 64422).
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    A proposed rule amendment would require clearing firms to (a) 
Forward customer complaints about an introducing firm to the 
introducing firm's designated examining authority, (b) notify 
complaining customers that they have the right to transfer their 
accounts to another broker-dealer, (c) provide introducing firms with a 
list of exception reports to help them supervise their activities, and 
(d) assume liability for any mistakes or fraud made by an introducing 
firm that issues checks drawn on the clearing firm's account.\28\
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    \28\ Securities Exchange Act Release No. 39349 (November 21, 
1997) (62 FR 63589).
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    Another new rule (Rule 1150) would provide NASD members with a 
qualified immunity in arbitration proceedings for statements made in 
good faith in certain disclosures filed with the NASD on Forms U-4 and 
U-5. The proposal, as described in an NASD Notice to Members, would 
require firms to give a terminated employee an opportunity to review 
the proposed Form U-5 language at least 10 days before it was filed 
with the NASD; any amendments would also be given to the employee 
before being filed.\29\
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    \29\ NASD Notice to Members 97-77 (November 1997).
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    These three NASD initiatives have been filed with the Commission, 
and are currently under review. Other initiatives still being 
considered by the NASD include the following three proposals.
    A proposed interpretive rule would require all unregistered 
employees of an NASD member firm who cold call prospective customers, 
either to solicit the purchase of securities or to market the member 
firm's services generally, to register as representatives.\30\ A 
proposed rule amendment would limit the securities that a member can 
quote on the OTC Bulletin Board to the securities of issuers that are 
registered under Section 12 of the Exchange Act, certain insurance 
companies, and registered closed-end investment companies, but only if 
they are current in their reporting obligations.\31\ Finally, a 
proposed new rule would require a member to review current financial 
statements of an issuer prior to recommending a transaction in the 
issuer's OTC securities to a customer, and to deliver a disclosure 
statement to its customer prior to making an initial purchase of an OTC 
security for the customer and annually thereafter.\32\
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    \30\ NASD Notice to Members 98-58 (September 1997).
    \31\ NASD Notice to Members 98-14 (January 1998).
    \32\ NASD Notice to Members 98-15 (January 1998).
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    The participants at the Conference will discuss the status of these 
proposals, the comments received to date, and their implications for 
small businesses and NASAA members.
G. Year 2000
    The Commission has been very active in addressing the potential 
problems for securities industry computer systems as a consequence of 
the date change on January 1, 2000 (``Year 2000''). For example, in 
October 1997, Chairman Levitt sent a letter to all registered transfer 
agents and broker-dealers emphasizing the importance of implementing 
plans and devoting adequate resources to ensure that their computer 
systems are ready for the Year 2000. The Chairman encouraged firms to 
have all necessary modifications in place by the end of 1998 to allow 
for participation in industry-wide testing scheduled for 1999. On 
January 7, 1998, the Commission staff sent a letter to all non-bank 
registered transfer agents which requested documentation regarding 
their progress in Year 2000 preparations. The Commission is 
coordinating efforts with the NYSE and the NASD, both of which have 
surveyed their member firms for similar information on Year 2000 
preparations. On March 5, 1998, the Commission issued releases to 
solicit comment on proposed rule amendments and a proposed rule under 
the Exchange Act which would require certain broker-dealers and all 
non-bank registered transfer agents to file reports with the Commission 
regarding their Year 2000 preparations.\33\
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    \33\ Securities Exchange Act Release Nos. 39724 (March 5, 1998) 
(63 FR 12056) and 39726 (March 5, 1998) (63 FR 12062).
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    During the past year, the Commission supported the industry's 
efforts to establish a testing program to aid firms and SROs in 
preparing for potential computer problems associated with the Year 
2000. The testing program involves bilateral testing, in which an SRO 
or utility conducts one-on-one testing with its members or another SRO 
or utility. Nasdaq, for example, intends to conduct

[[Page 18476]]

bilateral testing with the NYSE, the National Securities Clearing 
Corporation, and several broker-dealers. This type of testing is 
expected to be completed by the end of 1998. Bilateral testing will 
help to ensure that communication and data exchanges between all 
involved entities will not be disrupted. The testing program also calls 
for industry-wide, or street-wide, testing, in which industry 
participants will test sample trades from the trade date through 
settlement. This latter type of testing will begin in March 1999 and 
end in September 1999. The Commission staff has encouraged all SROs to 
adopt appropriate testing plans to ensure that they and their member 
organizations are prepared for the millennium.
    The participants at the Conference will discuss the issues, testing 
programs, and rule proposals involved in ensuring that the securities 
industry's computer systems are ready for the Year 2000.
H. Examination Issues
    State and federal regulators also will discuss various examination-
related issues of mutual interest, including: Summits and examination 
coordination; training; micro-cap issues; independent contractors and 
variable annuities.

