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92-68 Federal and State Legislative Update


Senior Management
Legal & Compliance
Mutual Fund
*These are suggested departments only. Others may be appropriate for your firm.


The second session of the 102nd Congress, which adjourned on October 9, 1992, passed only one major bill of direct interest to the securities industry, the Futures Trading Practices Act. Other proposed securities legislation involved government securities, limited partnership rollups, investment advisers, and mark-to-market securities inventory accounting. This Notice describes these bills, the NASD interest in them, and their status, including the likelihood of action in the next Congress. In addition, this Notice describes NASD activities with the states and the North American Securities Administration Association (NASAA).

The NASD's Office of Congressional and State Liaison monitors legislation that affects the NASD in particular and the financial services industry in general. At the federal level, it tracks legislation, coordinates testimony, gives technical legislative drafting assistance, and serves as a focal point for contact with the NASD by congressional members and staffs. It provides similar, though limited, legislative functions at the state level and is involved in the state regulatory process through state securities commissioners and NASAA.

If you need further information about the following bills, or have information about federal or state legislation or rules regarding securities regulation that you believe is of interest to the NASD, please call the Office of Congressional and State Liaison at (202)728-8248.


• Government Securities Act Amendments — When Congress passed the Government Securities Act (GSA) in 1986, it gave the NASD limited authority to regulate the financial condition of government securities broker/dealers. However, the GSA still prohibited the NASD from applying its sales-practice rules to transactions in government securities, which include treasury bills and bonds as well as securities issued by government sponsored agencies such as GNMA and FNMA. Given the increasing complexity and risk involved in government securities and their derivatives (such as STRIPS and CMOs), which have been more popular in recent years, the NASD has sought to have the statutory prohibition against sales-practice regulation removed.

The GSA was due to expire at the end of 1991, and in January 1991 a Senate bill was introduced to reauthorize the GSA and give the NASD sales-practice authority with SEC and Treasury oversight. Granting the NASD this sales-practice authority over the sales of government securities by its members was supported by the SEC, Treasury, and the Government Accounting Office (GAO) as a necessary protection for investors. The bill passed the Senate in July 1991.

After the Salomon Brothers disclosures in the government bond market surfaced in August 1991, the Senate and House held numerous hearings — at which the NASD testified — in September, and the Senate passed a second bill that month, clarifying the SEC's anti-fraud authority over the government securities auction. In November, the House Energy and Commerce Committee introduced a bill that included NASD sales-practice authority, quotation and transaction reporting for regulatory purposes, and SEC backstop authority for public dissemination of government securities information. The controversy surrounding these additional provisions prevented passage of the bill, and the Treasury's authority to write new rules for the government market expired.

In June, both the House Energy and Commerce Committee and House Ways and Means Committee approved the Energy and Commerce bill. The House Banking Committee reviewed the Energy and Commerce bill in August and made a number of changes to give bank regulators responsibility for bank government dealers instead of the SEC. The full House rejected the Energy and Commerce Committee's bill when it was sent to the floor in September without the Banking Committee's amendments, based on the bill's procedural status rather than a substantive determination of the issues. Because Congress must amend the GSA to restore the Treasury's authority to write government securities rules, this bill will most likely be reintroduced early in the 103rd Congress.

• Limited Partnership Rollups — Early in 1991, the House and Senate introduced bills to reform limited partnership rollup practices by changing proxy solicitation rules and granting rights to dissenters. The SEC and NASD opposed both bills as unnecessary, citing sufficient SEC and NASD authority to address the abuses that the legislation covers. The House bill passed last November, but the Senate bill — in spite of widespread sponsorship by the Senate — was blocked by Senator Gramm (R-TX), who opposed the bill as unnecessary and too burdensome. Both bills died when Congress adjourned.

The NASD has responded to the legislative activity by proposing rules to address congressional concerns about partnership rollups. After adjournment 18 senators wrote to the NASD in support of the NASD's proposed rollup rules. Those rules would limit NASD member participation in partnership rollups that meet predetermined criteria and would restrict listings on the Nasdaq National Market® of securities resulting from rollups that fail to meet these criteria. Because those rules generally track the Senate bill and were approved by the NASD Board at its November 1992 meeting, Congress may not see as compelling a need to reconsider rollup legislation next year.

• Investment Advisers — In February of this year the Senate introduced, at the request of the SEC, a bill to increase the number of SEC investment adviser examiners by charging an annual fee of $300 to $7,000 for registration. The bill also included a suitability requirement, fidelity bonding, and authorization for the SEC to require investment adviser filings to be made with a Central Registration Depository-type system for a fee. The SEC requested the bill because its resources allowed it to inspect advisers only once every 30 years on average. The Senate passed the bill in August without the suitability requirement.

The NASD sought to include in any adviser bills, authority for the SEC to designate a self-regulatory organization (SRO) to perform inspections of investment advisers affiliated with SRO members. The NASD believes that the incremental cost of expanding current inspections of members is lower than creating a new program, and members would benefit by having only one NASD inspection instead of both an NASD and SEC inspection. In addition, with the increased use of wrap-fee arrangements, the investment advisory and securities businesses are converging, with securities transactions being the focal point for both sets of regulations. Given that, it would be inefficient and disruptive to members for the SEC to examine transactions for compliance with adviser rules while the NASD examines the same transactions for compliance with securities rules.

