Securities Uniformity; Annual Conference on Uniformity of Securities Laws

SECURITIES AND EXCHANGE COMMISSION

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

Securities Uniformity; Annual Conference on Uniformity of

Securities Laws

AGENCY: Securities and Exchange Commission.

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

conference on uniformity of securities laws and requesting written

comments.

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SUMMARY: In conjunction with a conference to be held on April 28, 1997,

the Commission and the North American Securities Administrators

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

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

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

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

1980, to increase uniformity in matters concerning state and federal

regulation of securities, to maximize the effectiveness of securities

regulation in promoting investor protection, and to reduce burdens on

capital formation through increased cooperation between the Commission

and the state securities regulatory authorities.

DATES: The conference will be held on April 28, 1997. Written comments

must be received on or before April 23, 1997 in order to be considered

by the conference participants.

ADDRESSES: Written comments should be submitted in triplicate by April

23, 1997 to Jonathan G. Katz, Secretary, Securities and Exchange

Commission, 450 5th Street, N.W., Washington, D.C. 20549. Comments also

may be submitted electronically at the following E-mail address: rule-

[email protected]. Comments should refer to File No. S7-15-97; this file

number should be included on the subject line if E-mail is used.

Comment letters will be available for public inspection at the

Commission's Public Reference Room, 450 5th Street, N.W., Washington,

D.C. 20549. Electronically submitted comment letters will be posted on

the Commission's internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT:

John D. Reynolds or Richard K. Wulff, Office of Small Business Review,

Division of Corporation Finance, Securities and Exchange Commission,

450 5th Street, N.W., Washington, D.C. 20549, (202) 942-2950.

SUPPLEMENTARY INFORMATION:

I. Discussion

A dual system of federal-state securities regulation has existed

since the adoption of the federal regulatory structure in the

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

to raise capital through

[[Page 17654]]

securities offerings, as well as participants in the secondary trading

markets, are responsible for complying with the federal securities laws

as well as all applicable state laws and regulations. It has long been

recognized that there is a need to increase uniformity between federal

and state regulatory systems, and to improve cooperation among those

regulatory bodies so that capital formation can be made easier while

investor protections are retained.

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

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The importance of facilitating greater uniformity in securities

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

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

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

association of state securities regulators which can assist in carrying

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

that section is that there should be greater federal and state

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

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

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

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

burdens of raising investment capital, particularly by small business,

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

programs involved. In order to establish methods to accomplish these

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

1997 meeting will be the fourteenth such conference.

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\2\ Pub. L. 96-477, 94 Stat. 2275 (October 21, 1980).

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Recently, Congress has examined the system of dual federal and

state securities regulation and the effects of such dual regulation on

the nation's securities markets. During this process, Congress

considered the need for regulatory changes to promote capital

formation, eliminate duplicative regulation, decrease the cost of

capital and encourage competition, while at the same time promoting

investor protection. These efforts resulted in passage of The National

Securities Markets Improvement Act of 1996 \3\ (the ``1996 Act''),

which was signed by President Clinton on October 11, 1996. The 1996 Act

contains significant provisions that realign the regulatory partnership

between federal and state regulators. The legislation reallocates

responsibility for regulation of the nation's securities markets

between the federal government and the states in order to eliminate

duplicative costs and burdens and improve efficiency, while preserving

investor protections. The 1996 Act addresses regulation applicable to

securities offerings, investment companies and advisers and broker-

dealers.

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\3\ Pub. L. 104-290, 110 Stat. 3416 (October 11, 1996).

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II. 1997 Conference

The Commission and the North American Securities Administrators

Association, Inc. (``NASAA'') \4\ are planning the 1997 Conference on

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

April 28, 1997 in Washington, D.C. At the Conference, representatives

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

areas of corporation finance, market regulation and oversight,

investment management, and enforcement, to discuss methods of enhancing

cooperation in securities matters in order to improve the efficiency

and effectiveness of federal and state securities regulation.

Generally, attendance will be limited to representatives of the

Commission and NASAA in an effort to promote frank discussion. However,

each working group in its discretion may invite certain self-regulatory

organizations to attend and participate in certain sessions.

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\4\ NASAA is an association of securities administrators from

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

and twelve Canadian Provinces and Territories.

