« PreviousContinue »
the terms “broker” and “dealer” have the same meanings as in section 3 of the Securities Exchange Act of 1934; and
with respect to the term “investment adviser”
such term shall have the same meaning as in section 202(a)(11) of the Investment Advisers Act of 1940 if the investment adviser subsidiary is registered with the Securities and Exchange Commission under section 203 of the Investment Advisers Act of 1940; or
(B) such term shall have the same meaning as defined in the
State law of the State in which the investment adviser has its principal place of business if the investment adviser subsidiary is ineligible to register with the Securities and Exchange Commission under section 203 of the Investment Advisers Act of 1940 and is instead registered with
appropriate state authorities. The bifurcated definition of “investment adviser” is necessary because of the bifurcation in oversight resulting from the National Securities Markets Improvement Act of 1996.
Because NASAA's members are devoted to consumer protection, NASAA recognizes the importance of the consumer protection provisions contained in Section 176 of H.R. 10, which would add to the Federal Deposit Insurance Act a new Section 47 dealing with customer service and education issues. In light of the States' commitment to consumer protection and experience in administering securities laws, NASAA respectfully requests that State securities administrators be added to the consultation provisions in proposed new Section 47(a)(3).
In addition, NASAA is concerned that States will have neither notice of, nor an opportunity to be heard on, the preemption of State law by the joint regulations prescribed by the federal financial institutions regulators. Specifically, proposed new Section 47(1)(2)(B) of the Federal Deposit Insurance Act provides that such joint regulations will preempt State law if the federal financial institutions regulators determine jointly that the "protection afforded by such provisions for consumers is greater than the protection provided by a comparable provision" of State. While NASAA wholeheartedly agrees that the strongest consumer protection standard should govern, it offends notions of due process and fundamental fairness that federal authorities could preempt State law without public notice and an opportunity to be heard.
Consequently, NASAA would respectfully request that publication in the Federal Register and a public comment period be required. This could be accomplished by adding the following to the end of proposed new Section 47(1)(2)(B):
Provided, however, that such joint determination shall not be effective unless such joint determination is made after notice of such joint determination is published in the Federal Register and subject to public comment for a period of not less than sixty days.
NASAA agrees completely with eliminating the blanket exemption for banks in the definition of "broker" under the Securities Exchange Act of 1934. However, NASAA remains concerned that the approach taken by Section 201 of H.R. 10 creates a series of exceptions that swallow the general rule. NASAA's specific concems are as follows:
NASAA fully supports this exception, but respectfully suggests that it can be improved by being moved in line with the existing standards in this area. In particular, in February 1998, the National Association of Securities Dealers ("NASD") "bank broker-dealer rule," Rule 2350, took effect. In October 1998, the NASAA membership approved Model Rules for Sales of Securities at Financial Institutions, which track NASD Rule 2350. Both NASD Rule 2350 and the NASAA Model Rules address the issues relevant to third-party brokerage arrangements. namely; setting and physical separation, brokerage agreements and program management, customer disclosure and acknowledgment, communication with the public, and notice of termination. NASD Rule 2350 resulted after nearly three years of input from the banking and securities industries on how to properly regulate third party brokerage activities. Because NASD Rule 2350 represents a well-developed and well-reasoned approach, NASAA respectfully suggests that the third-party brokerage arrangement exception as proposed in new Section 3(a)(4)(B)(i) of the Securities and Exchange Act of 1934 be amended to include either a cross reference to NASD Rule 2350 or a list of the exact provisions contained in NASD Rule 2350.
NASAA does not object to codifying that banks engaged in traditional trust activities are excepted from the definition of "broker." However, NASAA is concerned that proposed Section 3(a)(4)(B)(ii), as drafted, permits banks to engage in activities exceeding those of traditional trust activities, without providing investors the protections of the federal and State provisions governing the conduct of investment advisers. The effect of the proposed exception for certain "trust" activities, including the extension of the exception to an "other department that is regularly examined by bank examiners," coupled with the solicitation activities permitted under this exception, is to permit banks to solicit publicly advisory business from deposit-holders and non-deposit-holders, devoid of the substantive federal and State regulation under the securities laws. NASAA respectfully suggests that the proposed limitless solicitation of advisory business be narrowed.
The language regarding solicitation activities now limits the activities to those banks that do not "publicly" solicit brokerage business. NASAA would note that this language, while appearing to limit a bank's solicitation activities, now would permit banks' brokerage businesses to actively solicit deposit holders in a non-public fashion).
