What's Around the Corner? Significant Proposed Changes in Federal Securities Regulations

June 1, 1996 Advisory

The Securities and Exchange Commission has issued several recent releases and Congress is considering legislation that would, if enacted, significantly change securities regulations. These proposed changes, which in the case of SEC proposals are subject to public comment and further internal review, and in the case of proposed legislation, to final approval by Congress, may significantly alter the regulatory framework in several areas of the securities laws during the second half of 1996.

Shorter Rule 144 Holding Periods
Currently, privately placed securities may be resold publicly pursuant to the Rule 144 safe harbor after a two-year holding period, if certain restrictions in the number of shares and manner of sale are adhered to. In addition, non-affiliates are allowed to make public resales after three years, without restriction. The SEC has proposed shortening each of these holding periods by one year, thus allowing limited resales after one year and unlimited resales by non-affiliates after two years. This proposal, if enacted, may have the effect of somewhat reducing the discount in the price of privately placed securities and may moderate the incentive for restricted stock recipients to insist that privately placed securities be registered for resale. The SEC has publicly announced that this rule change is on the fast track and it may be implemented as early as late summer.

Adoption of Uniform Blue Sky Requirements
On June 19, 1996, the House of Representatives passed, by a vote of 407 to 8, the Securities Amendments Act of 1996 (H.R. 3005) (the "Bill"). The Bill, as passed, seeks to create uniform standards with respect to state regulation of exempt security offerings and broker-dealer licensing. Specifically, it exempts from state regulation securities offerings and transactions which concern securities listed or authorized for listing on NASDAQ, NYSE, AMEX, or securities that are equal in seniority or senior to a security that is listed on one of those exchanges, or securities issued by an investment company registered under the Investment Company Act of 1940 (e.g. mutual funds).

The Bill would still allow states to regulate small company and regional offerings as well as blank check offerings, penny stocks and limited liability companies provided that the states regulate these offerings in a uniform manner. The Bill directs the Securities and Exchange Commission to conduct a study on the uniformity of state regulatory requirements. The goal is to minimize the impact of conflicting interstate regulations on capital formation and technological development. The Bill preserves the states' authority to enforce their anti-fraud statutes and to require notice filings, consent to service of process filings and the payment of fees.

The Senate Banking Committee approved the Senate version of H.R. 3005, the Securities Investment Promotion Act of 1996 (S. 1815), the same day, by a vote of 16-0. The Senate version is substantially similar to H.R. 3005, and is expected to come up for a vote before the full Senate in time to allow reconciliation with the House Bill and approval by both houses of the merged legislation prior to the November 1996 elections.