Recommendations Submitted for the Securities Markets Enhancement Act



Recommendations Submitted for the Securities Markets Enhancement Act

Securities Act of 1933:

1. National market treatment for certain securities --

2. Repeal of state fees for covered securities -- Eliminate state filing and fee requirements for secondary market transactions.

3. Covered securities -- Amend Section 18(b) to give the SEC the authority to include as "covered securities" those securities listed on automated quotation systems operated by national securities associations and those with similar listing standards.

4. Non-issuer transactions effected by a registered broker-dealer in foreign securities eligible for Federal Reserve margin rules -- Add non-issuer transactions in these securities effected by a registered broker-dealer as "covered securities" under Section 18(b) of the 1933 Act and for which no notice filing or fee could be required.

5. Maximum dollar limitation in Section 3(b) of the 1933 Act -- Increase the maximum dollar limitation for exemption from registration of small offerings under Section 3(b) from $5,000,000 to $10,000,000.

6. Statement of policy -- Instruct the SEC to adhere to the following fundamental principles when carrying out its rulemaking and oversight responsibilities under the federal securities laws: (1) competitive market forces should be permitted to shape market structure and participant behavior without undue government involvement, and (2) that the regulatory framework for the national securities markets should foster responsibility and accountability by all market participants, including brokers, dealers, issuers, and investors for the regulation of the nation's bond markets.

7. Offerings of foreign political subdivisions filing on SEC Schedule B -- Add offerings of foreign subdivisions as "covered securities" under Section 18(b) of the 1933 Act.

8. Clarification of state filings -- Clarify that states retain the authority to require fee payments and notice filings of all parts of Form D and the Appendix. In addition, states also retain anti-fraud authority over all securities offerings, including offerings of covered securities.

9. Disqualification provisions in Rule 506 offerings -- Prohibit preemption of state action on Rule 506 offerings if the issuer, the issuer's predecessors, affiliates, directors, officers, general partners, beneficial owners or underwriters (or any partner, director, or officer of any such underwriter) has been convicted of securities fraud or are subject to an administrative action or restraining order in connection with securities fraud.

Securities Exchange Act of 1934:

1. Eliminate daily confirmation obligations of broker-dealers and other financial institutions -- Require the Secretary of the Treasury to revise rules issued pursuant to Section 15C to allow customers of hold-in-custody repurchase transactions to waive the requirement that they receive daily written confirmation of which securities are subject to such repurchase agreement.

2. Modernization of electronic brokerage account disclosures -- Direct the SEC, the exchanges, and SRO's to update their rules for internet accounts (for example, to allow customers using electronic brokerage accounts to waive the requirement that the brokerage firm send them written quarterly account statements).

3. Bank employee securities qualification requirements -- Direct the NASD, SEC, and the bank regulators to issue rules requiring bank employees engaged in retail sales of non-deposit investment products to pass Series 6 or 7 securities licensing exams, whichever is appropriate, as a precondition for selling securities.

4. Prohibition of regulation of dealer compensation -- Prohibit the SEC, NASD, SRO's, and the states from directly or indirectly regulating dealer markups and profits on debt securities.

5. Designation of primary self-regulatory authority -- Direct the SEC to designate one SRO to examine broker-dealer firms, and to have that primary SRO enforce the rules of all other SRO'S.

6. Limitation on state licensing for associated persons --

7. Uniform state registration requirements for brokers or dealers --

8. Limitation of moral hazard incentives -- Restrict state law recission remedies in cases where a broker-dealer, or its associated person, is in violation of a state registration requirement, but has otherwise committed no misconduct. This provision would not apply where fraud or other serious misconduct is involved, or where the failure to register persists for more than one year.

9. Elimination of duplicative enforcement actions -- Prohibit states from filing civil actions or administrative proceedings seeking financial penalties based on previous actions by the SEC or an SRO if (1) the action is brought against the same party for the same underlying conduct, and (2) the SEC action resulted in a judgment or consent to pay a financial penalty which was paid in a timely manner.

10. Reporting transactions by corporate officers -- Repeal Section 16 provisions that prohibit trades by corporate officers within 6 months of purchase. Section 16(a) should be retained and amended to accelerate the timing of reports to within 10 days after an insider transaction.

11. Streamlining SEC processing of SRO rules -- Define the time period (within 10 days of filing) which the SEC has to publish for comment proposed rule changes sought by SRO's. Require the SEC either to (1) approve the SRO rule change within 35 days of the close of the comment period, or (2) institute a maximum 90 day proceeding process (that can be extended by 30 days for good cause) on whether the rule should be disapproved. Approval would be automatic if no action is taken within 35 days of the close of the comment period.

