Securities Uniformity; Annual Conference on Uniformity of Securities Law

SECURITIES AND EXCHANGE COMMISSION

[Release No. 33-7050, File No. S7-9-94]

Securities Uniformity; Annual Conference on Uniformity of

Securities Law

agency: Securities and Exchange Commission.

action: Publication of release announcing issues to be considered at a

conference on uniformity of securities laws and requesting written

comments.

-----------------------------------------------------------------------

summary: In conjunction with a conference to be held on April 18, 1994,

the Commission and the North American Securities Administrators

Association, Inc. today announced a request for comments on the

proposed agenda for the conference. This meeting is intended to carry

out the policies and purposes of section 19(c) of the Securities Act of

1933, adopted as part of the Small Business Investment Incentive Act of

1980, to increase uniformity in matters concerning state and federal

regulation of securities, to maximize the effectiveness of securities

regulation in promoting investor protection, and to reduce burdens on

capital formation through increased cooperation between the Commission

and the state securities regulatory authorities.

dates: The conference will be held on April 18, 1994. Written comments

must be received on or before April 15, 1994 in order to be considered

by the conference participants.

addresses: Written comments should be submitted in triplicate by April

15, 1994 to Jonathan G. Katz, Secretary, Securities and Exchange

Commission, 450 5th Street, NW., Washington, DC 20549. Comments should

refer to File No. S7-9-94 and will be available for public inspection

at the Commission's Public Reference Room, 450 5th Street, NW.,

Washington, DC 20549.

for further information contact: William E. Toomey or Richard K. Wulff,

Office of Small Business Policy, Division of Corporation Finance,

Securities and Exchange Commission, 450 5th Street, NW., Washington, DC

20549, (202) 272-2644.

supplementary information:

I. Discussion

A dual system of federal-state securities regulation has existed

since the adoption of the federal regulatory structure in the

Securities Act of 1933 (the ``Securities Act'').\1\ Issuers attempting

to raise capital through securities offerings, as well as participants

in the secondary trading markets, are responsible for complying with

the federal securities laws as well as all applicable state

regulations. It has long been recognized that there is a need to

increase uniformity between federal and state regulatory systems, and

to improve cooperation among those regulatory bodies so that capital

formation can be made easier while investor protections are retained.

---------------------------------------------------------------------------

\1\15 U.S.C. 77a et seq.

---------------------------------------------------------------------------

The importance of facilitating greater uniformity in securities

regulation was endorsed by Congress with the enactment of section 19(c)

of the Securities Act in the Small Business Investment Incentive Act of

1980.\2\ Section 19(c) authorizes the Commission to cooperate with any

association of state securities regulators which can assist in carrying

out the declared policy and purposes of section 19(c). The policy of

that section is that there should be greater federal and state

cooperation in securities matters, including: (1) Maximum effectiveness

of regulation; (2) maximum uniformity in federal and state standards;

(3) minimum interference with the business of capital formation; and

(4) a substantial reduction in costs and paperwork to diminish the

burdens of raising investment capital, particularly by small business,

and a reduction in the costs of the administration of the government

programs involved. In order to establish methods to accomplish these

goals, the Commission is required to conduct an annual conference. The

1994 meeting will be the eleventh such conference.

---------------------------------------------------------------------------

\2\Public Law 96-477, 94 Stat. 2275 (October 21, 1980).

---------------------------------------------------------------------------

II. 1994 Conference

The Commission and the North American Securities Administrators

Association, Inc. (``NASAA'')\3\ are planning the 1994 Conference on

Federal-State Securities Regulation (the ``Conference'') to be held

April 18, 1994 in Washington, DC. At the Conference, representatives

from the Commission and NASAA will form into working groups in the

areas of corporation finance, market regulation, investment management,

and enforcement, to discuss methods of enhancing cooperation in

securities matters in order to improve the efficiency and effectiveness

of federal and state securities regulation. Generally, attendance will

be limited to representatives of the Commission and NASAA in an effort

to promote frank discussion. However, each working group in its

discretion may invite certain self-regulatory organizations to attend

and participate in certain sessions.

---------------------------------------------------------------------------

\3\NASAA is an association of securities administrators from

each of the 50 states, the District of Columbia, Puerto Rico, Mexico

and twelve Canadian Provinces and Territories.

