[Federal Register Volume 64, Number 66 (Wednesday, April 7, 1999)]
[Notices]
[Pages 17042-17050]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-8515]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 33-7664, File No. S7-12-99]


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 April 
19, 1999. This meeting seeks 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 April 19, 1999. We must receive 
your written comments by April 14, 1999 in order to be considered by 
conference participants.

ADDRESSES: Please send three copies of written comments to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 5th Street, 
NW, Washington, DC 20549-0609. Comments also can be sent electronically 
to the following E-mail address: [email protected]. Comment letters 
should refer to File No. S7-12-99; 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, Stop 3-
4, (202) 942-2950.

SUPPLEMENTARY INFORMATION:

I. Discussion

    The federal government and the states have jointly regulated 
securities offerings 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, must comply with the 
federal securities laws as well as all applicable state laws and 
regulations. Parties involved in this process have long recognized the 
need to increase uniformity and cooperation between the federal and 
state regulatory systems so that capital formation can be made

[[Page 17043]]

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 that section's policy and 
purpose. Section 19(c) mandates greater federal and state cooperation 
in securities matters in order to:
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    \2\ Pub. L. 96-477, 94 Stat. 2275 (October 21, 1980).
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     Maximize effectiveness of regulation;
     Maximize uniformity in federal and state standards;
     Minimize interference with the business of capital 
formation; and
     Reduce the costs, paperwork and burdens of raising 
investment capital, particularly by small business, and also reduce the 
costs of the government programs involved.

The Commission is required to conduct an annual conference to establish 
ways to achieve these goals. The 1999 meeting will be the sixteenth 
conference.
    During 1996, Congress again examined the system of dual federal and 
state securities regulation. It 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. Congress passed The National 
Securities Markets Improvement Act of 1996 \3\ (the ``1996 Act'') as a 
result of this reexamination. The 1996 Act contains significant 
provisions that realign the 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. 1999 Conference

    The Commission and the North American Securities Administrators 
Association, Inc. (``NASAA'') \4\ are planning the 1999 Conference on 
Federal-State Securities Regulation to be held April 19, 1999 in 
Washington, DC. At the conference, Commission and NASAA representatives 
will divide into working groups in the areas of corporation finance, 
market regulation and oversight, investment management, investor 
education, and enforcement. Each group will discuss methods to enhance 
cooperation in securities matters and improve the efficiency and 
effectiveness of federal and state securities regulation. Generally, 
only Commission and NASAA representatives may attend the conference to 
encourage open and 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 preparing the conference agenda. We 
invite the public, securities associations, self-regulatory 
organizations, agencies, and private organizations to participate by 
submitting written comments on the issues set forth below. In addition, 
we request comment on other appropriate subjects. Conference attendees 
will consider all comments.

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, investor education, and enforcement.

(1) Corporation Finance Issues

    The 1996 Act amended section 18 of the Securities Act \5\ to 
preempt state blue-sky registration and review of offerings of 
``covered securities.'' \6\ ``Covered securities'' are defined by 
section 18 and include several types of securities, including 
securities traded on the New York Stock Exchange, Inc. (``NYSE''), 
American Stock Exchange (``Amex'') and the Nasdaq National Market 
System (``Nasdaq/NMS'') (these securities as a group are called 
``nationally-traded'' securities). 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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    The states retain some authority in connection with offerings of 
covered securities despite this preemption. Except for covered 
securities that are classified as nationally-traded securities, the 
states have the right to require fee payments and notice filings. The 
states also retain anti-fraud authority over all securities offerings, 
including offerings of covered securities.
    Securities that are not ``covered securities remain subject to 
state registration requirements. These securities generally include the 
securities of smaller companies, such as those quoted on the Nasdaq 
SmallCap market or the NASD's over-the-counter Bulletin Board, or in 
the ``pink sheets.'' Securities issued in a private offering under 
section 4(2) of the Securities Act are not covered securities if the 
offering does not meet the safe harbor requirements of Rule 506 of 
Regulation D.\7\ Also, securities issued under Regulation A \8\ and 
Rules 504 and 505 of Regulation D are not covered securities.\9\
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    \7\ 17 CFR 230.501 through 230.508.
    \8\ 17 CFR 230.251 through 230.263.
    \9\ Other securities also are not considered covered securities. 
These include securities traded on regional exchanges and asset-
backed and mortgage-backed securities.
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    The states' authority over securities offerings, particularly their 
ability to register and review offerings of non-covered securities, 
continues the need for uniformity between the federal and state 
registration systems, where consistent with investor protection. The 
group will discuss ways to increase uniformity between the systems. 
Conferees will focus primarily on the following topics:
A. Reform of the Securities Offering Process
    For many years, the Commission has been actively reexamining the 
regulatory framework for the offer and sale of securities under the 
federal securities laws. As a result of this work, the Commission 
issued a release in November 1998 proposing significant changes in the 
regulation of securities offerings and the disclosure system that 
applies to publicly reporting companies.\10\ The proposals relate to 
five areas:
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    \10\ Securities Act Release No. 7606 (November 3, 1998) [63 FR 
67174].
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     Registration system reform;
     Communications around the time of a securities offering;
     Prospectus delivery requirements;
     Integration of private and public offerings; and
     Periodic reporting under the Securities Exchange Act of 
1934 (the ``Exchange Act'').