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Representatives of the Commission and NASAA currently are

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

public, securities associations, self-regulatory organizations,

agencies, and private organizations are invited to participate through

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

addition, comment is requested on other appropriate subjects sought to

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

by the Conference attendees.

III. Tentative Agenda and Request for Comments

The tentative agenda for the Conference consists of the following

topics in the areas of corporation finance, investment management,

market regulation and oversight, and enforcement.

(1) Corporation Finance Issues

A. Uniformity of Regulation

The 1996 Act amended Section 18 of the Securities Act \5\ to

preempt state blue-sky registration of securities offerings of

``covered securities'' \6\ and prohibit state reviews of offerings of

covered securities.\7\ The definition of covered securities does not

include the following which, therefore, remain subject to state

registration requirements:

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\5\ 15 U.S.C. 77r.

\6\ 15 U.S.C. 77r(b). ``Covered securities'' are defined in

Section 18. The term generally includes New York Stock Exchange,

Inc. (``NYSE''), American Stock Exchange, Inc. (``AMEX'') and Nasdaq

National Market System (``Nasdaq/NMS'') securities, registered

investment company securities and specified exempt securities and

offerings.

\7\ 15 U.S.C. 77r(a).

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Securities quoted on the Nasdaq SmallCap market;

Securities quoted on the Nasdaq over-the-counter

Electronic Bulletin Board;

Securities quoted on the over-the-counter ``pink sheets;''

Securities listed on national securities exchanges other

than the NYSE or AMEX (unless the Commission determines by rule that

the listing standards of such exchanges are substantially similar to

the listing standards of the NYSE, AMEX, or Nasdaq/NMS);

Various investment grade securities, such as asset-backed

and mortgage-backed securities, since these securities usually are not

listed on a national exchange or Nasdaq/NMS;

Private placements of securities under Section 4(2) of the

Securities Act that do not meet the requirements of Rule 506 of

Regulation D; \8\ and

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\8\ 17 CFR 230.501 through 230.508.

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Securities offered in reliance upon Commission rules

adopted under Section 3(b) of the Securities Act, e.g., offerings that

are exempt from registration with the Commission under Regulation A \9\

and Rules 504 and 505 of Regulation D.

\9\ 17 CFR 230.251 through 230.263.

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In addition, with respect to offerings of covered securities (other

than listed securities), the states retain the authority to require

specified fee payments and/or notice filings. The states' continuing

authority to regulate certain offerings and to require other filings

and fees continues the need for uniformity between the federal and

state registration systems where consistent with investor protection.

The 1996 Act requires the Commission to conduct a study as to the

extent to which uniformity of state regulatory requirements for

securities and securities transactions that are not covered securities

has been achieved.\10\ The Commission is instructed to consult with the

states as well as issuers,

[[Page 17655]]

brokers and dealers in conducting this study. The results of the study

are to be reported to Congress within a year following the enactment of

the 1996 Act. The Commission and NASAA will discuss the nature and

extent of uniformity at present and discuss steps to increase

uniformity in light of the 1996 Act.

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\10\ Section 102(b) of 1996 Act.

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B. Sales to Qualified Purchasers under the 1996 Act

Section 18 of the Securities Act, as amended by the 1996 Act,

excludes from state regulation and review securities offerings to

purchasers who are defined by Commission rules to be ``qualified

purchasers.'' \11\ A security sold to a ``qualified purchaser'' is a

``covered security'' subject to the same new regulatory approach as

other covered securities as described above. The Commission will be

undertaking rulemaking to define ``qualified purchaser'' for this

purpose, and will discuss with NASAA the appropriate criteria for this

definition.

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\11\ 15 U.S.C. 77r(b)(3).

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C. Commission Exemptive Authority

The 1996 Act added new Section 28 to the Securities Act granting

the Commission extensive general authority to craft exemptions from the

Securities Act to the extent that such exemptions are necessary or

appropriate in the public interest and consistent with the protection

of investors.\12\ This new authority permits the Commission to adopt

rules which exempt any person, security or transaction, or any classes

thereof, from one or more of the provisions of the Securities Act. The

Commission is authorized to adopt conditions for the availability of

such exemptions or, if deemed appropriate, adopt unconditional

exemptions. The Commission and NASAA will discuss the nature and extent

of appropriate exemptions that may be adopted under the Commission's

new authority and the appropriate criteria of and conditions to such

exemptions. In this regard, the definition of covered securities does

not encompass securities issued pursuant to exemptions under new

Section 28. Accordingly, securities or transactions determined to be

exempt under Commission rules adopted pursuant to new section 28 may be

subject to state regulation and review. The conferees will discuss how

offerings exempted under new Section 28 may be regulated in a uniform

manner under state securities laws to the greatest possible extent,

consistent with investor protection.