NASAA respectfully recommends that the proposed new Section 3(a)(4)(B)(ii)(II) be revised as follows.
(II) does not publiely-solicit brokerage business, other than by
NASAA respectfully believes that the exception set out in proposed Section 3(a)(4)(B)(vii) falls short of establishing true functional regulation for private securities offerings. Documented sales practice abuses have occurred in private placement transactions, and investors need the assurance that the intermediary who is selling the security is trained and subject to the obligations applicable to other broker-dealers. To afford true functional regulation in this area, the securities should either be required to be sold through a registered broker-dealer, or in the alternative, to at least require bank employees to take and pass the examination contemplated in Section 203 of H.R. 10, which would add Section 15A() to the Securities Exchange Act of 1934.
NASAA is pleased with Section 3(a)(4)(B)(vii)(II), since NASAA believes that, to the extent a bank maintains an affiliation with a broker-dealer firm, all private placements be effected through that broker-dealer rather than through the bank itself. However, NASAA would respectfully suggest that the existing language creates little incentive for a bank to establish an affiliation with a broker-dealer firm through whom to channel these securities transactions.
NASAA believes that the registration and regulatory provisions provided under the Securities Exchange Act of 1934, State provisions, and self-regulatory organization rules are critical components of the investor protection equation. Regulators use these provisions to monitor the activities of broker-dealers and to screen out those entities and individuals that should not be permitted to engage in the offer and sale of securities in our markets. NASAA is also concerned that, by excusing banks from compliance with virtually all of the Securities Exchange Act of 1934 registered broker-dealers will suffer a significant competitive disadvantage when seeking to distribute securities in a nonpublic offering.
d. De Minimis Exception. NASAA continues to oppose the de minimis exception in proposed Section 3(a)(4)(B)(x). By allowing securities transactions to occur outside the established complementary State/federal securities oversight framework, the exception is inconsistent with true functional regulation and creates an unlevel playing field.
Nonetheless, if the de minimis exception is to be included in H.R. 10, NASAA respectfully suggests that the de minimis be in terms of customers, rather than transactions.
Underlying the de minimis exception seems to be the belief that banks should be allowed to carry out a certain few securities transactions as an accommodation for certain bank customers. Accordingly, a de minimis exception based on the number of customers seems more logical. Further, "customers" are more easily counted. "Transactions" is an amorphous concept not generally defined in the securities laws. Confusion would certainly arise as to what activity constituted a "transaction."
In contrast, it is clear who constitutes a customer. Support for this approach can be gleaned from the National Securities Markets Improvement Act of 1996, where Congress defined certain investment adviser de minimis standards in terms of people, not transactions.
Specifically, NASAA suggests that the de minimis be set at one hundred customers. In suggesting this number, NASAA started with the fact that the de minimis exception is designed to allow smaller, typically rural banks to undertake securities transactions as an accommodation and convenience for certain customers. From that starting point, it is reasonable to assume that small banks have about 2,000 customers. Using the general banking industry guidelines that 20% of an institution's depositors account for 80% of an institution's deposits, there would be 400 customers who would be larger depositors of a 2,000 depositor institution. It is safe to assume that these 400 larger depositors would be more likely to engage in securities transactions. And since the exemption is designed to be “de minimis” in nature, it would be reasonable to permit transactions for up to 100 or 25% of those customers.
Thus, NASAA would propose that the de minimis exemption read as follows:
The bank effects transactions in securities on behalf of not more than 100 customers in any calendar year; provided that such transactions are not effected by an employee of the bank who is also an employee of a broker or dealer; and provided further that prior to executing the first securities transaction in any calendar year on behalf of a customer under this de minimis exception, the bank obtains from the customer a written acknowledgement indicating the customer understands that the bank executing securities transactions on behalf of the customer within the de minimis exception to the federal definition of “broker”, and the consequences thereof.
The written acknowledgment is designed to assist the bank in accounting for the number of transactions within the de minimis.
6. The Importance of Registration for Sales of Private Securities Offerings.
NASAA fully supports Section 203 of H.R. 10, which would add to the Securities Exchange Act of 1934 Section 15A() requiring the NASD to create a limited qualification category for an associated person of an NASD member firm effecting nonpublic securities
transactions. While this provision creates a limited registration category for associated persons of member firms, it would presume such qualification if the same individual happened to be distributing the same securities not for a broker-dealer but for a bank.
