[House Report 110-380]
[From the U.S. Government Publishing Office]
110th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 110-380
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SCOPE OF EXEMPTION FROM STATE SECURITIES REGULATION
_______
October 15, 2007.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Frank of Massachusetts, from the Committee on Financial Services,
submitted the following
R E P O R T
[To accompany H.R. 2868]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred the
bill (H.R. 2868) to eliminate the exemption from State
regulation for certain securities designated by national
securities exchanges, having considered the same, reports
favorably thereon without amendment and recommends that the
bill do pass.
CONTENTS
Page
Purpose and Summary.............................................. 2
Background and Need for Legislation.............................. 2
Hearings......................................................... 3
Committee Consideration.......................................... 3
Committee Votes.................................................. 3
Committee Oversight Findings..................................... 3
Performance Goals and Objectives................................. 3
New Budget Authority, Entitlement Authority, and Tax Expenditures 3
Committee Cost Estimate.......................................... 4
Congressional Budget Office Estimate............................. 4
Federal Mandates Statement....................................... 5
Advisory Committee Statement..................................... 5
Constitutional Authority Statement............................... 5
Applicability to Legislative Branch.............................. 5
Section-by-Section Analysis of the Legislation................... 5
Changes in Existing Law Made by the Bill, as Reported............ 5
Purpose and Summary
H.R. 2868, a bill to eliminate the exemption from State
regulation for certain securities designated by national
securities exchanges, was introduced on June 26, 2007, by Mr.
Meeks of New York. The purpose of the bill is to provide
greater flexibility in applying the National Securities Markets
Improvement Act of 1996 (``NSMIA'') so as to permit certain
national securities exchanges to establish lower-tier markets,
subject to approval by the Securities and Exchange Commission
(``SEC'').
Background and Need for Legislation
The SEC is the federal agency responsible for enforcing the
nation's securities laws. Each individual State also has
enacted and enforces its own securities laws, known as ``blue
sky'' laws. Prior to 1996, State blue sky laws required
securities offerings made in those States to be registered in
the state or to be exempt from State registration requirements.
State requirements were duplicative of, and often inconsistent
with, the registration requirements under the Securities Act of
1933 (``1933 Act''). Most State laws permitted issuers to
coordinate the federal/State registration process for some
offerings, but the process could still be costly and
burdensome.
NSMIA was intended, among other things, to realign the
regulatory partnership between federal and State securities
regulators and thereby eliminate the costs and burdens of
duplicative and unnecessary regulation. NSMIA amended the 1933
Act to preempt State blue sky registration and review of
``covered securities,'' although it preserved the right of the
States to investigate and prosecute fraud. Covered securities
include: securities listed (or approved for listing) on the New
York Stock Exchange (``NYSE''), the American Exchange
(``Amex'') AMEX and the Nasdaq/National Market, and securities
of the same issuer that are equal in rank or senior to such
listed securities; mutual fund shares; securities sold to
certain qualified purchasers; certain securities exempt under
Section 3(a) of the 1933 Act (including government or municipal
securities, bank securities and commercial paper); and
securities issued in a private offering in compliance with Rule
506 of the SEC's Regulation D.
Covered securities listed on the NYSE, AMEX and a portion
of the Nasdaq Stock Market (collectively, the ``Exempted
Exchanges''), are subject to an automatic blanket exemption
from State ``blue-sky'' laws, in recognition of the high
listing standards of those exchanges. NSMIA gave the SEC
authority to exempt securities listed on other exchanges from
State law via rulemaking where appropriate. NSMIA did not give
the SEC explicit authority to remove covered securities listed
on the Exempted Exchanges from the automatic blanket exemption
from State law.
Foreign exchanges, such as the London Stock Exchange's
Alternative Investment Market, have developed tiered listing
standards that expand opportunities for small companies or
companies with alternative business models. U.S. exchanges not
specified in NSMIA have been able to establish such lower-tier
listing markets pursuant to State law. The Exempted Exchanges,
however, have been prevented from establishing lower tier
markets, with limited exceptions (for instance, the NYSE was
able to establish a second-tier listing market through its
acquisition of ARCA, formerly the Pacific Stock Exchange, whose
securities were not exempt from state securities regulation
under NSMIA and thus could establish alternative listing
standards). While the SEC believes securities issued pursuant
to lower listing standards should be subject to state law, it
does not have explicit authority to subject covered securities
listed on the Exempted Exchanges to State regulation.
The bill would amend the 1933 Act to allow the Exchanges to
establish additional tiers of listing standards, and to subject
securities listed on those lower tiers to state law, all
contingent upon SEC approval. The intention is to facilitate
development of domestic markets for smaller companies that do
not meet higher primary market listing standards, and to allow
the Exempted Exchanges to compete more effectively in the
global marketplace.