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\12\ 15 U.S.C. 77z-3.

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D. Small Business Initiatives

During 1996 the Commission adopted and revised rules to provide

additional assistance to small business. On May 1, 1996, the Commission

adopted Rule 1001, a new Securities Act Section 3(b) exemption from the

registration requirements of the federal securities laws.\13\ Under the

exemption, offers and sales of securities, in amounts of up to $5

million, that satisfy the conditions of a 1994 exemption from

California state qualification requirements (Section 25102(n) of the

California Corporations Code) are exempt from federal registration.

Also on May 1, 1996, the Commission adopted amendments to certain rules

under the Securities Exchange Act of 1934 \14\ (``Exchange Act'') that

raised the asset threshold for when a company must become a ``public''

reporting company from $5 million to $10 million.\15\

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\13\ Securities Act Release No. 7285 (May 1, 1996) [61 FR

21356].

\14\ 15 U.S.C. 78a et seq.

\15\ Securities Exchange Act Release No. 37157 (May 1, 1996) [61

FR 21354].

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On February 20, 1997, the Commission adopted amendments to the

holding period requirements contained in Rule 144 under the Securities

Act.\16\ Rule 144 provides a Securities Act registration safe harbor

for resales of securities by persons who hold either ``restricted''

securities or securities of a company of which they are affiliates.

``Restricted'' securities generally include securities issued in

offerings under certain exemptions from federal registration. The

amendments permit the resale of limited amounts of restricted

securities after a one-year, rather than the previous two-year, holding

period. In addition, the amendments permit unlimited resales of

restricted securities by non-affiliates after a holding period of two

years, rather than the previous three-year period. The Commission

believes that these changes will reduce the cost of private capital

formation and especially benefit small businesses, without reducing

investor protections. In a companion release, the Commission proposed

certain changes to Rule 144 to simplify the rule's operation and

solicited comments on additional changes to Rule 144.\17\

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\16\ Securities Act Release No. 7390 (February 20, 1997) [62 FR

9242].

\17\ Securities Act Release No. 7391 (February 20, 1997) [62 FR

9246].

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Also on February 20, 1997, the Commission proposed amendments to

Rule 430A to permit certain smaller or less seasoned reporting

companies to price securities on a delayed basis after effectiveness of

a registration statement, if they meet specified conditions.\18\ The

proposals are intended to provide flexibility and efficiency to

qualified registrants, enabling them to time their offerings to

advantageous market conditions, consistent with investor protection.

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\18\ Securities Act Release No. 7393 (February 20, 1997) [62 FR

9276].

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The participants will discuss the impact of the recent Commission

rule changes and the need for any additional exemptive relief in the

small business area. Conferees will consider the recent proposals and

discuss the effects of such proposals, if adopted, on small business

and public investors.

During the fall of 1996, the Commission began meeting with small

businesses in town hall meetings conducted throughout the United

States. These town hall meetings are intended to provide basic

information to small businesses about fundamental requirements that

must be addressed when they wish to raise capital through the public

sale of securities. In addition, the Commission has learned and will

continue to learn more about the concerns and problems facing small

businesses in raising capital so that initiatives and programs can be

designed to meet their needs, consistent with the protection of

investors. To date, the Commission has held six town hall meetings

attended by more than 1,000 small business persons. The Commission

representatives will share information and ideas obtained from these

meetings with conference participants.

E. Securities Act Concept Release

The Commission issued a concept release during 1996 to solicit

comment on the best means of improving the regulation of the capital

formation process while maintaining or enhancing investor

protection.\19\ The Commission has been engaged in a broad

reexamination of the regulatory framework for the offer and sale of

securities under the Securities Act.

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\19\ Securities Act Release No. 7314 (July 25, 1996) [61 FR

40044].

