Agency at a Glance

The mission of the State Securities Board (SSB) is to protect investors from securities fraud to assure that businesses in Texas have access to capital. The textbox, What is a Security?, defines securities.

To achieve its mission, the agency registers securities offerings, licenses and inspects securities professionals, investigates fraudulent securities offerings, and enforces violations of the Securities Act.

The State Securities Board cannot and does not attempt to regulate the risks inherent in securities dealings, but acts to ensure that all risks and other important facts relevant to a securities purchase are disclosed.

The textbox, Texas Securities Act, lists some major provisions of the Act.

Key Facts

• Funding. The State Securities Board's funding for fiscal year 1999 was about $3.5 million. While all of the agency's revenue comes from the General Revenue Fund, in fiscal year 1999, the agency collected about $107 million more in fees than it expended.

• Staffing. The State Securities Board employs 81 full-time employees - 67 working in the Austin headquarters, and 14 located in the Dallas, Houston, Corpus Christi, and Lubbock enforcement field offices.

• Securities Law Enforcement. Investigating and prosecuting violations of securities laws accounts for about one-third of the agency's budget. The agency focuses on obtaining indictments against individuals who violate the Securities Act. Agency staff assist prosecutors by forwarding them complete investigations and participating in all phases of trials.

• Securities Dealers Registration. The agency requires securities dealers, investment advisers, and their agents, to register to ensure that they meet minimum standards of conduct and financial solvency.

• Dealer Inspections. The agency inspects securities dealers and investment advisers to ensure compliance with the Securities Act and Board rules.

• Registration of Securities Offerings. The agency reviews all applications to register securities for sale in Texas to ensure investor access to full and fair disclosure of all material investment information. The agency also helps ensure that both the promoter and investor share in the results of the venture, that conflicts of interest are minimized, and that promotional expenses are reasonable.

Recommendation

Change in Statute

1.1 Expand the State Securities Board from three to five public members.

This recommendation would expand the State Securities Board to avoid problems with the Open Meetings Act, increase the Board's ability to communicate, allow the use of subcommittees, and increase its expertise. Expanding the Board's membership to five members keeps it within the structure of the recent constitutional amendment.

Fiscal Implication

Expanding the State Securities Board to five members would result in additional travel expenses and per diem of two new members costing the State about $1,800 a year.

Responses

Agency

The State Securities Board agrees with this recommendation. (Nicholas C. Taylor, Chair - State Securities Board, Austin)

For

A. Edward Moulin, Principal - Morgan Stanley Dean Witter, New York

Rob Schneider, Senior Staff Attorney - Consumers Union, Austin

Peter Scott, President - Texas Stock and Bond Dealer Association, Arlington

Keith Utsey, Vice President and Counsel - Securities Industry Association, New York

Against

None Received

Recommendations

Change in Statute

2.1 Establish criminal liability against corporations for violations of the State Securities Act.

This change would extend the Securities Act's criminal penalties for natural persons engaging in fraud or violating registration provisions to include business entities. Convicted businesses would be subject to sanctions set forth in the Texas Penal Code and the Business Corporations Act. To prevent corporations from being subject to this penalty for the actions of a few individuals, the fact that a high managerial agent of the entity, with supervisory responsibility over the subject matter of the offense, employed due diligence to prevent its commission would constitute an affirmative defense to prosecution.

2.2 Establish civil liability against investment advisers for fraud and registration violations.

This change would expand the civil liability provisions for securities dealers to include investment advisers engaging in fraud or violating registration provisions. A person or a firm would not be liable if either the client knew of the untruth or omission, or the investment adviser did not know, and in the exercise of reasonable care, could not have known, of the untruth or omission. A person or a firm who directly or indirectly controls the investment adviser would be liable to the same extent as the investment adviser, unless the controlling person did not know of the facts. Consistent with current civil liability provisions for securities dealers, the statute would place a three-year limitation on registration violations, and a five-year limitation on fraud actions.

2.3 Extend the Commissioner's cease and desist authority to include unregistered agents and fraudulent sales practices, and authorize the Commissioner to issue emergency cease and desist orders.

