March 15, 1995
TO: SEC RULES COMMITTEE No. 42-95
STATE LIAISON COMMITTEE No. 15-95
UNIT INVESTMENT TRUST COMMITTEE No. 31-95
RE: UPDATE ON SECURITIES REGISTRATION DEPOSITORY (""SRD"")
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As discussed at the recent Committee meetings, at its January 1995 meeting, the Board of
Directors of SRD, Inc. (the “Board”) increased the size of the Industry Advisory Group (“IAG”) from
five members to ten members. As a result, the IAG, which previously consisted of representatives of
the Institute, the Securities Industry Association (“SIA”), the American Bar Association, Scudder,
Stevens & Clark, and ClearSky, Inc., now includes representatives of Federated Investors, Fidelity
Investments, Merrill Lynch Pierce Fenner & Smith, Inc., Prudential Securities, Inc., and Van Kampen-
American Capital.
In anticipation of the first meeting of the expanded IAG and the Board, which was held on
March 4th, the IAG sent the Board a letter expressing its continuing concerns with certain unresolved
policy issues. As explained in detail in the attached letter to the Board, of primary concern to the
members of the IAG is the uncertainty associated with the SRD with respect to: (1) the ability to rely
upon representations made by the Board; (2) the pricing of the SRD services; and (3) the savings to be
realized by filing through the SRD. To address these concerns, the IAGGs letter recommends that the
Board: (1) convince potential users of the SRD that representations by the Board may be relied upon; (2)
ensure that users have an equal say with the Board in pricing decisions in order to avoid unbridled future
price increases; and (3) require states to agree to certain terms as condition of using the SRD. The
IAGGs letter advises the Board that if it continues to ignore the concerns of industry, “the SRD is
unlikely to win widespread industry acceptance and thus may prove to be nor more than a rather
expensive and embarrassing debacle for both the SRD and NASAA.” The IAGGs letter to the Board
and the BoardGs response at the March meeting are summarized below.
1. Reliance upon Board Representations
The IAGGs letter expresses concern with the degree to which potential users may rely upon
representations made by the Board to placate the concerns expressed by industry. This concern arises
from recent actions by the Board that are contrary to written representations made in October 1994 to
the IAG. The IAGGs letter cites the following three examples: (1) the Board agreed to “consult in
advance” with the IAG on the BoardGs budget and then informed the IAG that the Board will present
the BoardGs budget to the IAG only after it has been approved by the Board; (2) the Board met without
inviting members of the IAG to such meetings, notwithstanding its representation to invite the IAG to
“all meetings” of the Board and the BoardGs Executive Committee; and (3) the Board agreed that the
price of the SRD “shall remain unchanged for a period of two years from the inception of the SRD” and
then stated that such price may be adjusted for inflation.
At the March 4th meeting, the Board agreed that the price of the SRD will remain unchanged,
with no adjustments for inflation, until March 1998 when the BoardGs contract with General Electric
Information Services (“GEIS”) expires. [GEIS will be developing and maintaining the SRD.] With
respect to attendance by the IAG at Boar meetings, the Board commented that the IAG will be invited
to Board meetings, though the Board may discuss issues among themselves before such meetings. There
was no mention of the IAG being invited to attend meetings of the BoardGs Executive Committee.
Most importantly, there were no assurances provided regarding the binding nature of these current
representations.
2. Pricing of the SRD Services
The IAGGs letter reiterates that pricing issues remain of paramount concern to potential users of
the SRD, and unless users are granted meaningful input into pricing decisions, they will not be
comfortable that the SRD is providing its services as economically and efficiently as possible. In
discussing this concern, the IAGGs letter details those decisions that impact price that have already been
made by the Board without industry input, including the BoardGs decision to pay NASAA 10% of all
SRD revenues ad infinitum. [The IAGGs letter again requests justification for this payment to NASAA.]
To address this particular concern, the IAG had earlier recommended creation of a pricing committee
that is equally comprised of members of NASAA and filers and that is vested with authority as to all
SRD pricing decisions. In the event of an impasse, the IAG has suggested submitting the issue to
impartial arbitration or mediation. In response to this recommendation, in its last correspondence to the
IAG, the Board agreed to permit the IAG to “review” any price changes. The attached letter restates the
IAGGs previous recommendation and relates that the BoardGs response thereto is unacceptable because,
so long as the ultimate pricing decision remains vested in the Board, users will not have assurances
against unwarranted future price increases, which assurances are necessary for widespread acceptance or
usage of the SRD.