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The concept release solicited comment on different approaches, such

as: the recommendation of the Advisory Committee on the Capital

Formation and Regulatory Processes that a ``company registration''

approach be adopted; modifications to the existing shelf registration

system (many of which were recommended by the Commission's Task Force

on Disclosure

[[Page 17656]]

Simplification); reforms that would liberalize the treatment of

unregistered securities; and an approach that would involve

deregulation of offers. Comment also was requested with regard to any

other approaches that should be considered. The comment period ended

October 31, 1996. The participants will discuss the conceptual issues

raised by the release and the comments received in response to such

release and consider the changes that should be made in the regulation

of securities offerings.

F. Report of the Advisory Committee on the Capital Formation and

Regulatory Processes

On July 24, 1996, the Advisory Committee on the Capital Formation

and Regulatory Processes (the ``Advisory Committee'') presented its

report to the Commission recommending the adoption of a company

registration system. The Advisory Committee recommended a fundamental

conceptual change in the scheme of regulation governing offerings by

public companies. The Advisory Committee advised the Commission to

shift the focus of the regulatory process for public offerings of

securities by these companies from a transactional registration system

to a company registration system, beginning with a pilot program. As a

part of this new approach, the Advisory Committee recommended

enhancements to the Exchange Act periodic reporting requirements. The

participants will consider the recommendations proposed by the Advisory

Committee, including the impact of such conceptual changes on the

coordination of federal and state securities regulation.

G. Disclosure Simplification

On March 5, 1996, the Commission published the Report of the Task

Force on Disclosure Simplification (the ``Task Force Report''). The

Task Force Report includes several recommendations intended to reduce

the costs of raising capital by both smaller and seasoned companies. In

addition, the Task Force Report includes a discussion on the ongoing

debate regarding the need to adapt existing Securities Act requirements

and related concepts to current market conditions. Since publication of

the Task Force Report, the Commission initiated implementation of

certain of the recommendations by eliminating 45 rules and four forms

that were viewed as redundant or otherwise no longer necessary \20\ and

published proposals to implement additional recommendations to

eliminate unnecessary requirements and streamline the disclosure

process.\21\

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\20\ Securities Act Release No. 7300 (May 31, 1996) [61 FR

30397].

\21\ Securities Act Release No. 7301 (May 31, 1996) [61 FR

30405].

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The conference participants will discuss the findings and

recommendations of the Task Force Report and consider the Commission's

proposals that would implement certain recommendations. Conferees will

consider how the Commission's proposals, if adopted, would impact the

system of dual federal and state regulation.

H. Plain English

One of major concerns of the Task Force on Disclosure

Simplification was the lack of readability of prospectuses and other

disclosure documents. The Task Force Report criticized prospectuses for

their dense writing, legal boilerplate and repetitive disclosures and

recommended using plain English disclosure to improve the readability

of prospectuses. The Commission on January 14, 1997 proposed several

rule amendments that would be a first step in implementing the Task

Force's recommendation.\22\ The proposals require the use of plain

English writing principles when drafting the front part of

prospectuses--the cover page, summary and risk factors sections of

these documents. Concurrently with the issuance of the plain English

proposal, the Commission's Office of Investor Education and Assistance

issued a draft copy of a handbook to help issuers write plain English

documents.

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\22\ Securities Act Release No. 7380 (January 14, 1997) [62 FR

3152].

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The Division of Corporation Finance is operating a pilot program

for companies that want to draft their documents in plain English. The

Division's staff works with volunteers on the techniques for designing

and writing plain English documents filed under either the Securities

Act or the Exchange Act. The company participants can draft plain

English documents and submit them to the staff for suggestions and

comments in a nonpublic forum.

Conferees will discuss the Plain English initiative, including

federal and state coordination needed to facilitate implementation of

the initiative.

I. Electronic Delivery of Disclosure Documents

The Commission has issued interpretive releases and rules

addressing the use of electronic media to deliver or transmit

information under the federal securities laws.\23\ These initiatives

reflect the Commission's continuing recognition of the benefits that

electronic technology provides to the financial markets. These releases

are premised on the belief that the use of electronic media should be

at least an equal alternative to the use of paper delivery.

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\23\ Securities Act Release No. 7233 (October 6, 1995) [60 FR

53458], Securities Act Release No. 7289 (May 9, 1996) [61 FR 24652].