The Commission's staff will summarize these proposals and describe the 
responses from the public received to date. While the group may 
consider various aspects of the proposals, the representatives will 
discuss primarily how the proposals would affect state regulation of 
offerings of non-covered securities. The group will focus on some or 
all of the following matters:

[[Page 17044]]

1. Registration System Reforms

    The Commission proposed new Form B for large issuers that meet 
certain reporting and annual report requirements and had registered 
previously an offering of securities under the Securities Act which was 
declared effective by the Commission's staff. Form B also would be 
available to smaller issuers which meet the same requirements, but only 
when they offer securities to relatively sophisticated investors or 
knowledgeable investors.
    These smaller issuers could use Form B for offerings to qualified 
institutional buyers as defined in Rule 144A\11\ and for offerings to 
certain existing security holders, such as: rights offerings; 
securities offered under dividend or interest reinvestment plans; and 
offerings to holders of common stock, options, warrants and convertible 
securities.
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    \11\ 17 CFR 230.144A.
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    Form B would replace Form S-3, the current abbreviated registration 
statement form, and provide issuers with more flexibility than under 
the current system. The issuer would be able to delay filing the Form B 
registration statement until shortly before the first sale of 
securities and would be able to determine when its registration 
statement becomes effective.
    The Commission proposed new Form A for medium-sized issuers.\12\ It 
would replace Form S-1, the current registration statement form used by 
most issuers. Form A would be used by issuers that do not meet the 
requirements to use Form B. Some Form A issuers would be able to 
specify the time of effectiveness of their registration statements. 
Form A issuers that are able to incorporate company information into 
their prospectuses would be able to control the timing of effectiveness 
if either:
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    \12\ The effects of the reform proposals on small business 
issuers are discussed under (1) B.1. below.
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     They have a public float equal to or greater than $75 
million; or
     The Exchange Act annual report that is incorporated into 
the Form A registration statement was reviewed by the Commission's 
staff and amended to comply with any staff comments.
    The group will discuss these proposed registration statement 
reforms and consider how they would operate with state registration 
procedures for offerings of non-covered securities.

2. Communications Around the Time of an Offering

    Under current federal regulation, an issuer's communications to 
investors and the market are strictly limited around the time of an 
offering. The Commission's proposals in this area would loosen these 
restrictions while preserving the legal remedies to investors for 
inadequate disclosures.
    The approach would depend upon the type of offering. For Form B 
offerings, issuers would be able to make oral and written 
communications in any format at any time regardless of whether the 
offering is imminent or ongoing. Those communciations of course would 
be subject to the liability provisions of the federal securities laws 
and would need to be filed with the Commission.
    For non-Form B offerings, the Commission has proposed a bright-line 
safe harbor for all communications made before the 30-day period before 
the date of filing the registration statement. Communications within 30 
days of filing would remain restricted although the Commission has 
proposed safe harbors for factual business communications and regularly 
released, forward-looking information. After the registration statement 
is filed, the Commission proposes to lift restrictions on 
communications. These post-filing communications would be subject to 
the liability provisions and would have to be filed with the 
Commission.
    The group will discuss the proposed federal approach to 
communications. The conferees also will consider how the Commission's 
proposals would coordinate with state regulations applicable to 
communications.

3. Integration of Offerings

    An issuer of securities that has commenced a private offering may 
decide to switch to a registered public offering. Similarly, an issuer 
may decide to end a registered offering and offer securities under a 
private exemption. The current federal rules prevent most companies 
from switching from registration to a private offering, and vice versa, 
in a timely fashion. The Commission has proposed changes to remove most 
of these impediments.
    The Commission has proposed a safe harbor for issuers that have 
started a registered offering and wish to switch to a private offering. 
Under the safe harbor, the issuer may withdraw its registration 
statement and either wait 30 days to sell privately or sell privately 
sooner if it accepts a higher liability standard for written 
disclosures provided to purchasers.
    Another safe harbor would apply to an issuer that has started a 
private offering and later decides to abandon it and file a 
registration statement. Under this proposal, the issuer could file a 
registration statement for a public offering immediately after 
abandonment of the private offering, unless it had offered the 
securities to persons ineligible to buy in a private offering. In that 
case, the issuer would need to wait 30 days before filing its 
registration statement.
    The group will discuss the proposed integration safe harbors and 
consider how they would coordinate with state rules that apply in these 
situations.
B. Small Business Initiatives