This recommendation would extend the Commissioner's cease and desist authority to include unregistered agents of securities dealers and investment advisers, and the fraudulent sale practices in which a firm or individual has engaged or is about to engage. This change would also authorize the Securities Commissioner to issue emergency cease and desist orders to immediately stop any fraud, fraudulent activity, or violation of the Securities Act. These orders would be limited to situations presenting an immediate threat to the public welfare, including the sale of non-exempt unregistered securities and the unregistered activities of securities dealers, investment advisers and their agents. Emergency cease and desist orders would supplement, and not replace, the Commissioner's regular cease and desist authority.

An individual or firm served with an emergency cease and desist order would be able to file a request for hearing within 30 days of service of the order. Within 10 days after the receipt of such a request, the Commissioner would issue a notice of hearing to be held before a hearings officer in accordance with the Administrative Procedures Act to recommend whether the order should be modified, vacated, or upheld, and to consider such other matters set forth in the notice of hearing. At the hearing, the Commissioner would have the burden of proof and would be required to present evidence in support of the order. An emergency cease and desist order would continue in effect unless the order is stayed by the Commissioner.

Responses

Agency

The State Securities Board agrees with this recommendation. (Nicholas C. Taylor, Chair - State Securities Board, Austin)

For

Clyde Atteberry, Capitol City Task Force - American Association of Retired Persons, Austin

A. Edward Moulin, Principal - Morgan Stanley Dean Witter, New York

Rob Schneider, Senior Staff Attorney - Consumers Union, Austin

Peter Scott, President - Texas Stock and Bond Dealer Association, Arlington

Keith Utsey, Vice President and Counsel - Securities Industry Association, New York

Against

None Received

Modification

1. Establish a threshold for corporate criminal penalties to ensure that penalties are only applied for severe or repeated violations of the Securities Act and not unintentional violations. (Dr. Tim Roth, Sunset Commission Member)

Staff Comment: This modification clarifies the intent of the staff recommendation.

Change in Statute

3.1 Specify that the State Securities Board has the authority to inspect securities dealers and investment advisers.

This recommendation would authorize the Commissioner to conduct, without notice, an inspection of the records of a securities dealer or an investment adviser, at any office of the dealer or investment adviser during regular business hours, for the purpose of ensuring compliance with the Securities Act and agency rules. During such inspections, the Commissioner would have immediate and free access to such records, and to all locations where such records are kept by the dealer or investment adviser. During the inspection, the Commissioner would be permitted to make photostatic or electronic copies of such records without charge to the Commissioner.

3.2 Specify that information obtained through inspections is confidential and may not be disclosed to the public.

This recommendation would provide for the confidentiality of information obtained in the inspection of records of a dealer or investment adviser, in accordance with the requirements of Section 28 of the Securities Act. The confidentiality would extend to internal notes, memoranda, reports, and communications made in connection with the inspection.

Responses

Agency

The State Securities Board agrees with this recommendation. (Nicholas C. Taylor, Chair - State Securities Board, Austin)

For

Clyde Atteberry, Capitol City Task Force - American Association of Retired Persons, Austin

A. Edward Moulin, Principal - Morgan Stanley Dean Witter, New York

Rob Schneider, Senior Staff Attorney - Consumers Union, Austin

Peter Scott, President - Texas Stock and Bond Dealer Association, Arlington

Keith Utsey, Vice President and Counsel - Securities Industry Association, New York

Against

None Received

Modification

1. Exclude from public disclosure social security numbers, tax identification numbers, and personal identifying information that is not material to the clients of dealers and investment advisers. (Tamara Reed, Associate Counsel - Investment Company Institute, Washington)

Staff Comment: State law already provides for the confidentiality of social security numbers. Information identifying a person is often useful to clients to ensure that they are meeting with the actual dealer, adviser, or agent who is registered with SSB. This information is also already made public on securities dealers through a national database used to register them in all states.

Recommendations

Change in Statute

4.1 Specify in the Securities Act that investor education is a function of the State Securities Board.

This recommendation would require SSB to educate the public as part of the agency's statutory mission to protect investors. An investor education program should inform the public about the basics of investing and how to detect and avoid securities fraud. In the implementation of this program, SSB could collaborate with other organizations having an interest in investor education, such as the National Institute for Consumer Education (NICE) and the Texas Agricultural Extension Service.

4.2 Grant the State Securities Board statutory authority to accept gifts, grants, and donations for use in educating investors.