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The participants will discuss the impact of electronic technology

on the capital formation process and consider the nature and extent of

regulatory changes to accommodate the use of such technology in

securities offerings. In particular, conferees will consider the

various approaches that have been taken by states and the Commission

relative to securities offerings on the Internet.

J. Internationalization of the Securities Markets

1. Foreign Issuers in the U.S. Market. Foreign companies raising

funds from the public or having their securities traded on a national

exchange or the Nasdaq Stock Market are generally subject to the

registration requirements of the Securities Act and the registration

and reporting requirements of the Exchange Act. The Commission has

provided a separate integrated disclosure system for foreign private

issuers that provides a number of accommodations to foreign practices

and policies. Foreign companies conducting securities offerings in the

U.S. continue to be subject to state regulation and review unless the

securities being offered are ``covered securities'' within the meaning

of the 1996 Act. The participants will discuss steps to increase

coordination of federal and state treatment of multinational offerings.

2. Regulation S. In 1990, the Commission adopted Regulation S \24\

to clarify the extraterritorial application of the registration

requirements of the Securities Act. The Commission intended for

Regulation S to make clear that registration of an offering of

securities under the Securities Act would not be required where the

offering takes place outside the United States and the securities

offered come to rest offshore. Following the adoption of Regulation S,

the Commission became aware of certain abusive practices under the

regulation. The Commission issued a release on February 20, 1997

proposing revisions to Regulation S to

[[Page 17657]]

prevent those abusive practices.\25\ The proposals include lengthening

the restricted period during which persons relying on the Regulation S

safe harbor may not sell equity securities into the United States from

40 days to two years (absent registration or a valid exemption) and

classifying equity securities placed offshore pursuant to Regulation S

as ``restricted securities'' under Rule 144. The proposals would apply

to offshore sales of equity securities of domestic issuers and of

foreign issuers where the principal market for those securities is the

United States.

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\24\ 17 CFR 230.901 through 230.904 and Preliminary Notes.

\25\ Securities Act Release No. 7392 (February 20, 1997) [62 FR

9258].

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Conferees will discuss the proposed changes to Regulation S, share

their experiences with Regulation S offerings and discuss steps to

increase coordination of federal and state regulation of such

offerings.

(2) Market Regulation Issues

A. National Securities Markets Improvement Act of 1996

1. State Licensing Requirements. The 1996 Act directed the

Commission to conduct a study of the impact of disparate state

licensing requirements on associated persons of registered broker-

dealers and the methods for states to attain uniform licensing

requirements for such persons. The Commission is required to consult

with the self-regulatory organizations (``SROs'') and the states, and

to prepare and submit a report to Congress by October 11, 1997. To this

end, Commission staff have been consulting with the SROs, NASAA, and

members of the securities industry. The initial goal is to determine

the extent to which state licensing requirements differ and the effect

of different state requirements and procedures upon associated persons

and broker-dealers. The next phase of the study will be to analyze the

need for and feasibility of requiring uniform state requirements

(through legislation or other means). The participants will discuss the

status of the study at the conference.

2. State Requirements for Exchange-Listed Securities. As noted

above, the 1996 Act amended Section 18 of the Securities Act to provide

an exemption from state blue sky laws and regulations for securities

that are listed on the NYSE, the AMEX, and the Nasdaq/NMS. The

amendments to Section 18 also allow the Commission by rule to designate

securities listed on other national securities exchanges as exempt from

state blue sky laws and regulations if the applicable listing standards

are substantially similar to those of the NYSE, AMEX, or Nasdaq/NMS.

Section 18 allows the Commission to adopt such a rule on its own

initiative or in response to a rulemaking petition. The Commission has

received rulemaking petitions from the Pacific Stock Exchange, Inc.,

the Chicago Board Options Exchange, Inc., and the Chicago Stock

Exchange, Inc. The participants will discuss these proposals and their

potential impact on NASAA members.

