Securities Division

Introduction

The Securities Division (the “Division”) of the Arizona Corporation Commission (the “Commission”) proposes to adopt procedures concerning the processing of certain registration applications.

Findings

1. WHEREAS A.R.S. §41-1073 mandates that any state agency that issues licenses shall promulgate final rules establishing time-frames during which the agency shall either grant or deny each type of license that the agency issues.
2. WHEREAS, under A.R.S. §41-1073, the Division initiated rulemaking proceedings for three time-frame rules: A.A.C. R14-4-146, R14-4-147, and R14-6-105.
3. WHEREAS proposed A.A.C. R14-4-146 (Docket No. RS-00000A-97-0434) establishes time frames within which the Division shall process the initial and renewal applications for the registration or exemption of securities offerings.
4. WHEREAS proposed A.A.C. R14-4-147 (Docket No. RS-00000A-97-0435) establishes time-frames within which the Division shall process applications for dealer and salesman registration.
5. WHEREAS proposed A.A.C. R14-6-105 (Docket No. RS-00000A-97-0436) establishes time-frames within which the Division shall process applications for investment advisor and investment advisor representative licensure.
6. WHEREAS on March 27, 1998, the Division forwarded to the Commission a proposal recommending that the Commission adopt the proposed time-frame rules.
7. WHEREAS on April 6, 1998, the Commission issued Decision No. 60756 which directed that a hearing be scheduled regarding the proposed time-frame rules for the purpose of taking public comments.
8. WHEREAS by procedural order issued April 8, 1998, the public comment hearing was scheduled for June 2, 1998 in Phoenix, Arizona.
9. WHEREAS the Notices of the Proposed Rulemaking for the three time-frame rules were published in the Arizona Administrative Register on May 1, 1998.
10. WHEREAS the public comment hearing for the three proposed time-frame rules was held as scheduled on June 2, 1998.
11. WHEREAS the Division received comments, both written and oral, concerning R14-4-146 and R14-4-147. Generally, the comments supported the time-frame rules; however, the comments did request shorter “administrative completeness review” and     “substantive review” time-frames, as defined by A.R.S. §41-1072, for three scenarios: (i) securities offerings that are registered with the Securities and Exchange Commission (“SEC”); (ii) securities offering renewals; and (iii) applications for securities salesmen with “clean” disciplinary histories who are transferring firms.
12. WHEREAS the Division acknowledges that there are scenarios where applications can and will be processed in shorter periods of time than allowed for under the proposed time-frame rules. There also are scenarios where the processing of applications will require the full period of time allowed for under the proposed time-frame rules, if not longer.
13. WHEREAS the Division is not in favor of amending the proposed time-frame rules to address each such scenario, but the Division has expressed its commitment to processing all applications under the time-frame rules in a reasonably expeditious manner whenever possible.
14. WHEREAS A.R.S. § 41-1005 exempts from rulemaking an agency statement that concerns only the internal management of an agency which does not directly and substantively affect the procedural rights or duties of any segment of the public.
15. WHEREAS the Division has agreed to adopt an internal procedural statement that will direct staff of the Division to process the three applications identified above in an “expedited” manner. Specifically, the Division has agreed to the following:
    1. With respect to applications for securities offerings that are registered with the SEC, the administrative completeness review time-frame shall be 30 days, and the substantive review time-frame, when no hearing is requested, shall be 30 days.
    2. With respect to applications for the registration renewal of securities offerings, the administrative completeness review time-frame shall be 15 days, and the substantive review time-frame, when no hearing is requested, shall be 15 days.
    3. With respect to applications for securities salesmen with clean disciplinary histories who are transferring firms, the administrative completeness review time-frame shall be 15 days from the date that the Division receives the Form U-5 from the salesman’s former firm, and the substantive review time-frame, when no hearing is requested, shall be 15 days.
16. WHEREAS the parties who submitted comments concerning the proposed time-frame rules have expressed their approval of this statement of procedure in lieu of amendments to the proposed rules.
17. WHEREAS the hearing officer has recommended that the Commission adopt the time-frame rules, as proposed by the Division.
    