---------------------------------------------------------------------------

Representatives of the Commission and NASAA currently are

formulating an agenda for the Conference. As part of that process, the

public securities associations, self-regulatory organizations,

agencies, and private organizations are invited to participate through

the submission of written comments on the issues set forth below. In

addition, comment is requested on other appropriate subjects sought to

be included in the Conference agenda. All comments will be considered

by the Conference attendees.

III. Tentative Agenda and Request for Comments

The tentative agenda for the Conference consists of the following

topics in the areas of corporation finance, investment management,

market regulation and oversight, and enforcement.

(1) Corporation Finance Issues

a. Uniform Limited Offering Exemption

Congress specifically acknowledged the need for a uniform limited

offering exemption in enacting section 19(c) of the Securities Act and

authorized the Commission to cooperate with NASAA in its development.

Working with the states, the Commission developed Regulation D, the

federal exemption for limited offerings. To compliment Regulation D,

NASAA has endorsed a Uniform Limited Offering Exemption (``ULOE'') for

adoption by the states.

ULOE provides a uniform exemption from state registration for

certain issuers and, to date, more than half the states have adopted

some form of ULOE. Both the Commission and NASAA continue to make a

concerted effort toward its complete adoption. The conferees will

discuss the continued usefulness of ULOE, as well as possible steps to

encourage its adoption by the remaining states.

b. Small Business Initiative

On July 30, 1992, the Commission adopted a number of rulemaking

changes, often described as the Small Business Initiative, which are

designed to improve the overall capacity to help finance new companies,

and to provide new opportunities for investors.\4\ Among other things,

the ceiling for the Regulation A exemption was raised from $1,500,000

to $5,000,000, and issuers contemplating a Regulation A offering were,

for the first time, permitted to use a written document to ``test the

waters'' for investor interest prior to assuming the expense of an

offering.

---------------------------------------------------------------------------

\4\Securities Act Release No. 33-6949 (July 30, 1992) [57 FR

36442].

---------------------------------------------------------------------------

The participants will discuss the impact of these changes, and the

need for any additional exemptive relief in the small business area.

The participants will also review their experience with amended

Regulation A and the use of ``test the waters'' documents.

Public comment is invited on the efficacy of the Small Business

Initiative as a whole. Comment is also sought with respect to any other

uniform exemptions that might be developed to enhance the ability of

issuers to raise capital, while protecting legitimate interests of

investors.

c. Disclosure Policy and Standards

The Commission regularly reviews and revises its policies with

regard to the most appropriate methods of ensuring the disclosure of

material information to the public. Coordination of this effort with

the states has been extremely helpful.

The Commission and the states have devoted considerable attention

to issues arising from the so-called ``roll-up'' of limited

partnerships. A roll-up usually involves the combination or

reorganization of one or more partnerships. The conferees will again

consider the special disclosure problems involved in such transactions

with emphasis on the disclosure rules adopted by the Commission to

improve the quality of information provided to investors.\5\

---------------------------------------------------------------------------

\5\Securities Act Release No. 6922 (October 30, 1991) [56 FR

57237].

---------------------------------------------------------------------------

Commenters are invited to discuss other areas where federal-state

cooperation in the area of disclosure standards could be of particular

significance as well as any ways in which federal-state cooperation

could be improved.

d. Multinational Securities Offerings

The Commission has recently adopted or proposed a number of changes

to its rules designed to facilitate access by foreign issuers to the

U.S. capital markets. On November 3, 1993, the Commission proposed a

number of initiatives and adopted rule amendments designed to

streamline the registration and reporting process for foreign companies

accessing the U.S. public markets.\6\ In 1991, the Commission adopted a

multijurisdictional disclosure system which permits certain Canadian

issuers to offer securities, undertake tender offers, and file periodic

reports using the disclosure requirements of their home

jurisdiction.\7\ Also in 1991, the Commission proposed for comment

exemptive rules and related registration forms which were designed to

facilitate tender and exchange offers, business combinations and rights

offers by foreign issuers in the United States.\8\ Comment is

specifically requested on ways to coordinate federal and state

treatment of multinational offerings. Comment is also sought on the

possible application of plain language principles to disclosure

documents that are becoming increasingly lengthy and complex.