1. Registration System Reform--Effects on Small Business Issuers

    Certain Commission registration reform proposals are tailored to 
benefit smaller issuers. One important proposal would modify the 
definition of ``small business issuer.'' In 1992 and 1993, the 
Commission adopted special forms for small issuers to use in 
registering under the Securities Act and Exchange Act and in reporting 
under the Exchange Act. The disclosure requirements of these forms are 
less extensive than those applicable to larger issuers. The Commission 
adopted the definition of ``small business issuer'' to distinguish the 
class of smaller issuers that would be permitted to use these special 
forms. A small business issuer generally is a company with revenues of 
less than $25 million and a public float of less than $25 million.\13\
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    \13\ 17 CFR 228.10. Other requirements also must be met.
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    The Commission proposed to change the definition by increasing the 
revenue level to $50 million and removing the public float limitation. 
This proposal would update the definition for the significant economic 
and market changes that have occurred since the definition was adopted 
in 1992. The proposal would significantly increase the number of public 
companies that would qualify as small business issuers.
    Another important reform proposal would allow small business 
issuers to use Form B when offering securities to relatively 
sophisticated or knowledgeable investors. Small business issuers would 
be able to enjoy the various benefits of Form B in these offerings.\14\
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    \14\ See discussion under (1) A.1. above.
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    Other reform proposals also would benefit smaller issuers. Under 
one proposal, a small business issuer whose registration statement has 
become effective would be allowed to increase the size of its offering 
by up to 50% of the maximum offering price of the earlier effective 
registration statement. The second registration statement for the 
additional offering amount would become effective automatically under 
certain circumstances. Another proposal

[[Page 17045]]

would permit incorporation by reference of Exchange Act reports into 
Form SB-2, the basic registration statement for small business issuers. 
This change would permit earlier incorporation by reference than 
allowed currently.\15\ Also, the Commission proposed a new Form SB-3, a 
registration statement form designed especially for small business 
issuers to use in business combinations.
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    \15\ Existing Form S-2 permits incorporation by reference if the 
issuer has been reporting for a three year period and meets other 
requirements. Proposed Form SB-2 would reduce the three year period 
to two years.
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    The Commission's integration proposal, although applicable to all 
issuers, may benefit small business issuers in particular. Because 
small business issuers often have no market or only a limited market 
for their securities before a securities offering, they may be unable 
to predict investors' interest in their offerings. Once a smaller 
issuer begins an offering, it may wish to switch between a registered 
offering and an exempt offering depending upon the amount of investor 
interest in its securities. The integration proposal would permit an 
issuer to switch between registration and an exemption in a timely 
manner if certain conditions are met.\16\
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    \16\ See the discussion under (1) A. 3. above.
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    The group will discuss the impact of these proposed changes, if 
adopted, and the need for any additional rulemaking in the small 
business area.

2. Rule  504

    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 that do not report under the 
Exchange Act. Under prior Rule 504, issuers were permitted to generally 
solicit and advertise in Rule 504 offerings, and the securities issued 
in those offerings were freely tradeable. The Commission recently 
amended Rule 504 to address concerns with the previous approach.\17\ 
The revised rule limits the circumstances where general solicitation is 
permitted and freely tradeable securities are issued under the rule. 
Specifically, issuers may generally solicit and advertise and issue 
freely tradeable securities only in transactions that are either:
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    \17\ Securities Act Release No. 7644 (February 25, 1999) [64 FR 
11090].
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     Registered under state law requiring public filing and 
delivery of a substantive disclosure document to investors before sale; 
or
     Exempted under state law permitting general solicitation 
and general advertising so long as sales are made only to ``accredited 
investors.'' \18\
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    \18\ 17 CFR 230.501(a). 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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    Only companies that do not report under the Exchange Act may use 
Rule 504. Where an issuer becomes a reporting company during an ongoing 
Rule 504 offering, the issuer may not continue to rely on the rule 
after it becomes a reporting company. To address this case, one of the 
Commission's reform proposals would amend Rule 504 to permit an issuer 
that becomes a reporting company during an ongoing Rule 504 offering to 
continue to rely on the rule in that offering, if certain conditions 
are met.
    The group will discuss the revisions and proposed amendment to Rule 
504. Conferees will consider whether other changes are needed in the 
rule while at the same time preserving the ability of small companies 
to raise capital.