(3) Investment Management Issues

A. Division of Regulatory Authority
    Title III of the 1996 Act, the Investment Advisers Supervision 
Coordination Act, included amendments to the Investment Advisers Act of 
1940 (``Advisers Act'') \34\ that divided regulatory responsibility for 
investment advisers between the Commission and state securities 
regulators. The law generally requires advisers that have assets under 
management of $25 million or more, or that advise registered investment 
companies to register with the Commission; \35\ and requires advisers 
that have assets under management of less than $25 million to register 
with the appropriate state securities authorities.
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    \34\ 15 U.S.C. 80b-1 et seq.
    \35\ Advisers Act section 203A(a), 15 U.S.C. 80b-3a. The 
Advisers Act also provides for registration with the Commission of 
advisers that have their principal office and place of business in a 
state that has not enacted an investment adviser statute (currently, 
Colorado, Iowa, Ohio, and Wyoming), or that have their principal 
office and place of business outside the United States. In addition, 
the Commission has adopted rules exempting four categories of 
investment advisers from the prohibition on registration with the 
Commission. See Rule 203A-2, 17 CFR 275.203A-2.
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    On May, 15, 1997, the Commission adopted rules to implement this 
division of regulatory authority,\36\ including a requirement that each 
Commission-registered adviser file a Form ADV-T with the Commission not 
later than July 8, 1997, indicating whether the adviser was eligible 
for continued registration with the Commission and, if not, withdrawing 
from Commission registration.\37\ As of January 30, 1998, the 
Commission had received Form ADV-T's from 7,476 advisers indicating 
that they were eligible for registration with the Commission, and from 
11,764 advisers withdrawing their registrations. Most states have also 
now amended their securities laws and adopted new rules to implement 
the division of authority. The conferees will discuss and coordinate 
state and federal implementation of the 1996 Act.
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    \36\ Investment Advisers Act Rel. No. 1633 (May 15, 1997) (62 FR 
28112).
    \37\ Rule 203A-5, 17 CFR 275.203A-5.
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B. Electronic Filing System
    One of the requirements of the 1996 Act is for the Commission to 
establish and maintain a ``readily accessible telephonic or other 
electronic process'' to receive public inquiries about the disciplinary 
histories of investment advisers and persons associated with investment 
advisers.\38\ In order to implement this provision and to provide an 
efficient and convenient means for filing and retrieving information 
about investment advisers, the Commission is working with NASAA and the 
state securities authorities to develop a one-stop electronic filing 
system to be used by investment advisers to submit their initial 
registrations and to update the information they are required to 
provide. Since the information will be filed electronically, it will 
create an electronic data base that will be easily accessible by both 
the regulators and the public. As currently planned, all of this 
information will be posted on an Internet web site and readily 
available to the public. This will allow clients and prospective 
clients of investment advisers to quickly obtain not only disciplinary 
information, but a broad range of other important information as well. 
The conferees will discuss the progress to date in creating this new 
electronic filing system and offer ideas about how the system can be 
made most efficient and effective.
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    \38\ 1996 Act section 306.
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C. Revised Disclosure Forms
    The Commission and NASAA are also working on new, easier-to-use 
forms for investment adviser filings. These new forms should provide 
more useful information both to the Commission and the state securities 
regulators, and to clients and prospective clients of investment 
advisers. The new disclosure form for clients and prospective clients 
should also encourage advisers to provide clear and complete 
disclosures in plain English. Disclosures will not be effective if 
clients cannot understand them or if they are presented in a way that 
discourages clients from reading them. The conferees will consider and 
discuss ways in which the forms can be made most useful to clients and 
prospective clients of investment advisers, as well as to state and 
federal regulators.
D. Examination Issues
    State and federal regulators also will discuss various examination-
related issues of mutual interest, including: Cooperation between 
Commission and state adviser programs; sharing information about past 
examinations, advisers moving from federal to state registration and 
vice versa, and information potentially leading to cause examinations; 
and examinations to verify an adviser's qualification for federal or 
state registration.

(4) Enforcement Issues

    In addition to the above topics, state and federal regulators will 
discuss various enforcement-related issues which are of mutual 
interest.

(5) Investor Education

    The participants at the Conference will discuss investor education 
and potential joint projects in some of the working group sessions. The 
Commission currently pursues a number of programs to educate 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 intends to coordinate and complement 
those efforts to the greatest extent possible. Our most recent joint 
effort includes the launch of the ``Facts on Saving and Investing 
Campaign,'' a national public awareness campaign to motivate Americans 
to save and invest wisely. During the week of March 29 to April 4, 
1998, federal agencies, securities regulators, consumer groups, the 
financial industry, and the media will join together to conduct 
educational events in our communities and schools and to announce 
future initiatives. Securities regulators from twenty-one nations in 
North, Central, and South America and the Caribbean will also offer 
investor education programs in their countries that week.

[[Page 18477]]

(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.

    By the Commission.

    Dated: April 9, 1998.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-9883 Filed 4-14-98; 8:45 am]
BILLING CODE 8010-01-P