Committee Consideration
The Financial Services Committee met in open session on
September 18, 2007, and ordered H.R. 2868, a bill to eliminate
the exemption from State regulation for certain securities
designated by national securities exchanges, reported with a
favorable recommendation by a voice vote.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. No
record votes were taken in conjunction with the consideration
of this legislation. A motion by Mr. Frank to report the bill
to the House with a favorable recommendation was agreed to by a
voice vote.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee has held hearings and
made findings that are reflected in this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee establishes the
following performance related goals and objectives for this
legislation:
The national securities exchanges will be authorized to
establish multiple listing standards and, subject to approval
by the Securities and Exchange Commission, securities listed on
the lower tiers will be subject to regulation by the States.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act.
Committee Cost Estimate
The Committee adopts as its own the cost estimate prepared
by the Director of the Congressional Budget Office pursuant to
section 402 of the Congressional Budget Act of 1974.
Congressional Budget Office Estimate
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
September 28, 2007.
Hon. Barney Frank,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 2868, a bill to
eliminate the exemption from state regulation for certain
securities designated by national securities exchanges.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Susan Willie.
Sincerely,
Peter R. Orszag.
Enclosure.
H.R. 2868--A bill to eliminate the exemption from state regulation for
certain securities designated by national securities exchanges
H.R. 2868 would authorize the Securities and Exchange
Commission (SEC) to permit certain stock exchanges to designate
a new tier of securities that could be listed. Companies
listing such securities would be subject to state registration
requirements; under current law, securities listed on those
exchanges are exempt from state regulation. While the SEC would
be required to write regulations that would guide the exchanges
in developing the new tiers, CBO expects that the securities
listed would be for small, less-capitalized companies that do
not meet the current listing standards.
Based on information from the SEC, CBO estimates that
implementing H.R. 2868 would have an insignificant effect on
the federal budget. SEC would be required to develop and
enforce regulations related to a new listing tier, but CBO
expects that such activities would not significantly increase
SEC's workload or its costs. Enacting the bill would not affect
direct spending or revenues.
H.R. 2868 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act and
would impose no costs on state, local, or tribal governments.
The CBO staff contact for this estimate is Susan Willie.
This estimate was approved by Peter H. Fontaine, Assistant
Director for Budget Analysis.
Federal Mandates Statement
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates Reform
Act.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Constitutional Authority Statement
Pursuant to clause 3(d)(1) of rule XIII of the Rules of the
House of Representatives, the Committee finds that the
Constitutional Authority of Congress to enact this legislation
is provided by Article 1, section 8, clause 1 (relating to the
general welfare of the United States) and clause 3 (relating to
the power to regulate interstate commerce).
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of section
102(b)(3) of the Congressional Accountability Act.
Section-by-Section Analysis of the Legislation
Section 1. Scope of exemption from state securities regulation
This section updates the Nasdaq references in section
18(b)(1) of the 1933 Act, from the National Market System of
the Nasdaq Stock Market, to the Nasdaq Stock Market. The
amendment acknowledges that Nasdaq is now an integrated
exchange. This section further amends the 1933 Act to allow the
Exchanges to establish additional tiers of listing standards,
and to subject securities listed on those lower tiers to state
law, all contingent upon SEC approval. The intention is to
facilitate development of domestic markets for smaller
companies that do not meet higher primary market listing
standards, and to allow the Exempted Exchanges to compete more
effectively in the global marketplace.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
SECURITIES ACT OF 1933
TITLE I
* * * * * * *
SEC. 18. EXEMPTION FROM STATE REGULATION OF SECURITIES OFFERINGS.
(a) * * *
(b) Covered Securities.--For purposes of this section, the
following are covered securities:
(1) Exclusive federal registration of nationally
traded securities.--A security is a covered security if
such security is--
(A) listed, or authorized for listing, on the
New York Stock Exchange [or the American Stock
Exchange, or listed, or authorized for listing,
on the National Market System of the Nasdaq
Stock Market (or any successor to such
entities)], the American Stock Exchange or the
Nasdaq Stock Market (or any successor to such
entities), except that a security listed, or
authorized for listing, on the New York Stock
Exchange, the American Stock Exchange or the
Nasdaq Stock Market (or any successor to such
entities) shall not be a covered security if
the exchange adopts listing standards pursuant
to section 19(b) of the Securities Exchange Act
of 1934 (15 U.S.C. 78s(b)) that designates a
tier or segment of such securities as
securities that are not covered securities for
purposes of this section and such security is
listed, or authorized for listing, on such tier
or segment;
(B) listed, or authorized for listing, on a
national securities exchange (or tier or
segment thereof) that has listing standards
that the Commission determines by rule (on its
own initiative or on the basis of a petition)
are substantially similar to the listing
standards applicable to covered securities
described in subparagraph (A); or
* * * * * * *