3. State Initiatives

    The group will discuss several state initiatives designed to 
facilitate offerings by smaller issuers. These 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 42 states that require 
registration of these offerings) have agreed to participate in the 
program. The states have reviewed approximately 32 registration 
statements under this 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 47 states. This 
form is used to register securities offerings exempt from federal 
registration under Rule 504 of Regulation D or Regulation A. 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 22 of the 
states requiring registration of these offerings.\19\ About 37 SCOR 
filings have been reviewed under the Regional Review Program. 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.
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    \19\ A fourth regional program is forming now. It will consist 
of six states in the mid-Atlantic region and expects to accept 
filings in late spring 1999.
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    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.
C. Definition of Qualified Purchaser and Accredited Investor; NASAA's 
Model Accredited Investor Exemption
    Section 18 of the Securities Act, after the 1996 Act, excludes from 
state regulation and review securities offerings to purchasers who are 
defined by Commission's rules to be ``qualified purchasers.'' \20\ A 
security sold to a ``qualified purchaser'' is a ``covered security'' 
subject to the same regulatory approach as other covered securities. 
The Commission is planning to propose a definition of ``qualified 
purchaser'' for this purpose. In this process, the Commission is 
considering whether changes should be made to the definition of 
``accredited investors'' under the Securities Act, and whether the 
definitions of ``qualified purchasers'' and ``accredited investors'' 
should be similar or different. The Commission and state 
representatives will discuss the appropriate criteria for these two 
definitions.
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    \20\ 15 U.S.C. 77r(b)(3).
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    The group 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, 16 states 
have adopted the exemption and other states indicate that they intend 
to adopt the exemption in the near future. State representatives will 
share their

[[Page 17046]]

experiences with the exemption, including any issues that have arisen.
D. Plain English Disclosure
    Beginning October 1, 1998, issuers filing Securities Act 
registration statements must use plain English writing principles when 
drafting the front part of prospectuses, i.e., the cover page and the 
summary and risk factors sections.\21\ These plain English 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.
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    \21\ Securities Act Release No. 7497 (January 28, 1998) [63 FR 
6370].
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    The Division of Corporation Finance, in its full review of a 
registration statement, examines the prospectus for compliance with the 
plain English requirements. If appropriate, the Division staff will 
issue comments to obtain improved plain English disclosures. The 
Division representatives will discuss their experiences with the plain 
English system. The group will consider any issues that have arisen and 
federal and state coordination needed to facilitate success of the 
system.
E. Year 2000 Disclosure Issues
    The Commission and its staff have published several statements 
which provide guidance about the disclosure requirements of public 
companies facing year 2000 technology problems. The Commission recently 
provided guidance in a July 1998 release.\22\ That release provides 
advice to public companies so they can determine whether their year 
2000 issues should be disclosed in the Management's Discussion and 
Analysis of Financial Condition and Results of Operations section of 
their disclosure documents. The release also advises public companies 
to consider Year 2000 issues when preparing their financial statements 
and drafting other disclosures, such as risk factors and business 
description disclosures. The working group will consider this issue and 
discuss how to require and review disclosures on this matter in a 
consistent manner.
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    \22\ Securities Act Release No. 7558 (July 29, 1998) [63 FR 
41394].
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(2) Market Regulation Issues

A. Books and Records
    Section 103 of the 1996 Act prohibits any state from imposing 
broker-dealer books and records requirements that differ from, or are 
in addition to, the Commission's requirements. In addition, the same 
section directs the Commission to consult periodically with the state 
securities authorities concerning the adequacy of the Commission's 
books and records requirements.
    On October 2, 1998, the Commission reproposed amendments to the 
books and records rules to clarify and expand recordkeeping 
requirements with respect to purchase and sale documents, customer 
records, associated person records, customer complaints, and certain 
other matters. The reproposed amendments also specified the books and 
records that broker-dealers would make available at their local 
offices. The Commission modified the reproposed amendments to reduce 
the burden on broker-dealers without substantially detracting from the 
original objective of establishing rules that would facilitate 
examinations and enforcement activities of the Commission, self 
regulatory organizations (``SROs''), and state securities 
regulators.\23\ Among other changes in the reproposed amendments, the 
Commission redefined the term ``local office'' to include a place where 
two or more associated persons regularly conduct a securities business. 
The original proposal \24\ defined the term local office to include a 
place where one associated person conducted a securities business. 
Furthermore, as reproposed, a broker-dealer would be required to update 
its customer account records at least once every three years. The 
original proposal required broker-dealers to update the customer 
account records annually.
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    \23\ Exchange Act Rel. No. 40518 (October 2, 1998) [63 FR 
54404].
    \24\ Exchange Act Rel. No. 37850 (October 22, 1996) [61 FR 
55593].
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    The comment period closed December 9, 1998. The Commission received 
approximately 120 comment letters in response to the release re-
proposing the amendments. The Commission's staff has been reviewing the 
comments that have been submitted. The working group will discuss these 
efforts to amend Rules 17a-3 and 17a-4.
B. Central Registration Depository
    The CRD system is a computer system operated by the National 
Association of Securities Dealers, Inc. (``NASD'') and 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 regulators 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 regulators with: (1) 
Streamlined capture and display of data; (2) better access to 
registration and disciplinary information through the use of 
standardized and specialized computer searches; and (3) electronic 
filing of uniform registration and licensing forms, including Forms U-
4, U-5, BD and BDW.
    The NASD is preparing to implement the web-based form filing 
component of the modernized CRD system in the third quarter of 1999. In 
the past year, NASAA, the NASD, the Commission and others have worked 
together to modify Forms U-4, U-5 and BD in order to accommodate the 
electronic filing environment that will exist in the modernized CRD. At 
NASAA's Annual Fall conference held in October 1998, NASAA adopted new 
versions of Forms U-4 and U-5. The NASD has submitted, and the 
Commission is reviewing, a rule proposal to modify Forms U-4 and U-5. 
The NASD rule proposes additional formatting and technical changes to 
the forms in order to fully implement the web-based CRD system. Also, 
the Commission is considering revisions to the Form BD to accommodate 
web-based form filing.
    In anticipation of the conversion to the web-based CRD system, the 
NASD is planning a two week transition period during which time 
registration activities will not be processed. This two week period is 
currently scheduled for the beginning of August 1999.
    The conference participants will discuss the CRD modernization 
process, including the proposed changes to the forms and the transition 
period.
C. Micro-cap Fraud Rules
    Rule 15c2-11 under 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 in a number of ways.\25\ The 
Commission received approximately

