INSTITUTE COMMENT LETTER ON 1997 CONFERENCE ON FEDERAL-STATE SECURITIES REGULATION

April 28, 1997 TO: BOARD OF GOVERNORS No. 29-97 INVESTMENT ADVISER MEMBERS No. 14-97 SEC RULES COMMITTEE No. 43-97 STATE SECURITIES MEMBERS No. 4-97 UNIT INVESTMENT TRUST COMMITTEE No. 23-97 RE: INSTITUTE COMMENT LETTER ON 1997 CONFERENCE ON FEDERAL-STATE SECURITIES REGULATION _____________________________________________________________________________ Since 1983, the Securities and Exchange Commission ("SEC") and the North American Securities Administrators Association, Inc. ("NASAA") have held an annual conference on uniformity of federal-state regulation. Prior to the Conference, the SEC and NASAA solicit written comments on the issues to be discussed. Accordingly, the Institute has submitted the attached comment letter that highlights several issues to be discussed at this year
s conference: 1) implementing the provisions of the National Securities Markets Improvement Act of 1996 ("NSMIA"), including establishing uniformity between federal-state regulatory systems with respect to mutual funds, investment advisers, and broker-dealers; 2) implementing proposed improvements in mutual fund disclosure, including the "plain English" initiative, the proposed amendments to Form N-1A, and fund profiles; 3) the capital formation process, including the use of the electronic media and the Internet; and 4) initiating investor information and education programs and related projects. 1. Implementing the Provisions of NSMIA The Institute
s letter notes the importance of federal-state cooperation during the implementation phase of NSMIA, particularly with respect to investment advisers, when converting from a state "registration" system to a state "notice filing" system. Noting its concern with how individual states may attempt to address this conversion process, the Institute
s letter suggests that proposed new Form ADV-T, which would be used by investment advisers to indicate their continued eligibility for SEC registration, could be instrumental in facilitating that process. The Institute
s letter strongly encourages the SEC and the states to discuss these and other investment adviser issues relating to implementing the new scheme of regulation. The Institute
s letter also discusses several broker-dealer provisions contained in NSMIA that would reduce the level of disparity between federal-state licensing requirements, and preempt states from imposing books and records requirements that are different from or in addition to the SEC
s requirements. In addition, the Institute
s letter notes pending NASD and NASAA proposals that would regulate the conduct of broker-dealers operating on the premises of financial institutions. Recognizing that both proposals attempt to reduce the level of customer confusion in connection with the sales of securities at financial institutions, the Institute
s letter emphasizes the importance of establishing federal-state uniformity in this area. 2. Streamlining Mutual Fund Disclosure The Institute
s letter discusses the initiatives proposed by the SEC to streamline mutual fund disclosures. Of particular significance is the plain English initiative, in which the SEC proposed several rule amendments requiring the use of plain English writing principles when drafting certain portions of prospectuses (i.e. the front and back cover pages, summary, and risk factors sections). The Institute
s letter supports this initiative and also urges the SEC and the staff to exercise discretion in administering the requirements so as to avoid rigid or mechanical application of plain English principles. Also significant are the SEC
s proposals that would amend substantially Form N-1A, create new Rule 498 under the Securities Act of 1933 (permitting the use of a "fund profile"), and create new Rule 35d-1 under the Investment Company Act of 1940 (80% fund name test). The Institute
s letter supports these proposals, noting that, if adopted, they would result in significant improvement in fund disclosure. The Institute will be providing detailed recommendations on each of these three pending proposals in the near future. 3. Developing Capital Formation Processes The Institute
s letter discusses the capital formation process, including various issues involving the Internet and the electronic delivery of documents that broker-dealers, transfer agents, and investment advisers are required to send to their customers. The Institute recommends that the SEC and the states bear in mind the importance of the new technologies to the capital formation process. The Institute
s letter also addresses the importance of having appropriate regulatory policies on the use of electronic media, and notes its support for the ongoing consultations by the SEC and NASAA on state securities law issues relating to Internet matters. 4. Initiating Investor Education Programs The Institute
s letter notes that the SEC is currently pursuing a wide range of programs to assist and inform investors, and notes that state participation is essential to success. The Institute
s letter encourages continued cooperation among the SEC, NASAA and the states to address investor needs and promote greater investor understanding of the securities markets. Barry E. Simmons Assistant Counsel Attachment (Letter without attachments)