---------------------------------------------------------------------------

\6\Securities Act Release Nos. 7026 and 7029 (November 3, 1993)

[58 FR 60304, 60307].

\7\Securities Act Release No. 6902 (June 21, 1991) [56 FR

30036].

\8\Securities Act Release Nos. 6896 and 6897 (June 5, 1991) [56

FR 27564, 27582].

---------------------------------------------------------------------------

e. Municipal Securities

On March 9, 1994, the Commission approved the publication of two

releases relating to municipal securities.\9\ One is an interpretive

release addressing the disclosure obligations of issuers and other

market participants under the antifraud provisions of the federal

securities laws in both the primary and secondary markets for municipal

securities. The interpretive release also expresses the Commission's

support for legislation removing the exemption from the registration

and reporting requirements for certain nongovernmental, private

activity conduit issuers. The second release proposed two rules for

comment. The proposed rules would prohibit a municipal securities

dealer from underwriting an issue of municipal securities unless the

issuer undertakes to provide disclosure to the secondary market on an

annual basis by providing information to repositories. A dealer also

would be prohibited from recommending a security unless it has reviewed

the information the issuer has committed to provide. The conferees will

discuss the provisions of the releases and the area of municipal

securities in general.

---------------------------------------------------------------------------

\9\Securities Exchange Act Release Nos. 33742 and 33743 (March

9, 1994) [59 FR 12748, 12750].

---------------------------------------------------------------------------

f. Derivatives

Typically, derivative instruments are futures contracts, forwards,

swaps, option contracts or other instruments with similar

characteristics. Investments in derivative instruments expose investors

to potential gains or losses from changes in an underlying market price

that may be an interest rate, equity price, market or defined index,

foreign currency exchange rate, commodity price or other defined

measure of market price.

The increasing complexity and widespread use of derivatives for

trading and risk management purposes has generated widespread interest.

Conferees will discuss the application of federal and state securities

laws to derivative instruments as well as disclosure issues relating to

such issuances and investments.

(2) Market Regulation Issues

a. Central Registration Depository (``CRD'')

The CRD is a computerized filing and data processing system

operated by the NASD that maintains information concerning NASD member

broker-dealers and their registered personnel for access by state

regulators, self-regulatory organizations, and the Commission. The NASD

is currently in the process of implementing a total redesign of the

CRD. The redesign, which is expected to be completed in 1995, will

result in a significantly improved system. Among the improvements

anticipated in the CRD redesign are: (i) User friendly capture of data,

(ii) streamlined and much improved presentation of data, and (iii)

better access to information.

The participants will discuss the status of the CRD rewrite

project, as well as issues relating to ongoing operation of the

existing CRD system.

b. Forms Revision

In connection with the CRD rewrite project, NASAA and the self-

regulatory organizations are in the process of considering revisions to

Form U-4, the uniform form used to register sales personnel in the

securities industry. The revisions are designed to facilitate the

conversion of data from the existing CRD system to the newly designed

CRD. The participants will discuss issues relating to the proposed

revisions and to the appropriate level of disclosure generally

regarding the disciplinary and customer complaint history of registered

sales personnel.

c. Bank Securities Activities

In response to continuing low level of interest rates, banks and

other financial institutions have suffered large outflows of funds from

certificates of deposit and other traditional bank-sponsored savings

vehicles. As a result, financial institutions have sought to offer

mutual funds and other securities services to their customers, either

directly or through bank affiliates or arrangements with unaffiliated

broker-dealers. The participants will discuss these developments, any

concerns raised by sales of securities on the premises of financial

institutions, and possible regulatory, examination or other responses

available to the Commission, the self-regulatory organizations, and the

states. In particular, the participants will focus on issues relating

to advertising of securities products and activities, as well as

ensuring proper sales practices by persons selling securities on bank

premises.

d. Penny Stock Activities

During 1993, the Commission, together with the NASD, the New York

Stock Exchange, and 40 state securities commissions undertook a

nationwide sweep of more than 125 broker-dealers to determine the

effectiveness of the Commissions penny stock rules (Rules 15g-1 through

15g-6 under the Securities Exchange Act of 1934). The sweep was the

largest joint Commission, state and self-regulatory organization

examination effort ever undertaken. The participants will discuss the

results of the examinations and future efforts to combat fraud and

sales practice abuses in the sale of low-priced securities.

