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[House Report 110-380]
[From the U.S. Government Publishing Office]

110th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    110-380

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          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

                          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 ``blue-sky'' 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 exceptions (for instance, the NYSE was 
able to establish a second-tier 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.

                        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.

                       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

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SEC. 18. EXEMPTION FROM STATE REGULATION OF SECURITIES OFFERINGS.

  (a) * * *
  (b) Covered Securities.--For purposes of this section, the 
following are covered securities:
          (1) Exclusive federal registration of nationally 
        traded securities.--A security is a covered security if 
        such security is--
                  (A) listed, or authorized for listing, on the 
                New York Stock Exchange [or 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

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