The House proposed legislation that would have, in addition to the Senate bill's requirements, required surveys for unregistered investment advisers, a rulemaking on the definition of adviser, disclosure of disciplinary history to clients, updated disclosure of compensation arrangements, a private right of action under the Investment Advisers Act, confidentiality for clients, and increased federal-state cooperation. As the bill went through the House process, Congress added the NASD proposal for SEC designation of an SRO for adviser inspections, dropped the private right of action and definition rulemaking, and relaxed a number of other requirements. The bill that passed the House in late September was combined with two unrelated securities bills.

The House and Senate were not able to resolve their different bills, which died when Congress adjourned. Given the effort spent on the bills by both Houses and the SEC's continuing need for more frequent investment adviser inspections, the 103rd Congress is likely to reconsider investment adviser legislation.

Futures Trading Practices Act — The Senate reintroduced its bill to reauthorize the Commodity Futures Trading Commission (CFTC) at the beginning of the 102nd Congress in 1991. Since it agreed with the Treasury and SEC that revisions were necessary to the Commodity Exchange Act to respond to the increasing impact stock index futures have had on the underlying securities markets, the NASD joined with other SROs to support a Bush Administration proposal on the CFTC's reauthorization in 1990, and NASD President Joseph Hardiman testified several times in support of it. That proposal would have moved jurisdiction of stock index futures from the CFTC to the SEC, provided federal margin-setting authority over commodities markets, and revised the exclusivity clause in the Commodities Exchange Act. The jurisdictional shift was not accepted, but a Senate bill was passed that granted federal oversight of stock index future margins and provided a regulatory framework for hybrid products — which include both securities and futures aspects.

Because the House bill had no similar provisions, the bills went to conference to reconcile differences. In October of this year, the Future Trading Practices Act became law. The Act's reauthorization, which lasts through fiscal year 1994, authorizes the Federal Reserve to set stock index future margins, which may be delegated to the CFTC. It also gives the CFTC general exemptive authority, which may be exercised, among other things, over exchange-traded and over-the-counter swaps, and over the regulation of hybrid instruments. While the futures exchanges raised competitive concerns about the absence of governmental oversight of the over-the-counter derivative market, no jurisdictional changes were made on swaps pending a GAO study now in progress. When that study is completed early 1993, swaps could again become an issue in Congress.

• Mark-to-market securities inventory accounting — The President's budget submitted in January of this year included a proposal to require securities inventories valuation at market for tax purposes, a change from the current method of lower of cost or market valuation. The proposal, included in both major tax bills this year, is a significant revenue item, with estimates ranging from $2.5 to $3.7 billion over a four- or five-year period. The NASD was concerned that the legislation could adversely affect market liquidity by increasing the tax on market makers' inventories and discouraging position-taking at year end.

As a result of NASD efforts, the second Senate tax bill, which also provides for urban enterprise zones, contained an exemption for market makers' and specialists' inventory. This provision was eliminated in conference and was not in the final bill sent to the President. The President vetoed both this and the earlier tax bill as violating his "no new taxes" pledge. Given the size of the revenue projected for this proposal, it will likely be re-examined in the 103rd Congress.


The NASD has also been involved in significant state developments in the past year. These issues have involved the redevelopment and redesign of the CRD, an investment adviser registration system, the state "blue sky" exemption for Nasdaq National Market securities and amendments to broker/dealer reporting requirements.

With the addition of five states in 1991, the Nasdaq National Market has the same exemption status as the New York and American Stock Exchanges in all states except Virginia. Nasdaq National Market securities — both initial and secondary public offerings — are exempt from blue-sky review in all states except New Hampshire, Connecticut, and Virginia.

During 1992, the NASD filed a report with the State of California on the listing and waiver process for Nasdaq National Market securities. As a result, the California securities commissioner has reported to the California legislature that he has no objection to making the Nasdaq National Market exemption, now subject to a sunset provision, permanent. In addition, the NASD has actively worked this year with the NASA A Registration Exemption Committee, which examines, among other things, state registration marketplace exemptions.

As part of its technology redesign of all of its systems, the NASD is completely rebuilding the CRD. The CRD is the database of records of all broker/dealer members and registered representatives. Members and agents use the CRD to register with the NASD and all states and update their CRD information.

The NASD has reached an agreement with NASAA on the redesign effort. The agreement provides for a completely new system that will involve more efficient access and communications between the membership, NASD, and the states. This new system will employ state-of-the-art technology as well as electronic filing. The redesign will also include a more logical presentation of the information, as well as a new system for relicensing registered representatives with new employers that will replace the current Temporary Transfer Program (TAT).

The redesigned CRD will be used to register investment advisers and agents. This issue has become more critical as the members and associated persons registering with the states as investment advisers increase. Like CRD, the new system will permit registrants to file once with the new system and become registered in the various states.

After several years of discussion, the SEC, NASD, and NASAA have resolved their differing views regarding disclosure requirements in matters reportable by broker/dealers on Form BD. The differences involved what needed to be reported as a "proceeding" on the form.

The resolution requires reporting SRO and government formal administrative and civil actions, formal felony criminal indictments and informations or equivalents, and certain formal misdemeanor criminal informations. Not to be reported are criminal arrests without a formal written charge, investigations, and civil litigation.

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