[[Page 17047]]

199 written comments from 193 commenters, including 68 identical 
letters from OTC Bulletin Board issuers in response to the release 
proposing amendments. Broker-dealers, trade associations, and law firms 
representing broker-dealers submitted 45% of the comment letters. OTC 
Bulletin Board issuers submitted 30% of the comment letters. State 
securities regulators and NASAA accounted for 5% of the comment 
letters. The majority of the comment letters opposed the proposed 
amendments. Because of the significant comments received, the 
Commission decided to modify some of these amendments and repropose 
them for public comment.\26\ The reproposal acknowledges commenters' 
concerns about the initial proposal by limiting the scope of the rule 
principally to priced quotations and to those securities that are more 
likely to be the subject of improper activities. The provisions 
relating to the broker-dealer's obligations under the rule and the 
specified issuer information that the broker-dealer must obtain and 
review are essentially unchanged from the initial proposal. The 
reproposed amendments would:
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    \25\ Exchange Act Release No. 39670 (February 17, 1998) [63 FR 
9661].
    \26\ Exchange Act Release No. 41110 (February 25, 1999) [64 FR 
11124].
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     Eliminate the rule's piggyback provision and require all 
broker-dealers to review current issuer information before publishing 
priced quotations for a security;
     Limit the rule's applicability to priced quotations only 
(except in the case of the first broker-dealer to quote the security);
     Require broker-dealers publishing priced quotations for a 
security to review current information about the issuer at least 
annually;
     Require documentation of the broker-dealer's compliance 
with the rule; and
     Require broker-dealers publishing quotes in compliance 
with the rule to make the issuer information available at the request 
of customers, prospective customers, information repositories, and 
other broker-dealers to the extent that such information is not 
available through EDGAR, any other federal or state electronic 
information system, or an information repository.
    However, the new amendments would narrow the scope of the rule to 
those kinds of securities most frequently involved in micro-cap fraud 
schemes by excluding the following securities:
     Securities with a worldwide average daily trading volume 
value of at least $100,000 during each of the six full calendar months 
immediately preceding the date of publication of a quotation, and 
convertible securities where the underlying security satisfies this 
threshold;
     Securities with a bid price of at least $50 per share;
     Securities of issuers with net tangible assets in excess 
of $10,000,000, based on audited financial statements; and
     Non-convertible debt, non-participatory preferred stock, 
and investment grade asset-backed securities.