3. Broker-Dealer Books and Records. Section 103 of the 1996 Act

prohibits any state from imposing broker-dealer books and records

requirements that are different from or in addition to the Commission's

requirements. In addition, the same section directs the Commission to

consult periodically with state securities authorities concerning the

adequacy of the Commission's requirements. The Commission's current

proposal to amend Rules 17a-3 and 17a-4 \26\ originated in discussions

between NASAA representatives and the Commission about the adequacy of

the existing broker-dealer books and records requirements.\27\ The

proposed amendments clarify, modify, and expand the Commission's

record-keeping requirements with respect to purchase and sale

documents, customer records, associated person records, customer

complaints, and certain other matters. In addition, the proposed

amendments specify certain types of books and records that broker-

dealers must make available in their local offices. In consideration of

the substantial number of organizations that have expressed interest in

commenting on the proposed amendments, the Commission extended the

comment period until March 31, 1997. The participants at the Conference

will discuss the proposed amendments and the comments received.

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\26\ 17 CFR 240.17a-3 and 17a-4.

\27\ Securities Exchange Act Release No. 37850 (October 22,

1996) [61 FR 55593].

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B. Central Registration Depository (``CRD'') Redesign

The CRD system is a computer system operated by the National

Association of Securities Dealers, Inc. (``NASD'') that is used by the

Commission, the states and the SROs primarily as a means to facilitate

registration of broker-dealers and their associated persons. The NASD

is in the process of implementing a comprehensive plan to redesign the

CRD and to expand its use by federal and state securities regulators as

a tool for broker-dealer regulation. As a result of the NASD's efforts,

the redesigned CRD system ultimately is expected to provide the

Commission, SROs, and state securities regulators with: (i) Streamlined

capture and display of data; (ii) better access to registration and

disciplinary information through the use of standardized and

specialized computer searches; and (iii) electronic filing of uniform

registration and licensing forms, including Forms U-4, U-5, BD and BDW.

The NASD has been testing the pilot version of the redesigned CRD

since mid-1996, and this version is now in use on a trial basis at

approximately 800 broker-dealers nationwide. Among other things, the

participants will discuss the status of the CRD implementation process,

and issues relating to the conversion of existing registration

information to the redesigned CRD and electronic filing of uniform

forms.

C. Broker-Dealer Examinations

In December 1995, regulators responsible for examining broker-

dealers (NASAA on behalf of state regulators, the AMEX, the CBOE, the

NYSE, the NASD and the Commission) signed a Memorandum of Understanding

(``MOU'') in which they committed to undertake their regulatory

responsibilities in the most efficient and effective manner possible by

sharing information, coordinating examinations and identifying

regulatory priorities. As part of the MOU, NASAA, the SROs and the

Commission agreed to meet yearly for a national planning summit and

each state securities regulator, NASD district office and Commission

regional office agreed to meet at least annually for a regional

planning summit, to discuss examination schedules and priorities,

review broker-dealers' examination histories, and discuss other areas

of related interest, with the goal of encouraging information-sharing

to avoid unnecessary duplication of examinations. Common regulatory

findings and the status of this coordination and of the implementation

of the MOU will be discussed.

In March 1996, the Commission, NASAA, the NASD and the NYSE

released a report on the findings of a joint regulatory effort--``The

Joint Regulatory Sales Practice Sweep: A Review of the Sales Practice

Activities of Selected Registered Representatives and the Hiring,

Retention, and Supervisory Practices of the Brokerage Firms Employing

Them.'' The objectives of this joint initiative were to identify

possible problem registered representatives, to review their sales

practices, and to assess whether adequate hiring, retention, and

supervisory mechanisms were in place.

[[Page 17658]]

The findings of the report suggested generally that, while many firms

maintain satisfactory supervisory mechanisms, firms can and should

improve and strengthen their hiring, retention, and supervisory

practices. Consequently, the report contained specific recommendations

aimed at improving brokerage firms' hiring, retention, and supervisory

practices. The attendees will discuss implementation of the

recommendations.

D. Arbitration

The NASD and other members of the Securities Industry Conference on

Arbitration have been developing new approaches to important issues

affecting the administration of securities arbitration over the past

year. Much of their work was prompted by the 1996 report of the NASD's

Arbitration Policy Task Force. The participants will discuss the status

of some of the important developments in their area. For example,

proposed changes related to the variations in administering claims of

different dollar amounts, the administration of older claims, and

punitive damages are likely to be discussed.