This recommendation would grant SSB legal authority to accept gifts, grants, and donations for use in the agency's education program. This change would extend SSB's appropriation rider authority to include the acceptance of donations for the entire education program -- not just the distribution of teaching materials to high school teachers. In accordance with the Ethics Code, the agency could only accept a gift if the board approves. The Code would also prevent the agency from accepting a donation from a party in a contested case until a month after a final decision is made. In addition, SSB could not accept gifts, grants or donations from a person who is affiliated with the securities industry.

Management Action

4.3 Require the State Securities Board to maintain a toll-free number and collaborate with the National Fraud Complaint Management Center to handle investors' questions and complaints.

This recommendation would require SSB to maintain a toll-free number, restricted to Texas, to answer investors' questions and requests for documentation. To advertize its toll-free number, the agency would be required to print its name and number on securities professionals' licenses, and on a written document distributed by securities professionals when contracting with investors. This recommendation would also require the agency to collaborate with the National Fraud Complaint Management Center to receive complaints and inquiries made to the Center and addressed to SSB.

4.4 Require the State Securities Board to maintain an e-mail address on its Web site to specifically handle questions and requests for documentation from investors and securities professionals.

This recommendation would require SSB to create a new email address on its Web site that would specifically handle questions and requests for documentation from investors and securities dealers.

Fiscal Implication

An investor education program would cost the State about $77,500 per year to pay for the program's operating expenses and one full-time employee to manage the program.

Responses

Agency

The State Securities Board agrees with this recommendation. (Nicholas C. Taylor, Chair - State Securities Board, Austin)

For

Clyde Atteberry, Capitol City Task Force - American Association of Retired Persons, Austin

Nancy L. Granovosky, CFP, CFCS, Professor and Extension Specialist - Texas Agricultural Extension Service, College Station

A. Edward Moulin, Principal - Morgan Stanley Dean Witter, New York

Rob Schneider, Senior Staff Attorney - Consumers Union, Austin

Peter Scott, President - Texas Stock and Bond Dealer Association, Arlington

Keith Utsey, Vice President and Counsel - Securities Industry Association, New York

Against

None Received

Modifications

1. Specify that education programs should emphasize fraud prevention and that materials would be provided in both Spanish and English. (Senator Judith Zaffirini -Sunset Commission Member)

2. Establish a dedicated fund for investor education using fees assessed by SSB on the securities industry. (Nancy L. Granovosky, CFP, CFCS, Professor and Extension Specialist - Texas Agricultural Extension Service, College Station)

Recommendation

Change in Statute

5.1 Define securities dealers, investment advisers, and their agents separately in the Securities Act.

This recommendation would distinguish between securities dealers and investment advisers, and between the agents and representatives of securities dealers and investment advisers. The definition of securities dealers would include only persons who are involved in the offer or sale of securities. The definition of investment adviser would include individuals who engage in giving investment advice or analysis for compensation. This definition would exclude any person whose performance of such services is solely incidental to the practice of his or her profession. This definition would also exclude federal covered advisers and any other person designated by rule or order of the Securities Commissioner.

Responses

Agency

The State Securities Board agrees with this recommendation. (Nicholas C. Taylor, Chair - State Securities Board, Austin)

For

Karen L. Barr, General Counsel - Investment Counsel Association of America, Inc., Washington

A. Edward Moulin, Principal - Morgan Stanley Dean Witter, New York

Peter Scott, President - Texas Stock and Bond Dealer Association, Arlington

Keith Utsey, Vice President and Counsel - Securities Industry Association, New York

Against

None Received

Modifications

1. Add greater clarity by defining federally covered investment advisers in the Texas Securities Act. (Tamara Reed, Associate Counsel - Investment Company Institute, Washington)

Staff Comment: This modification is consistent with the intent of the staff recommendation.

2. Specify that a person who is dually registered with SSB as a dealer and an investment adviser or federally covered adviser must only pay one fee. Also provide that a person who is dually registered with SSB as a salesman and an investment adviser representative needs to pay only one fee. (Tamara Reed, Associate Counsel - Investment Company Institute, Washington)

Staff Comment: This modification is consistent with the intent of the staff recommendation.