The amendments also reorganize and simplify the rule's provisions 
consistent with the Commission's plain English program. 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 
reproposal and the effects of such reproposal, if adopted, and other 
ways to promote investor protection in the OTC market arena.
D. NASD Proposals
    The NASD has undertaken several regulatory initiatives in the past 
two years. A new rule change limited 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.
    A proposed rule amendment would require clearing firms to (1) 
forward customer complaints about an introducing firm to the 
introducing firm and the introducing firm's designated examining 
authority (``DEA''), (2) notify complaining customers that the 
complaint has been forwarded to the introducing member and the 
introducing member's DEA, (3) provide introducing firms with a list of 
exception reports available to help the introducing firms supervise 
their activities, and (4) permit introducing firms to issue checks 
drawn on the clearing firm's account only after the introducing firm 
has notified the clearing firm, in writing, that it has established and 
will maintain and enforce appropriate supervisory procedures.
    The NASD submitted a proposed rule that would provide guidelines 
that apply to the employment and supervision of unregistered persons 
who contact prospective and existing customers, and provide for 
heightened supervision of cold callers. This proposal is currently out 
for comment.
    Finally, a new rule proposed by the NASD in 1998 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.
    These four initiatives are still being reviewed by the Commission. 
The working group will discuss the impact of the new rules, the status 
of the proposals, the comments received to date, and their implications 
for small businesses and NASAA members.
E. Arbitration
    The NASD submitted to the Commission rule filings that focus on and 
deal with the eligibility rule, the contract rule, the creation of a 
discovery guide for arbitrators, whether punitive damages should be 
capped in arbitration, and the use of interim injunctive relief in 
arbitration. On June 22, 1998, the Commission approved an NASD rule 
filing which eliminated the NASD's regulatory requirement that 
securities industry employees arbitrate statutory employment 
discrimination claims.\27\ Additionally, on December 29, 1998, the 
Commission approved by delegated authority the NYSE's proposal to 
exclude statutory employment discrimination claims from its arbitration 
forum unless all parties agreed to the arbitration after the claim 
arose.\28\ On October 14, 1998, the Commission approved the NASD's rule 
change altering the system for selecting arbitrators by substituting 
for the current system of administrative appointment of arbitrators by 
NASD staff a new system whereby parties are provided with lists of 
arbitrators that they may rank by preference.\29\ Recently, the 
Commission approved an NASD rule proposal to increase NASD

[[Page 17048]]