12. Exempt transactions on after-hours crossing sessions from payment of Section 31 transaction fees -- Prohibit the imposition of Section 31 fees on transactions taking place at times of low volume and during non-traditional trading hours.

13. Improve access to public information at the SEC -- Require the SEC to include on its internet website (1) all matters open to public comment and all comments received, (2) all rule filing by SRO'S, all public comments on such rule filings, and all SEC actions on such rule filings, (3) all "no action" letters. Also, require the SEC to report to Congress within 3 months on its progress to comply with this requirement.

14. Eliminate registration requirement for exchange-listed bonds -- Exempt bonds that are traded on an exchange from registration with the SEC.

15. Disclosure of disciplinary actions -- Give internet website disclosures by registered securities associations the same immunity protection currently applied to their disciplinary-action hotlines. Immunity should be extended to disclosure of other proceedings and information as well.

16. Definition of "exchange" -- Limit the definition of "exchange" to entities that provide purchasers and sellers with a reasonable expectation of liquidity. Direct the SEC to repeal the rules and rule amendments promulgated in its rulemaking on alternative trading systems. Commission a study by the SEC of possible alternative approaches to regulating electronic trading systems.

17. Simplification of providing written materials pertaining to securities offerings -- Permit issuers and underwriters to provide institutional and other accredited investors with written materials ( prior to delivery of the final prospectus) regarding securities that are the subject of a public offering. Mandate that the SEC adopt, within 180 days, exemptive rules under the Securities Act to enhance the process for offering debt and other fixed-income securities, particularly mortgage and asset-backed securities. These rules shall permit issuers and underwriters to provide accredited investors with term sheets, computational materials, and similar written information prior to delivery of a prospectus, without filing or otherwise incorporating such written information into the registration statement for a public offering.

18. Margin reform -- Exclude extensions of credit to institutional investors and extensions of credit in connection with debt securities from Section 7 margin rules. Direct the SEC to approve the NYSE's proposed rule amendments respecting the margin requirements for non-equity securities in SEC Release No. 34-40278. Establish an inter-agency task force to study and develop specific recommendations for revising the current structure of SRO margin regulation, including the expansion of permissible cross-margining of customer positions.

19. Institutional investor responsibility and accountability -- Require the SEC and SRO'S to review and to take action to exempt or modify the application of existing rules as applied to "institutional investors," based on the definition of "qualified purchaser" adopted by Congress in recent amendments to the Investment Company Act.

20. Suitability reform -- Provide that an SRO's suitability rules may not make a broker-dealer responsible for an investment decision of an institutional investor unless the broker-dealer has agreed that its recommendations will be relied upon as being suitable. Amend Section 15 of the Exchange Act to establish a rebuttable presumption that a broker-dealer is not liable for the investment decisions of institutional investors. Amend Section 15(h)(1) of the Exchange Act to preempt state suitability requirements for broker-dealers to the extent they differ from or add to suitability obligations imposed by the SEC or the SRO's.

21. Church pension plans -- Clarify that the list of entities (church employee pension plans) contained in section 3(g)(1) is consistent with the comparable list in subsection 3(g).

22. Issuer agents in Rule 506 offerings -- Establish uniform treatment for issuer-agents in Rule 506 offerings so that individuals who do not receive compensation in conjunction with soliciting a person in connection with a Rule 506 transaction would not be considered an issuer-agent.

23. Cap of Section 6(b) filing and Section 31 transaction fees -- Prohibit the collection of Section 6(b) filing fees in excess of the total amount collected in fiscal year 1999, and prohibit the collection of Section 31 transaction fees in excess of the total amount collected in fiscal year 1999.

24. Charitable gift annuities -- Amend Section 3(e) to clarify that a person who presents and closes a charitable gift annuity transaction is not subject to the broker-dealer provisions of the Securities Exchange Act.

25. Registration exclusion of qualified purchasers -- Exclude any security of an issuer that is excluded from the definition of an investment company under section 3(c)(7) of the Investment Company Act from Section 12(g)(2).

Investment Company Act of 1940:

1. Funds of funds -- Clarify that limits on the ability of one fund to invest in another (so-called funds of funds) apply to unregistered funds.

2. SEC review of affiliated transactions -- Direct the SEC to reevaluate Sections 17(a) and 17(d) and determine if these provisions hinder transactions that are in the best interests of fund shareholders. The SEC would determine whether to adopt or amend rules, or issue interpretations, that would permit transactions that are beneficial to shareholders (but which are currently prohibited).

Investment Advisers Act of 1940:

1. Authority to deny or revoke registration based on state (and other governmental) administrative actions -- Allow the SEC to deny registration of investment advisers based on state administrative proceedings, as well as actions taken by state banking regulators, state insurance regulators, and federal banking regulators.