а It would appear that this provision is added to permit associated persons of NASD member firms to engage solely in the distribution of securities through a nonpublic offering without having to undertake full registration as a registered representative. It is NASAA's observation that very few registered representatives engage solely in the distribution of private placements. Additionally, it would appear that bank employees would be "grandfathered" from any examination requirement. However, Section 203 does not appear to require the "nongrandfathered" bank employees to satisfy any qualification requirements to distribute these securities.
This provision would appear to place NASD member firms at a competitive disadvantage with banks in the private placement market. It is assumed that, like other limited examinations, the examination is a "subset" of the Series 7 examination. Broker-dealer representatives would be permitted to take this limited examination. However, bank personnel effecting the same transactions would not be required to take this examination, even though the conduct in which they would be engaged could be identical to that of the broker-dealer representative. There exists no other provision of the federal securities laws or of H.R. 10 that would place any requirements or registration upon these bank personnel. To provide some minimal protections for the depositor/investor, NASAA believes it imperative for bank personnel to at least be required to take this limited qualifying examination.
The mechanism that would provide for true functional regulation would be to require the NASD to create this limited qualification examination, but require associated persons of member firms and bank personnel to take and pass this qualification examination (or be qualified under a more comprehensive examination, such as the Series 7) prior to effecting transactions in securities not involving a public offering. NASAA believes that the following language would address this issue:
Registration for Sales of Private Securities Offerings. A
As a practical matter, the NASD currently administers qualifying examinations for individuals not associated with a member firm, and thus would appear capable of administering this new examination for members and non-members alike. For example, NASAA would note that individuals not affiliated with a member firm could, in certain circumstances, sit for the Series 7 examination, which is owned jointly by the NASD and New York Stock Exchange. NASAA would note that little reason exists to excuse bank personnel from sitting for a qualification examination as a prerequisite of effecting private securities transactions. It would appear that the exception in proposed Section 3(a)(4)(B)(vii) of the Securities Exchange Act of 1934 could be conditioned upon the transaction being effected either through a registered brokerdealer or through a bank employee that has passed a qualifying examination:
(II) at any time after one year after the date of enactment of the
(III) is effected solely by bank employees that have attained a
passing score on the qualification examination created pursuant to
All}(VI) effects transactions exclusively with qualified investors.
NASAA fully concurs with the removal of the concept of "derivatives" from the definition of "traditional banking product" set out in Section 205 of H.R. 10. This section now appropriately lists items in which banks have historically dealt. NASAA has one aditional investor protection concern with Section 205, and that is that Section 205(a)(5)(B) would permit loan participations to be sold to non-qualified investors. The sale of loan participations presents the opportunity to shift the risk of bank loans, defaulting mortgages or insolvent borrowers onto investors. Consequently, only those investors meeting the financial standards of being a "qualified investor" should be permitted to purchase these products.
As a result, NASAA respectfully suggests that Section 205(a)(5)(B) be deleted.
In general, NASAA believes that the definition of "qualified investor," set out in Section 206 of H.Ř. 10, sets out an appropriate standard for persons and entities who can "fend for themselves" when making investment decisions. However, NASAA remains concerned with the relatively low threshold of $50,000,000 in investments for governmental entities.
NASAA is concerned that many county and local governments will meet this threshold yet not possess the sophistication or knowledge to be appropriately deemed "qualified investors." This relatively
low standard and the absence of any required professional management make this part of the definition, NASAA believes, inadequate. Many state, county and local government pensions are advised by volunteers, or elected or appointed officials who are not principally engaged in the business of investment management. Requiring that professionals manage the investments, or that the investments be of a size where the fund will be professionally managed as a matter of course, would greatly decrease the likelihood that entities that sell to qualified investors will later become defendants in securities suits alleging unsuitable recommendations or other violations of the securities laws.
To remedy this problem, NASAA would respectfully suggest that governmental entities be treated as "qualified investors" only if a registered broker-dealer, investment adviser, insurance company,
or insured depository institution professionally manages the investments. In the alternative, NASAA would respectfully suggest that this classification of qualified investor be required to own and invest a greater quantity of investments, such as $250 million. This higher threshold would greatly increase the likelihood that professional advisers manage the portfolio, due to its size. Language addressing this issue could appear as follows:
(xiii) any governmental or political subdivision, agency or
instrumentality of a government who owns and invests on a
9. True Functional Regulation of Banks wbo act as Investment Advisers.
To provide for true functional regulation over persons providing investment advice to others for compensation, NASAA would respectfully suggest an amendment to the definition of "investment adviser" found at Section 202(a)(11) of the Investment Advisers Act of 1940, in