Regulation's arbitration fees and the honoraria it pays its 
arbitrators.\30\
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    \27\ Exchange Act Release No. 40109 (June 22, 1998) [63 FR 
35299].
    \28\ Exchange Act Release No. 40858 (December 29, 1998) [64 FR 
1051]. Commission staff is working with the regional exchanges to 
assure conforming changes to their rules. In December 1998, the 
Commission approved proposals substantially similar to the NYSE's 
filed by the Boston Stock Exchange and Chicago Stock Exchange. 
Exchange Act Release No. 40861 (December 29, 1998) [64 FR 1039] 
(Boston); Exchange Act Release No. 40873 (December 31, 1998) [64 FR 
1253] (Chicago).
    \29\ Exchange Act Release No. 40556 (October 14, 1998) [63 FR 
56957].
    \30\ Exchange Act Release No. 41056 (February 16, 1999) [64 FR 
10041].
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    The NASD filings resulted in part from its work with the Securities 
Industry Conference on Arbitration (``SICA''). The participants are 
likely to address some or all of the above proposed changes in the 
securities arbitration process.
F. Day Trading
    ``Day trading'' has been in the news a great deal recently. A ``day 
trader'' can be loosely defined as someone who buys and sells stocks 
during the day, often within minutes, hoping to take profitable 
advantage of intraday swings in share prices. What particularly 
distinguishes a day trader from a more typical retail investor is that 
he or she, generally, will (1) not carry a position overnight; (2) try 
to make money on the ``spreads'' between the bids and offers; (3) trade 
through automatic order execution systems, and not on-line through the 
Internet, in order to obtain nearly instantaneous order execution; (4) 
look at historical buying patterns in order to determine if the stock 
is most actively sought during certain hours of the day, times of the 
year, etc., rather than looking at a company's fundamentals or growth 
prospects; (5) have the mind set of a ``trader'' rather than a long 
term investor; and (6) focus on trading in volatile stocks.
    The Commission is looking carefully at the activity of firms that 
facilitate day trading. Areas that the Commission is looking into 
include: (1) Activities that may require broker-dealer or investment 
adviser registration with the Commission, or that may require 
registration with the Commission of sales of shares of day trading 
accounts or firms; (2) compliance by day trading firms with margin and 
short sale rules, including loans made to customers; (3) capital 
requirements; (4) the manner in which client funds are used; and (5) 
suitability requirements.
    In early 1998, NASAA formed a task force to examine day trading. 
The work of the task force is ongoing. The participants are likely to 
address the task force's work.
G. Migration of Rogue Brokers
    The federal securities laws do not currently prevent persons 
subject to disciplinary findings by state securities and insurance 
commissions, and federal banking agencies,\31\ from entering the 
securities industry (and vice-versa). A 1994 General Accounting Office 
(``GAO'') study raised similar concerns about the migration of 
unscrupulous brokers into the financial services industry, such as 
banking and insurance.\32\ The GAO recommended that the Department of 
Treasury work with the Commission and other financial regulators to (1) 
increase disclosure of CRD information so that regulators can consider 
a broker's disciplinary history in allocating examination resources and 
employers can use the information in making hiring decisions and (2) 
determine whether legislation or additional reciprocal agreements 
between the Commission and other financial regulators are necessary to 
prevent the migration of unscrupulous brokers to other financial 
services industries.
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    \31\ This includes the Comptroller of the Currency, the Board of 
Governors of the Federal Reserve System, the Federal Deposit 
Insurance Corporation and the Office of Thrift Supervision.
    \32\ Securities Markets: Actions Needed to Better Protect 
Investors Against Unscrupulous Brokers (Letter Report, September 14, 
1994, GAO/GGD-94-208).
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    In 1996, the Commission's staff met with representatives from the 
NASD, NASAA, and the National Association of Insurance Commissioners 
(``NAIC''), to discuss steps that could be taken to stem the migration 
of unscrupulous brokers. At that meeting, it was agreed that an 
important first step would be to complete the ongoing CRD modernization 
project. The participants also discussed ways for additional regulatory 
authorities to obtain access to the insurance industry's Producer 
Information Network (``PIN'').\33\
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    \33\ The NAIC's five year strategic plan, issued in 1993, 
included the development of a producer database and common 
insurance/producer licensing procedures. PIN, developed in 1995, is 
one of the tools to modernize the insurance licensing process. The 
insurance industry will have access to the Producer Database 
(``PDB'') through PIN. PDB access will include all non-confidential 
information such as the states in which a producer is licensed, what 
type of license is held as well as the status of the license and 
lines of authority.
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    The participants are likely to discuss the CRD modernization 
program and other avenues of information sharing between federal and 
state securities, insurance and banking regulators in order to address 
the possible migration of unscrupulous brokers.
    Similarly, the group also expects to discuss whether it would be 
appropriate to amend the Exchange Act, to make persons subject to a 
``statutory disqualification'' \34\ if they have been found by a state 
securities or insurance commission, or state or federal banking agency, 
to have committed certain fraudulent acts or violated the statutes 
enforced by these agencies.
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    \34\ Exchange Act Section 3(a)(39).
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H. 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'').
    In particular, the Commission adopted rules that require broker-
dealers, non-bank transfer agents, and investment advisers to file with 
the Commission (and, in the case of broker-dealers, with their 
designated examining authority) reports regarding their Year 2000 
efforts.\35\ The first reports for broker-dealers and transfer agents 
were due August 31, 1998; the first reports for investment advisers 
were due December 7, 1998. The Commission brought enforcement actions 
against 37 broker-dealers and 9 transfer agents who failed to file the 
first report or filed it late, while the NASD brought 59 similar 
actions against broker-dealers.\36\
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    \35\ Exchange Act Release Nos. 40162 and 40163 (July 2, 1998) 
[63 FR 37668, 37688]; Investment Advisers Act Release No. 1769 
(October 1, 1998) [63 FR 54308].
    \36\ Exchange Act Release No. 40573 and 40574 (October 20, 1998) 
and 40895 (January 7, 1999).
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    Broker-dealers and non-bank transfer agents are required to file a 
second report on April 30, 1999; larger broker-dealers and non-bank 
transfer agents are also required to file a report prepared by an 
independent public accountant regarding the broker-dealers' and the 
non-bank transfer agents' processes for preparing for the Year 2000. 
Investment advisers are required to file a second report on June 7, 
1999.\37\
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    \37\ Exchange Act Release Nos. 40608 (October 28, 1998) [63 FR 
59208] and 40587 (October 22, 1998) [63 FR 58630].
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    Also during the past year, the Commission has supported the 
industry's efforts to conduct an industry wide test for Year 2000 
problems in March 1999. Commission staff has worked with test 
organizers and the SROs to identify key test participants. In 
particular, the Commission has approved new SRO rules that allow the 
SROs to mandate their member firms conduct Year 2000 testing. 
Commission staff also meets regularly with the SROs to discuss member 
readiness for Year 2000 and contingency planning.
    Other Commission efforts regarding Year 2000 efforts include a 
moratorium on the implementation of new Commission rules that require 
major reprogramming of computer systems by Commission-regulated 
entities between June 1, 1999 and March 31, 2000 \38\ and surveys of 
Year 2000 remediation efforts

[[Page 17049]]

at the exchanges, Nasdaq and clearing agencies.
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    \38\ Exchange Act Release No. 40377 (August 27, 1998) [63 FR 
47051].
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I. Examination Issues
    State and federal regulators also will discuss various examination-
related issues of mutual interest, including: summits and examination 
coordination; branch office examinations; micro-cap issues; and day 
trading.