2. Bars on persons associated with investment advisers -- Authorize the SEC to bar felons from serving as persons associated with investment advisers.

3. Enhance public disclosure over the internet -- Provide the NASD with the ability to extend its public disclosure of broker disciplinary history to its internet website, while maintaining its immunity from liability for actions it takes or omits in good faith. In addition, it would permit the SEC to designate an entity, such as the NASD, to establish an investment adviser public disclosure system.

4. Extend national de minimis standard to federally registered advisers -- Clarify that the national de minimis threshold (prohibiting states from regulating advisers who do not have a place of business in the state and who advise fewer than six clients in the state) applies to federally registered advisers.

5. Prohibit state notice filing and fee requirements on certain investment adviser representatives -- Amends Section 203A of the Investment Advisers Act to prohibit states from collecting information or fees from investment adviser representatives of federally registered investment advisers that do not have a "place of business" in the state.

6. Vestigial provisions in Investment Advisers Act -- Make the limitations on advisory contracts contained in Section 205 inapplicable to advisers not registered or not required to be registered with the SEC.

7. Restrict state notice filings to Form ADV and amendments thereto -- Clarify that states may require federally registered investment advisers to notice file only Form ADV and amendments thereto.

8. Require states to participate in one-stop filing system -- Require any state that wishes to impose notice filings or fee requirements on SEC-registered investment advisers, or their employees, to participate in the one-stop filing system currently being designed by the SEC and NASAA.

9. Investment adviser books and records -- Prohibit states from requiring, in addition to requirements imposed by the state where the adviser maintains its principal place of business, "financial reporting requirements," "examination requirements," and "disclosure requirements."

10. Definition of "place of business" -- Amend Section 202(a) by redefining a "place of business" as an office at which the investment adviser regularly provides investment advisory services.

11. Limitation on state regulation of federally regulated persons -- Amend Section 203A(b) of the Advisers Act by prohibiting state registration requirements of any person as an investment adviser, person associated with an investment adviser or supervised person of an investment adviser if the entity is (1) associated with a broker or dealer that is registered with the SEC and registered as an investment adviser with the SEC, (2) registered with a national securities association, and (3) registered with the state as an associated person of a broker or dealer. Registration may be required if the person is banned or suspended by the SEC, has been denied association with a member of a national securities exchange, or has been denied membership with a member by a national securities association.

12. Streamlining procedures for registering state-regulated investment advisers -- States may only require licensing or registration of investment advisers, persons associated with an investment adviser or supervised person of an investment adviser if the requirements (1) do not differ or are in addition to registration requirements of the SEC, and (2) do not require filing of disciplinary and other disclosure records that are readily available through a national securities association.

13. Limitation on state notice filings and fees for federally registered investment advisers -- Prohibit states from requiring the filing of any document (with the exception of documents filed with the SEC) by an investment adviser registered with the SEC or by any person associated with such an investment adviser or a supervised person of such an investment adviser, and further prohibit states from requiring the payment of any fee by such a person, if such person does not have a "place of business" in the state.

14. Transactions by investment advisers -- Permit affiliates of investment advisers to enter into transactions otherwise prohibited by Section 206(3), provided 1) appropriate "firewalls" are in place to control information flow, 2) the client has give its prospective consent to such transactions, and 3) either the security involved is an investment grade debt security or the client is a "qualified purchaser" under the Investment Company Act of 1940.

15. Internet related firm exclusion -- Exclude any internet related business (that is not primarily engaged in the business of investing, reinvesting, owning, holding, or trading securities) from the definition of an investment company.

16. SEC review of Advisers Act -- Direct the SEC to identify those rules under the Advisers Act that have become unnecessary, outdated, or have resulted in undue expense or compliance difficulties for registered advisers, particularly smaller advisers, in light of changes to the investment advisory industry since 1940. The SEC should then amend, adopt or repeal those provisions.

Proposals that Affect Multiple Acts:

1. SEC report on the SRO benefits and costs -- Direct the SEC to study the benefits and costs of SRO's. The SEC should also evaluate the merits of SRO's "spinning off" their regulatory functions to become for-profit entities.

2. Electronic Securities Transactions Act (the text of S. 921) -- Provide a framework for the use of electronic signatures in securities transactions.

3. State enforcement actions as basis for SEC actions -- Specify certain state actions which the SEC may rely upon to impose sanctions or seek relief authorized by federal law.

4. Higher sanctions for aggravating circumstances -- Enact higher civil penalties where aggravating circumstances are present in a violation of federal securities laws.