E. Internet Fraud/Electronic Delivery

A leadership area of mutual interest to both the Commission staff

and NASAA is the impact of developments in technology. This year there

were ongoing discussions concerning a variety of new issues. Areas of

concern include: industry retention of electronic records and

communications; computer security; unregistered brokerage, investment

advisory and other regulated financial business conducted through the

internet; foreign exchange and foreign financial sector access to the

U.S. through electronic media; and industry and investor education

about the use of electronic media for the securities business. In 1996,

the Division issued no-action or information letters with respect to

certain financial business activities on the Internet, including

issuer-based bulletin board services,\28\ non-profit matching

services,\29\ and activities of on-line service providers (America

Online, Compuserve, and Microsoft).\30\ The Commission staff and NASAA

also have ongoing consultations on state securities law issues.

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\28\ Spring Street Brewing Co. (April 17, 1996); Real Goods

Trading Corp. (June 24, 1996); PerfectData Corp. (August 5, 1996);

and Flamemaster Corp. (November 6, 1996).

\29\ Angel Capital Electronic Network (October 25, 1996).

\30\ Charles Schwab & Co., Inc. (November 27, 1996).

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On May 9, 1996, the Commission published an interpretive release

expressing its views on the electronic delivery of documents that

broker-dealers, transfer agents, and investment advisers are required

to send to their customers.\31\ The conference participants will

discuss these and other matters concerning the Internet and the use of

electronic media.\32\

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\31\ Securities Exchange Act Release No. 37182 (May 9, 1996) [61

FR 24644].

\32\ See related discussion under Corporation Finance Issues,

supra page 13.

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F. Regulation M

On December 18, 1996, the Commission approved Regulation M,

representing the most sweeping changes in the way the Commission seeks

to prevent the manipulation of securities offerings since the

Commission adopted Rules 10b-6, 10b-7, and 10b-8 (also known as the

``trading practices rules'') over 40 years ago.\33\ Regulation M, which

became effective March 4, 1997, differs from the former trading

practices rules by focusing the restrictions on securities that are

more susceptible to manipulation; using better measures for

manipulative potential; recognizing the global nature of securities

markets; assimilating the changes in market transparency and

surveillance; and codifying a variety of earlier actions by the

Commission to adapt the former rules to current market conditions.

Regulation M addresses the concern that persons with a stake in a

securities offering, such as issuers, selling securityholders and

underwriters, might artificially influence the market price of the

security in distribution, thereby boosting its offering price. The

regulation seeks to prevent this result by restricting the activities

of these persons. In particular, Regulation M requires offering

participants to cease their market activities, such as proprietary

trading, during a restricted period that begins one or five business

days prior to the offering's pricing and ends when the offering is

over. A notable change from the trading practices rules, and one which

reflects the more focused approach of Regulation M, is that

underwriters of an actively-traded security of a larger issuer would

not be subject to these restrictions. Participants will discuss issues

raised by the new regulation.

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\33\ Securities Exchange Act Release No. 38067 (December 20,

1996) [62 FR 520].

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G. Order Execution Rules

In August of 1996, the Commission adopted Rule 11Ac1-4 \34\

(``Limit Order Display Rule'') and amendments to Rule 11Ac1-1 \35\

(``Quote Rule'') (collectively ``Order Execution Rules'').\36\ The

Limit Order Display Rule requires, under certain circumstances, the

public display of customer limit orders priced better than an exchange

specialist's or market maker's quote. The Limit Order Display Rule also

requires that specialists and market makers add limit orders priced at

their quote to the size associated with their quote when the quote

represents the best market-wide price. The rule establishes standard

display requirements for limit orders in all markets. The Quote Rule

was amended to require specialists and market makers to reflect in

their quote any better priced order that they enter into an electronic

communication network, or in the alternative, the electronic

communication network may route the best specialists' or market makers'

orders entered therein into the public quotation stream. In addition,

the Quote Rule was amended to require that substantial market makers

for any security listed on an exchange publish their quotations for

such security. The Order Execution Rules enhance the quality of public

quotations for equity securities and improve investor access to the

best prices available. The new rules also present investors with

improved execution opportunities and improved access to best prices

when they buy and sell securities. The participants will discuss the

new rules and their implementation.

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\34\ 17 CFR 240.11Ac1-4.

\35\ 17 CFR 240.11Ac1-1.

\36\ Securities Exchange Act Release No. 37619A (September 6,

1996) [61 FR 48290].

