State Bar Urges Securities Deregulation Austin Texans are known to pride themselves on individual freedom and self-reliance. Consistent with the Texas tradition, antiregulation forces have always had a strong grip on the state legislature. But despite this tradition and the Texas businessman’s reputation as the modern epitome of our “pioneer spirit,” Texas maintains one of the most highlyregulated securities markets in the nation. Deregulation advocates may, however, soon strangle security regulation, too. The Texas State Bar Committee on Securities and Investment Banking, with strong backing from securities dealers, has drafted a new version of the State Securities Act which greatly softens its regulatory powers. The proposed legislation’s most radical departure from the current act is its repeal of the merit review standards which are central to regulation of Texas’ multi-billion dollar securities market. Those who intend to testify against the bar committee’s legislation including two former state securities commissioners fear that merit review’s elimination will do irreparable harm to the robust Texas securities market. Roy Mouer, Texas securities commissioner from 1972 to 1976, says that eliminating merit review “will be issuing an open invitation for low quality securities dealers to set up shop in Texas and will increase securities fraud. Current regulation requires State duct a “merit review” of the financial prospectus of any organization that wishes to issue securities in Texas. The SSB examiners must be convinced that the relationship between securities issuer and new investor will be “fair, just, and equitable,” and thus “merit” investment by Texas investors. The examiners’ judgment is based on standards for offering price, promoter investment, stock options Leslie Whitaker is an Austin freelance writer. By Leslie Whitaker and warrants, cheap stock, stockholder voting rights, and marketing expenses. If convinced, the examiners grant the potential issuer a permit to sell in Texas. Issuers who do not pass merit review receive recommendations from the examiners for financial reorganization if they wish to pursue permission to sell here. SMU law professor Alan Bromberg, drafter of the bar committee’s legislation, contends that the state agency does not have the expertise to review securities adequately and that interference in ,the securities market is inappropriate for state government. Bromberg and other critics of merit review favor abolishing state review and relying on federal regulations called “full disclosure” which mandate that securities issuers make an extensive financial prospectus available to interested investors. These same critics charge that the protection afforded to Texas investors by merit review is paternalistic and stifles the free market. That securities lawyers and dealers stand to gain from merit review’s elimination is no secret. Securities dealers would have easier access to Texas investor dollars without merit review. Legal fees would decrease and reorganization costs would be eliminated. Securities lawyers, in turn, would have an increased volume of clients, as increasing numbers of dealers begin operating in Texas, and less work in advising each client. Securities lawyers may also enjoy an increase in litigation if fraud cases increase. Bromberg, however, maintains that merit review’s elimination is against the self-interest of securities lawyers. “We make a lot of money guiding clients through the maze [of merit regulation];” he says, predicting that securities lawyers’ fees will come down if the bar committee’s draft is enacted. Not all securities dealers, however, are subject to merit review under the present securities act. The lengthy list of exemptions includes securities listed on national exchanges, utilities securities, securities sold to less than 25 persons, and securities sold to exempt investors financial institutions and investors worth $1 million with an annual income of $200,000. Exempt issuers do not have to register with the state before selling in Texas. The bar committee charges that current regulations fail to detect scurrilous claims for exemptions. “There’s a lot of bad stuff that goes on in Texas, and it’s not taking place in the light of the board,” says bar committee chairman Charles Still, a lawyer with the Houston law firm Fulbright and Jaworski. He feels that to protect the investor better the enforcement division staff must be increased. The staff shortage is illustrated most dramatically, Still says, by the one enforcement officer assigned to West Texas, whose territory stretches from El Paso to Amarillo. Bromberg argues that merit review regulation has a discriminatory effect against small businesses and small investors. Small businesses are less able to afford the legal counsel and reorganization costs often required to obtain a seller’s permit and, therefore, are denied access to the Texas capital market. Bromberg adds that investors usually have access to securities which have not passed Texas merit review in the secondary market-trading between individuals but then often at a higher price than if they had bought directly from the issuer. The Case for Merit Review Texas has a national reputation as being one of the strictest and most efficient merit review enforcers among the 30-odd states which have similar regulations. Though the SSB officially takes a neutral stance on the regulation, Commissioner Richard Latham has been known to favor merit review regulation on previous occasions. Two former commissioners maintain that the average Texas investor has operated under the protection of this legislation since its drafting in 1957 and stands to gain from its retention. “I can still remember the headlines,” says 16 JANUARY 28, 1983
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