5. Wholesale dealers -- Create a new regulatory framework for the regulation of wholesale dealers that eliminates or reduces margin and suitability requirements, as well as permits the use of more flexible and modern regulatory capital measurements.

6. Net capital reform -- Establish a task force to study and develop specific recommendations for revising the current net capital rule -- including the potential for taking into greater account modern portfolio theory, value-at-risk models, and internal valuation techniques as the basis for regulatory capital adequacy directives -- with a view toward eliminating competitive disparities between broker-dealers and other domestic and foreign financial institutions.

7. Issuance of municipal securities -- Require a study by the SEC regarding alternative legislative approaches to improve the quality, timeliness, accessibility and efficiency of disclosure in connection with the issuance of municipal securities. The study should include the feasibility of imposing disclosure standards on municipal issuers that are functionally comparable, but not necessarily identical, to those imposed on corporate issuers under the federal securities laws.

8. Cost/benefit analysis -- Direct the SEC to implement rules requiring, in connection with the making of rules and regulations and the review of proposed SRO rule changes under the federal securities laws, a cost/benefit analysis. The analysis should consider, among other issues, the cumulative impact of regulatory initiatives imposed during any regulatory cycle. Mandate an empirical study by the General Accounting Office of the accuracy of cost/benefit analysis undertaken by the SEC and SRO'S.

9. Duplicative regulation -- Require a study by the SEC of possible approaches to minimizing the duplicative regulation of the securities markets among federal and state agencies, and SRO'S.

10. Fair notice of regulation -- Amend the federal securities laws to prohibit the imposition of sanctions for any regulatory violation if the person was justifiably unaware that his or her conduct violated the regulation.

11. Commencement of enforcement proceedings -- Amend the federal securities laws to require that the SEC shall 1) provide persons under investigation with adequate notice (not less than 30 days) prior to any determination by the SEC to commence an enforcement action against them, 2) afford such persons an opportunity to review and to submit a response to the written enforcement recommendation of the SEC staff, and 3) consider any submissions made by such person in determining whether to commence an enforcement proceeding. Alternatively, mandate the adoption by the SEC of new procedural rules that would afford potential defendants a more effective opportunity to provide informed views to the Commission prior to a determination to commence an enforcement proceeding.

12. Micro-cap fraud legislation (the text of S. 1189) -- Broaden the penny stock bar to prevent a barred penny stock promoter from participating in a micro-cap offering (in this case, any offering other than investment company securities or those traded on the NYSE, AMEX, or NASDAQ NMS). Broker-dealers would have to review information about micro-cap stocks before selling them. Authorize the SEC and the courts to take direct enforcement action against parties who violate a court order by barring them from serving as an officer, director or promoter of any publicly traded company. Also, authorize the SEC to take administrative actions against barred individuals who associate with municipal securities broker-dealers, government securities broker-dealers, or clearing agents.

13. Federal funds for state internet fraud enforcement -- Provide federal funding for state regulation of securities fraud on the internet.

14. Investor arbitration -- Provide investors with the option to have disputes heard in a neutral arbitration forum or before a state securities agency administrative law judge.

15. SIPC coverage -- Extend SIPC coverage to investors for loss due to fraud or uncollectible arbitration awards, judgments, and settlements.

16. Federal funding for do-not-call databases -- Authorize federal funding for centralized "do-not-call databases" that list citizens who does not want to answer telephone calls from broker-dealers. Require firms wishing to make cold calls to check a quarterly update of the database.

17. NYSE authority over municipal bonds -- Provide the NYSE with the authority to discipline members for violations of MSRB rules.

18. Online investor legislation (the text of S. 1015) -- Require online brokerages to (1) make quarterly disclosures of any system outages that prevented or materially delayed execution of transactions and steps taken to prevent such outages, (2) disclose information regarding risk of loss that is unique to online trading, and (3) maintain links to SEC investor education and fraud prevention websites. Also, double civil money penalties for internet related violations of federal securities laws. Require the SEC to study the effects of retail securities trading over the internet, including whether "day trading" poses a greater risk of fraud and increases volatility as well as the quality of execution through online brokers. Furthermore, authorize $70 million for each of FYs 2000-2004 for the SEC's Office of Internet Enforcement.

19. Hedge fund regulation (President's Working Group recommendations) -- Require hedge funds to disclose additional up-to-date information to the public. Provide the SEC, CFTC, and Treasury with expanded risk assessment authority over unregulated affiliates of broker-dealers and futures commission merchants.

20. Netting reform (the text of S. 958) -- Improve bankruptcy code provisions regarding the netting of financial contracts. Specifically, encourage the netting of financial contracts by expanding the institutions and contracts eligible for netting, and strengthen the netting provisions applicable to the FDIC as conservator or receiver for a failed depository institution.



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