Securities Uniformity; Annual Conference on Uniformity of Securities Laws

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

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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

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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

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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

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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