(3) Investment Management Issues

A. Division of Regulatory Authority
    Title III of the 1996 Act amended the Investment Advisers Act of 
1940 (``Advisers Act'') \39\ to divide 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.\40\ Advisers that have 
assets under management of less than $25 million must register with the 
appropriate state securities authorities.
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    \39\ 15 U.S.C. 80b-1 et seq.
    \40\ 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, 
Wyoming), or that have their principal office and place of business 
outside the United States. In addition, the Commission has adopted 
rules exempting five 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,\41\ including a requirement that each 
Commission-registered adviser indicate whether it was eligible for 
continued registration with the Commission and, if not, withdraw from 
Commission registration. Approximately 11,800 advisers withdrew from 
Commission registration and the Commission canceled the registrations 
of 4,200 advisers that failed to indicate whether they were eligible 
for continued registration with the Commission.\42\ Approximately 8,500 
investment advisers are currently registered with the Commission.
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    \41\ Investment Advisers Act Rel. No. 1633 (May 15, 1997) [62 FR 
28112].
    \42\ The Commission published a Notice of Intention to Cancel 
Registrations of Certain Investment Advisers on March 9, 1998. See 
Investment Advisers Act Rel. No. 1705 [63 FR 12526].
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    The conferees will discuss cooperation between Commission and state 
adviser programs, including sharing information about past examinations 
and monitoring advisers switching between federal and state 
registration.
B. Electronic Filing System
    The 1996 Act requires 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.\43\ In 
October 1998, Commission staff announced that they would recommend that 
the Commission designate NASD Regulation, Inc. (``NASDR'') to operate 
an electronic investment adviser registration system.\44\ This decision 
was made jointly with a NASAA committee.
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    \43\ 1996 Act Section 306.
    \44\ SEC News Release 98-120.
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    The Commission has been working with NASAA, the state securities 
authorities, and NASDR to develop a one-stop electronic filing system 
that investment advisers will use to apply for registration with the 
Commission or the appropriate state securities authorities, and to 
update their registration. The Commission and state authorities will 
have access to the resulting database to review adviser registration 
materials and the database will be available to the public on an 
Internet web site. Clients and prospective clients of investment 
advisers will be able to quickly obtain disciplinary and other 
information about investment advisers and persons associated with 
investment advisers.
    The conferees will discuss the progress to date in creating this 
new electronic filing system.
C. Revised Registration and Disclosure Forms
    The Commission and NASAA are revising the investment adviser 
registration and disclosure forms. The revised registration form would 
provide more useful information to the Commission and the state 
securities regulators. The new disclosure form would require advisers 
to provide clear and complete disclosures in plain English to clients 
and prospective clients.
    The conferees will consider and discuss ways in which the forms can 
be made most useful to the Commission and state securities authorities, 
and clients and prospective clients of investment advisers.

(4) Investor Education and Assistance

    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 complement those 
efforts to the greatest extent possible. The working group will discuss 
the following investor education initiatives and potential joint 
projects:
A. Financial Literacy 2001
    In the spring of 1998, NASAA, the NASD, and the Investor Protection 
Trust (``IPT'') joined forces to launch ``Financial Literacy 2001'' 
(``FL2001''), an unprecedented $1 million campaign targeting 25,000 
high school teachers across America. The goal of FL2001 is to 
encourage--and make it easier for--teachers in every state to teach the 
basics on saving and investing. Working together, NASAA, the NASD, and 
the IPT have developed a state-by-state customized classroom guide and 
have begun to provide aggressive distribution and teacher training. 
During the working group session, the states will brief the 
Commission's staff on the progress of FL2001 and plans for 
dissemination of the FL2001 program in the coming year.
B. Plain English Update
    In January 1998, the Commission approved new rules that require 
issuers to write the cover page, summary, and risk factors section of 
prospectuses in plain English. These rules apply to all registration 
statements filed with the Commission on or after October 1, 1998, and 
to all mutual fund disclosure statements filed on or after December 1, 
1998. During the working group session, the participants will discuss 
the status of the Commission's plain English initiative.
C. Facts on Saving and Investing Campaign
    In the spring of 1998, NASAA and the Commission, in conjunction 
with the Council of Securities Regulators of the Americas, launched the 
``Facts on Saving and Investing Campaign.'' The campaign is an ongoing, 
grassroots effort to educate individuals about saving, investing, and 
avoiding financial fraud. Twenty-one countries throughout the Western 
Hemisphere participated in the campaign's enormously successful kick-
off week. In the U.S., campaign partners--including more than thirty 
government agencies, consumer organizations, and financial industry 
associations--held educational events and distributed information on 
saving and investing throughout the country. In the coming year, the 
campaign plans to target two key audiences--schools and

[[Page 17050]]

the workplace. During the working group session, participants will 
discuss the campaign and future campaign initiatives. The group also 
will discuss other initiatives for international investor education.
D. New Investor Education Programs
    Participants in the working group session will brainstorm ideas for 
new investor education programs, including joint NASAA and Commission 
initiatives.
E. Investor Education Resources
    Participants in the working group session will assess existing 
resources for investor education--including brochures, videotapes, 
online materials, and other media--and identify gaps. Conferees also 
will discuss the most efficient and effective ways to provide 
educational resources to individuals at the grassroots level.

(5) Enforcement Issues

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

(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: March 31, 1999.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-8515 Filed 4-6-99; 8:45 am]
BILLING CODE 8010-01-P