The SEC recently (Aug. 8, 2011) proposed (PDF) an amendment to Rule 146 under Section 18 of the Securities Act of 1933 to designate certain securities on BATS Exchange, Inc. as “covered securities” for purposes of Section 18. As a general matter, “covered securities” are exempt from state law registration or qualification requirements pursuant to the National Securities Markets Improvement Act of 1996 (“NSMIA”). The proposed amendment raises the question: what securities are “covered securities” today?
Section 18 of the Securities Act exempts from state registration or qualification requirements, and any other state-imposed limits, any security that is a covered security or will be a covered security upon the completion of a pending transaction. By statute, covered securities specifically include any security listed or authorized for listing on:
- the New York Stock Exchange;
- the American Stock Exchange (now NYSE Amex);
- the National Market System of the Nasdaq Stock Market (now the NASDAQ Global Market of the NASDAQ Stock Market); and
- any national securities exchange “that has listing standards that the Commission determines by rule . . . are substantially similar” to the listing standards of the exchanges named in Section 18;
- as well as any security of the same issuer that is equal in seniority or senior to the security that is a covered security.
A covered security also includes a security issued by an investment company that is registered (or in the registration process) under the Investment Company Act of 1940.
Rule 146(b) under the Securities Act identifies additional covered securities as those securities listed (or authorized for listing) on the following national securities exchanges:
- Tier 1 of the NYSE Arca, Inc. (formerly the Pacific Stock Exchange) (added in Jan. 1998);
- Tier 1 of the Philadelphia Stock Exchange, Inc. (now known as the NASDAQ OMX PHLX LLC) (added in Jan. 1998);
- The Chicago Board Options Exchange, Incorporated (added in Jan. 1998);
- options listed on the International Securities Exchange, LLC (added in Jul. 2004); and
- the NASDAQ Capital Market (added in Apr. 2007).
In each case, the designation as covered securities is conditioned on the applicable exchange’s listing standards continuing to be substantially similar to the listing standards of the exchanges named in Section 18.
The BATS Exchange petitioned the SEC (PDF) for the proposed amendment of Rule 146. This is the same procedures utilized by the exchanges currently listed in Rule 146(b). In each case, the SEC carefully reviewed the exchange listing standards compared to those of the named exchanges. The BATS Exchange proposed revised listing standards to the SEC (PDF) on May 25, 2011 (updated Jul 14, 2011). In connection with the proposed rule amendment, the SEC has preliminarily determined that the BATS Exchange proposed listing standards are substantially similar to, meaning at least as comprehensive as, the named exchanges. Comments to the proposed rule amendment are due to the SEC by Sep. 12, 2011.
OUR TAKE: Thanks to NSMIA, the concept of “covered securities” has had a significant impact on federal registrations of securities, simplifying the process by insulating these offerings from state registration or qualification requirements. As this proposed rulemaking indicates, however, the concept is not static. The SEC will continue to add to add covered securities designations as listing standards evolve and become more sophisticated.