At the March 4th Board meeting, the Board and the IAG again discussed providing users
meaningful input into pricing decision. According to the Board, it opposes the IAGGs pricing committee
concept because (1) it could ultimately bankrupt NASAA and (2) the Board believes that no standards
could be provided to an arbiter or mediator upon which to resolve any impasse. With respect to the
concern of bankrupting NASAA, apparently the Board is concerned that the pricing committee may set
the price below cost, thereby requiring NASAA to continually infuse capital into the SRD and depleting
NASAAGs reserves. In lieu of a pricing committee, the Board has offered to create a cost oversight
committee, which would be comprised of two Board members and two representatives of the IAG.
This oversight committee would meet once a month to review all costs incurred by the SRD in the
previous month to make sure such costs were reasonable and necessary. The Board did not specify what
was to occur in the event the members of this oversight committee determined a cost was unreasonable
or unnecessary. While the members of the IAG welcomed the opportunity to review the monthly
expenditures of the SRD, the IAG reiterated to the Board that this oversight committee does not
provide the meaningful input requested by the IAG because (1) such committee will always be
conducting a retroactive review of the SRDGs expenditures and (2) the ability to redress any
unreasonable or unnecessary expenditures or to determine the price of the SRD would presumably
remain vested solely in the Board.
3. Savings to Result from Use of the SRD
Though no details of savings have been provided, the SRD has consistently been touted by the
SRD and by NASAA as an electronic filing system that will save filers “millions of dollars” in costs that
are currently incurred through the manual paper filing system. These savings would result, in part, from
the SRD (1) supplanting the need to make manual filings and (2) being a reliable conduit for filing
purposes. The IAGGs letter expresses concern that although the SRD is expected to electronically
provide states the same information they currently receive in hard copy, it may not supplant the need to
make manual filings. Because electronic delivery will not facilitate a state analystGs review of the
information contained in the registration statement and because the analyst will not be able to
manipulate the information on the computer screen, the IAG is concerned that analysts will require
issuers to file a duplicate hard copy of the information. Such a requirement, of course, would largely
eliminate the benefits of electronic filing.
Assuming, however, that the SRD would (1) supplant the need to make manual filings and (2)
cost $3.00 per month to maintain each permit on the SRD, which is the current estimate provided by the
SRD, members of the IAG have estimated that, rather than resulting in any savings, the SRD would
increase costs anywhere from 37-100%. In addition to the $3.00 fee that only covers monthly permit
maintenance, the SRD has estimated that filers will incur additional costs (e.g., for converting permits
onto the system and for functions such as electronically filing fees with the SRD or communicating with
states via e-mail) of approximately 10% of the permit maintenance charges. These additional costs,
coupled with the fact that the SRD does not plan to provide potential filers with assurances that the
SRD will supplant the need to make manual filings, should result in the costs associated with using the
SRD being even greater than currently estimated by the IAG.
These preliminary estimates were provided to the Board during the March 4th meeting and the
Board appeared to be disturbed by them. Because the members of the IAG used different
methodologies to determine these estimates, the Board decided to devise a uniform methodology to be
used to survey members of the industry to determine whether these estimates of increased costs by the
IAG are valid. If the estimates are determined to be valid, it appears that the Board will need to rethink
completely its current pricing system. As soon as this methodology is available, we will provide it to
members of the Institute to assist us and the Board in determining whether the SRD will result in any
savings to potential filers as currently priced.
4. Timetable
At the time of the IAGGs letter, the Board had planned to begin implementation of the SRD on
April 1, 1995. At the BoardGs March 4th meeting, however, it was announced that, due to delays in
executing the contract with GEIS and the Memorandum of Understanding with the SEC to permit the
SRD to access EDGAR documents, implementation has been
delayed until June. When initially implemented, the SRD will only be able to convert existing permits
onto the system and process renewal of such permits. The system is not expected to be able to process
all initial registrations until sometime in 1997.
The next meeting with the Board is scheduled for March 29th.
Tamara K. Cain
Assistant Counsel
Attachment