e. Sales Practices

An area of continuing concern to the Commission, the self-

regulatory organizations and the states is responding effectively to

sales practice abuses (such as churning, unsuitable recommendations,

misrepresentations, and unauthorized trading) by securities

professionals. In particular, the participants are concerned about

persons who have a history of customer complaints, arbitration or other

litigation, or disciplinary actions. The participants will discuss the

need for greater cooperation in addressing sales practice abuse--

particularly by recidivists--and possible approaches (such as joint

examination efforts) to identifying and disciplining violators.

f. Market 2000

In January 1994, the Division completed a major study of the

structure of the U.S. equity markets and the regulatory environment in

which our markets operate. The Study, entitled Market 2000, addressed

the challenges presented to the Commission by the rapidly changing

structure of the secondary markets. The Division's basic finding was

that the equity markets are operating efficiently within the existing

regulatory structure. Record amounts of trading activity are processed

smoothly and efficiently. The Division concluded that a major revision

of equity market regulation was not needed and instead, recommended

that the Commission concentrate on the improvements that are needed to

make the markets work better for investors and competition work better

for the markets. Specific recommendations were made in four areas: Fair

treatment of investors, disclosure of market information, fair

competition, and open market access.

The participants will discuss the results of the Market 2000 study,

as well as two Commission rule proposals that have already resulted

from the study: (i) A proposed rule on disclosure regarding the issue

of payment for order flow, and (ii) a proposed rule imposing

recordkeeping and reporting requirements for trading systems operated

by brokers and dealers.

g. Municipal Securities

Over the past year, the Commission has worked with Congress, other

regulators, and industry participants on a number of issues relating to

the municipal securities market. As indicated above, the Commission

recently proposed for public comment amendments to Rule 15c2-12 that

would prohibit a municipal securities dealer from acting as an

underwriter of an issue of municipal securities unless the issuer has

agreed to provide certain disclosure to a central repository. Moreover,

these amendments would require broker-dealers, prior to recommending

transactions in municipal securities, to review the disclosure that the

issuer has agreed to provide. The Commission also proposed for comment

rule 15c2-13 and amendments to rule 10b-10, which would require broker-

dealers to disclose mark-ups in riskless principal transactions of

certain debt securities. These proposals further would require broker-

dealers to disclose when municipal securities are unrated. The

participants will discuss these rule proposals, as well as the recent

Municipal Securities Rulemaking Board rule proposal regarding political

contributions.

h. Additional Issues

The participants will also discuss other issues of mutual interest

relating to the regulation of broker-dealers. Possible discussion

topics include the following: i. Broker-dealer books and records

retention requirements, particularly a recent Commission proposal and

no-action letter relating to the use of electronic storage technology

(such as optical discs);

ii. Supervisory responsibilities of broker-dealers with

``franchised'' branch offices or large numbers of ``independent

contractors;''

iii. Sales practices of broker-dealers with respect to mutual

funds, municipal securities and collateralized mortgage obligations and

derivative products;

iv. Continuing assessment/education requirements for associated

persons of broker-dealers;

v. Disclosure of front-end sales loads on mutual fund

confirmations; and

vi. Payment of commissions to retired registered representatives.

(3) Investment Management Issues

a. Investment Company Disclosure

Over the last decade, investment company assets--particularly

assets invested in open-end investment companies, or ``mutual funds''--

have increased dramatically. A large part of this growth is

attributable to the increasing number of new investors and new

participants in the fund industry, such as banks and defined

contribution plans. The conferees will discuss ways to improve the

quality of information regarding mutual funds available to investors,

particularly newer, or less sophisticated investors, as well as federal

and state efforts toward more uniform federal and state investment

company disclosure requirements.