3. Specify in the Texas Securities Act that investment adviser representatives of federally covered advisers are required to register with the State Securities Board only if they have a place of business in Texas. (Karen L. Barr, General Counsel - Investment Counsel Association of America, Inc.)

Staff Comment: SSB currently does not require investment adviser representatives of federally covered advisers who do not have a place of business in Texas to register, but to notice file. This modification would clarify current practice.

4. Specify in the Texas Securities Act that investment advisers and federally covered advisers are exempt from all registration, fee, and notice filing provisions of the Act if they do not have a place of business in Texas and have fewer than six clients in Texas. (Karen L. Barr, General Counsel - Investment Counsel Association of America, Inc., and Tamara Reed, Associate Counsel - Investment Company Institute )

Staff Comment: The State Securities Board currently does not require investment advisers and federal covered advisers who do not have a place of business in Texas and have fewer than six clients in Texas to register, but only to notice file and pay a filing fee. This practice is consistent with the National Securities Markets Improvement Act which preserves the State's authority over notice filings and fees. If Texas were to stop requiring notice filings for investment advisers, SSB estimates that the state would loose $411,795 per year.

Change in Statute

6.1 Continue the State Securities Board for 12 years.

Responses

Agency

The State Securities Board agrees with this recommendation. (Nicholas C. Taylor, Chair - State Securities Board, Austin)

For

Clyde Atteberry, Capitol City Task Force - American Association of Retired Persons, Austin

A. Edward Moulin, Principal - Morgan Stanley Dean Witter, New York

Rob Schneider, Senior Staff Attorney - Consumers Union, Austin

Keith Utsey, Vice President and Counsel - Securities Industry Association, New York

Against

None Received

New Issues

The following issues were raised in addition to the six issues contained in the staff report. These issues are numbered sequentially to follow the staff recommendations.

7. To better conform the Texas Securities Act with the National Securities Markets Improvement Act's (NSMIA) limits on state record keeping requirements, remove the requirements that federally registered broker dealers (1) post their certificate of authority, and (2) notify their customers that complaints may be filed with the State Securities Board. (Tamara Reed, Associate Counsel - Investment Company Institute)

Staff Comment: The Securities and Exchange Commission does not define certificates of authority and consumer complaint notices within its record keeping rules. Implementing this new issue would limit the information and protection provided to Texas investors.

8. To distinguish securities that are subject to registration with SSB from those that are only subject to notice filing requirements, define "federal covered securities" in the Securities Act. (Tamara Reed, Associate Counsel - Investment Company Institute)

9. To recognize limits provided by NSMIA, clarify that the Securities Commissioner does not have authority to register federal covered securities, but may only require notice filings. In addition, remove the requirement that sales literature on federal covered securities be routinely filed with SSB and that these securities be registered before being offered. (Tamara Reed, Associate Counsel - Investment Company Institute)

10. To ensure that federal covered securities are not affected, limit the Securities Commissioner's authority to compel issuers of securities to escrow the proceeds of the offering. (Tamara Reed, Associate Counsel - Investment Company Institute)

11. To conform with provisions of NSMIA, specify in the Texas Securities Act that SSB has limited authority to require the registration of out-of-state agents of broker dealers who conduct limited business within the state. (Tamara Reed, Associate Counsel - Investment Company Institute)

12. To limit SSB's potential unbridled authority, clarify that the agency's investigation and enforcement authority over federal covered securities and federal covered investment advisers is limited to fraud and deceit, and not all potential violations of the Act. (Tamara Reed, Associate Counsel - Investment Company Institute)

Staff Comment: As no specific instances of harm have been shown, this provision would unnecessarily hamper the authority of the State to conduct investigations.

13. Require that all rules adopted by the State Securities Board conform with NSMIA. (Tamara Reed, Associate Counsel - Investment Company Institute)

14. Clarify in the Texas Securities Act that the sale of securities that are exempt from registration does not constitute the criminal offense of selling unregistered securities. (Tamara Reed, Associate Counsel - Investment Company Institute)

15. Clarify that federal covered investment advisers and sellers of exempt securities may bring actions to collect commissions or compensation. (Tamara Reed, Associate Counsel - Investment Company Institute)

16. Include in the Act the fees that are currently imposed on money market funds by Board rule. (Tamara Reed, Associate Counsel - Investment Company Institute)

Across-the-Board Recommendations