69–006 

110TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 1st Session 110–380 

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 


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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 ‘‘bluesky’’ 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 


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exceptions (for instance, the NYSE was able to establish a secondtier 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. 


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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. 


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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) * * * 


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(b) COVERED SECURITIES.—For purposes of this section, the following are covered securities: 

(1) EXCLUSIVE FEDERAL REGISTRATION OF NATIONALLY TRAD- ED SECURITIES.—A security is a covered security if such security is—

(A) listed, or authorized for listing, on the New York 

Stock Exchange øor 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 

* * * * * * * 

Æ 


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