March 6, 1989
TO: UNIT INVESTMENT TRUST COMMITTEE NO. 10-89
RE: USE OF THE MANUAL EXEMPTION TO EXEMPT RESALES IN THE STATES
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In most states, unit trusts rely on an exemption from
registration under the state securities acts for resales of units
of unit trusts. The most commonly relied on exemption is the
manual exemption, which exempts a non-issuer distribution if the
issuer is listed in a securities manual accepted by the state
securities department. Approximately thirty-seven states have
adopted the manual exemption.
On four occasions since the unit trusts joined the
Institute in 1985, the Institute has been called upon to defend
the use of the manual exemption for resales of units of unit
trusts.
Missouri takes the position that unit trusts are not
entitled to a non-issuer distribution exemption, such as the
manual exemption. In August, 1986, the Institute suggested that
the Missouri Securities Division adopt an exemption for any offer
or sale of a unit of a unit trust after an initial bona fide sale
of the unit and repurchase of it by a sponsor of the unit
investment trust. In February, 1987, Missouri adopted, by rule,
the exemption suggested by the Institute.
In October, 1986, the Idaho Department of Finance proposed
to amend its manual exemption in a way that would preclude its
use by unit trusts for resales. The Institute suggested an
exemption that would allow unit trusts to continue to use the
manual exemption. In November, 1986, the Idaho Department of
Finance adopted, by rule, the Institute's suggestion.
In September, 1987, the Oklahoma Department of Securities
issued an interpretive opinion that secondary trades of units of
unit trusts through a market maintained by the sponsor would not
be deemed non-issuer transactions. Based on that interpretation,
the manual exemption could not be used by unit trusts for resales
of units. The Institute requested that the Department grant an
exemption from registration for resales of units of unit trusts.
In November, 1987, the Department issued an Order Granting
Exemption which exempts the resale of units of unit trusts.
Recently, Virginia repealed its manual exemption. The
Director of the Virginia Securities Division has agreed to work
with the Institute to develop a solution to the problem of
registering units of unit trusts for resale.
Relying on the manual exemption to avoid registration of
units for resales in the states is likely to be a continuing
problem for two reasons. The first reason is unrelated to unit
trusts. Many states believe that securities that could otherwise
not qualify for registration, such as penny stocks, are being
sold under the manual exemption. Some of these states, such as
Virginia, believe that the exemption should be repealed to stop
the sale of such securities.
The second problem relates to the unit trusts' entitlement
to use the manual exemption. As stated above, the manual
exemption is available only for non-issuer distributions. Some
states, such as Oklahoma, have questioned whether a resale by a
sponsor of the unit trust is a non-issuer distribution.
It is likely, because of issues such as the penny stock
problem, that other states may attempt to repeal or amend their
manual exemption. The problem created by a manual exemption
being repealed or amended is compounded by the time frame in
which the Institute generally has to react to such legislation or
rule making. Therefore, it would be helpful if a plan of action
were developed prior to the next attempt by a state to repeal or
amend a manual exemption. On March 21, 1989, a meeting will be
held in the New Jersey Room at the Mayflower Hotel, 1127
Connecticut Ave., Washington, D.C. to discuss this matter. Lunch
will be served at noon; the meeting will begin at 1:00 p.m.
Please let Mary Jenkins at (202) 293-7700 know if you can attend.
Natalie Shirley
Associate General Counsel