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H. Bank Securities Activities

Last year, the NASD submitted a rule proposal to the Commission

that would govern the conduct of member broker-dealers operating on the

premises of financial institutions. The NASD has since substantially

revised its rule proposal to address a number of issues raised by the

commenters, and expects to submit a revised rule proposal to the

Commission shortly. The participants will discuss the proposed rule

revisions, as well as other developments in this area, including a

proposal by the federal banking regulators to require bank employees

that sell securities directly to take certain qualification

examinations currently required of broker-dealer employees.

[[Page 17659]]

(3) Investment Management Issues

Title III of the 1996 Act (the ``Investment Advisers Supervision

Coordination Act'' (``Coordination Act'')) made several amendments to

the Investment Advisers Act of 1940, \37\ the most significant of which

reallocates federal and state responsibilities over investment

advisers. Under the new scheme larger advisers will principally be

regulated by the Commission, while smaller advisers the businesses of

which tend to be more local will be primarily regulated by the states.

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\37\ 15 U.S.C. 80b-1 et seq.

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Upon the effective date of the Coordination Act, an investment

adviser that is regulated or required to be regulated as an investment

adviser in a state in which it maintains its principal office and place

of business is prohibited from registering with the Commission unless

the adviser (i) has assets under management of not less than $25

million (or such higher amount as the Commission may, by rule, deem

appropriate), or (ii) is an adviser to an investment company registered

under the Investment Company Act of 1940. \38\ The Commission is

authorized to deny registration to any applicant that does not meet the

criteria for Commission registration and is directed to cancel the

registration of any adviser that no longer meets the criteria for

registration.

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\38\ 15 U.S.C. 80a-1 et seq.

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The Coordination Act preempts state investment adviser statutes as

they apply to investment advisers registered with the Commission. The

Coordination Act preserves, however, the ability of state regulators

to: (i) Investigate and bring enforcement actions against Commission-

registered advisers with respect to fraud and deceit, (ii) require

Commission-registered advisers to file notice documents with the state,

and (iii) require Commission-registered advisers to pay state

registration and other fees. State law is also preempted as to certain

``supervised persons'' of Commission-registered advisers, except that a

state retains the authority to register an investment adviser

representative that has a place of business in the state.

On December 20, 1996 the Commission proposed rules designed to

implement the provisions of the Coordination Act.\39\ The proposed

rules: (i) Address the procedures by which advisers not eligible to

register will identify themselves to the Commission and withdraw from

registration, (ii) exempt certain advisers that do not meet the

criteria from Commission registration from the new prohibition, and

(iii) define certain terms used in the statute. The comment period on

the proposed rules closed on February 10, 1997.

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\39\ Investment Advisers Act Release No. 1601 (December 20,

1996) [61 FR 68480].

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The conferees will discuss the Commission's rules as they affect

the allocation of regulatory responsibilities between the states and

the Commission. In addition, the conferees will discuss mutual concerns

regarding the implementation of the Coordination Act, including the

transition to the new regulatory scheme, the sharing of information

regarding the status of registrants, and arrangements for the provision

of technical assistance by the Commission including training,

conducting joint exams and sharing of information with respect to

investment advisers. In addition, state and federal regulators will

discuss the coordination of regulatory, examination and enforcement

activities subsequent to the effective date of the Coordination Act.

The conferees will also discuss progress with regards to the

development of a one-stop electronic filing system for investment

advisers, and the development of a system for investors to obtain

information regarding the disciplinary history of investment advisers.

(4) Enforcement Issues

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

regulators will discuss various enforcement-related issues which are of

mutual interest.

(5) Investor Education

The Commission is pursuing a number of programs for investors on

how to invest wisely and to protect themselves from fraud and abuse.

The states and NASAA have a longstanding commitment to investor

education and the Commission is intent on coordinating and

complementing those efforts to the greatest extent possible. The

participants at the conference will discuss investor education and

potential joint projects in some of the working group sessions.

(6) General

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

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

electronic disclosure system, rulemaking procedures, training and

education of staff examiners and analysts and sharing of information.

The Commission and NASAA request specific public comments and

recommendations on the above-mentioned topics. Commenters should focus

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

would enhance uniformity in the existing scheme of state and federal

regulation, while helping to maintain high standards of investor

protection.

Dated: April 4, 1997.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97-9204 Filed 4-9-97; 8:45 am]

BILLING CODE 8010-01-M