The conferees are also expected to discuss specific topics relating

to mutual fund disclosure and sales practices such as:

(i) Methods to reduce any confusion that exists among bank

customers between insured deposits and uninsured investments in mutual

funds and other securities;

(ii) Simplification of prospectuses for money market mutual funds

relying on rule 2a-7 under the Investment Company Act; and,

(iii) Guidelines proposed for adoption by the North American

Securities Administrators Association for disclosure of investment

companies' investments in high yield, or ``junk'', bonds and the risks

associated with such investments.

The conferees will also discuss the steps they are taking to

examine and to improve the clarity and adequacy of mutual fund

prospectuses generally.

b. ``Off-the-Page'' Prospectuses

On March 19, 1993, the Division of Investment Management proposed

for comment rule 482(g) under the Securities Act of 1933 to permit

advertisements for certain mutual funds to include an order form if

they contain specified disclosure and comply with other

requirements.\10\ The conferees are expected to discuss this proposal

and the roles the Commission, state regulatory authorities and the

National Association of Securities Dealers will play in monitoring the

use of these ``off-the-page'' prospectuses.

---------------------------------------------------------------------------

\10\Off-the-Page Prospectuses for Open-End Management Investment

Companies, Securities Act Release No. 6982 (March 19, 1993).

Proposed rule 482 would implement a recommendation made by the

Division of Investment Management in chapter 9 of its report,

Protecting Investors: A Half Century of Investment Company

Regulation (May 1992).

---------------------------------------------------------------------------

c. Investment Advisers

The Commission has proposed for comment rule and form amendments

that would specify the information that registered investment advisers

that are sponsors of ``wrap fee'' programs must provide to prospective

clients.\11\ In a wrap fee program an investor receives a bundle of

investment services including portfolio management, custody of funds

and securities, execution of transactions, and monitoring of portfolio

manager performance for a single ``wrap'' fee. The conferees are

expected to discuss this proposal and the comments that the Commission

has received.

---------------------------------------------------------------------------

\11\Disclosure by Investment Adviser Regarding Wrap Fee

Programs, Investment Advisers Act Release No. 1401 (January 13,

1994).

---------------------------------------------------------------------------

The Senate and the House of Representatives have passed legislation

to amend the Investment Advisers Act of 1940.\12\ On January 24, 1994,

Chairman Levitt sent a letter to Congress indicating that several

provisions in the House bill could be addressed through rulemaking,

including a suitability rule and a rule prohibiting custodian

arrangements under which only the adviser (and not the client) receives

periodic account statements. The letter also suggested the possibility

of a joint federal/state effort to identify investment advisers that

have failed to register under the Investment Advisers Act of 1940. The

conferees will discuss the status of the legislation, the rule

proposals that might result from the legislation, and the joint effort

to identify unregistered investment advisers. The conferees will also

discuss the effect the legislation might have upon proposed joint

Commission and state action, such as revisions to Form ADV and the

establishment by the Commission of a ``one-stop'' filing system

allowing advisers to make one filing that would be transmitted

electronically to the Commission and the states, which the legislation

would authorize. The conferees are also expected to discuss the extent

to which managers of mutual fund portfolios trade for their own

accounts, any abuses that may be associated with that practice, and

whether steps should be taken to curb the practice.

---------------------------------------------------------------------------

\12\Investment Adviser Oversight Act of 1993, S. 423, 103rd

Cong., 1st Sess. (November 20, 1993); Investment Adviser Regulatory

Enhancement and Disclosure Act of 1993, H.R. 578, 103rd Cong., 1st

Sess. (May 4, 1993).

---------------------------------------------------------------------------

(4) Enforcement Issues

In addition to the above-stated topics, the state and federal

regulators will discuss various enforcement-related issues which are of

mutual interest.

(5) General

There are a number of matters which are applicable to all, or a

number, of the areas noted above. These include Edgar, the Commission's

electronic disclosure system, rulemaking procedures, training and

education of staff examiners and analysts and sharing of information.

In addition, issues of consumer protection and assistance will be

discussed.

The Commission and NASAA request specific public comments and

recommendations on the above-mentioned topics. Commenters should focus

on the agenda but may also discuss or comment on other proposals which

would enhance uniformity in the existing scheme of state and federal

regulation, while helping to maintain high standards of investor

protection.

By the Commission.

Dated: March 23, 1994.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-7448 Filed 3-29-94; 8:45 am]

BILLING CODE 8010-01-M