Order

THEREFORE IT IS ORDERED that the Division’s staff shall process the following applications within the prescribed time-frames whenever possible:

1. With respect to applications for securities offerings that are registered with the SEC, the administrative completeness review time-frame shall be 30 days, and the substantive review time-frame, when no hearing is requested, shall be 30 days.
2. With respect to applications for the registration renewal of securities offerings, the administrative completeness review time-frame shall be 15 days, and the substantive review timeframe, when no hearing is requested, shall be 15 days.
3. With respect to applications for securities salesmen with clean disciplinary histories who are transferring firms, the administrative completeness review time-frame shall be 15 days from the date that the Division receives the Form U-5 from the salesman’s former firm, and the substantive review time-frame, when no hearing is requested, shall be 15 days.

IT IS FURTHER ORDERED that this statement of procedure shall become effective immediately.

BY ORDER OF THE ARIZONA CORPORATION COMMISSION

[Administrative Order, Arizona Corporation Commission, 7-16-98.]

This substantive policy statement is advisory only.  A substantive policy statement does not include internal procedural documents that only affect the internal procedures of the agency and does not impose additional requirements or penalties on regulated parties or include confidential information or rules made in accordance with the Arizona administrative procedure act.  If you believe that this substantive policy statement does impose additional requirements or penalties on regulated parties you may petition the agency under section 41-1033, Arizona Revised Statutes, for a review of the statement.

Effective June 18, 1991, issuers of securities pursuant to Securities and Exchange Commission Rule 415 relating to shelf registrations who desire to register those securities by qualification in Arizona are required to file a single Form U-1 with the Division at the time of filing the initial application with the SEC. Upon completion of the Division’s examination of the filing and resolution of issues raised, and upon SEC effectiveness, an Order of Effectiveness will be issued by the Division. The registration will remain effective for one year from the date of effectiveness and may be renewed upon timely application by the issuer.

The Division’s former policy requiring the separate registration of each “takedown” from the “shelf” is hereby rescinded.

[Policy Statement, Arizona Corporation Commission, Securities Division, 8-22-91.]

This substantive policy statement is advisory only.  A substantive policy statement does not include internal procedural documents that only affect the internal procedures of the agency and does not impose additional requirements or penalties on regulated parties or include confidential information or rules made in accordance with the Arizona administrative procedure act.  If you believe that this substantive policy statement does impose additional requirements or penalties on regulated parties you may petition the agency under section 41-1033, Arizona Revised Statutes, for a review of the statement.

The Securities Division holds the position that when a guarantee/letter of credit is an integral part of an underlying security and is not separable from the underlying security and has no value apart from the underlying security, the guarantee/letter of credit and the underlying security will be considered as a single unit. When the underlying security is exempt from registration, separate registration of the guarantee/letter of credit is not required. When registration is required, a single registration of both the underlying security and the guarantee/letter of credit is sufficient.

[Policy Statement, Arizona Corporation Commission, Securities Division, 1-21-91.]

This substantive policy statement is advisory only.  A substantive policy statement does not include internal procedural documents that only affect the internal procedures of the agency and does not impose additional requirements or penalties on regulated parties or include confidential information or rules made in accordance with the Arizona administrative procedure act.  If you believe that this substantive policy statement does impose additional requirements or penalties on regulated parties you may petition the agency under section 41-1033, Arizona Revised Statutes, for a review of the statement.

The Division will require that a complete U-1 application be filed for any of the following registrations:

1. a. Qualification: A.R.S. 44-1891
2. Description: A.R.S. 44-1871
3. Additional: A.R.S. 44-1874 and A.R.S. 44-1900
4. Oversale: A.R.S. 44-1861(J).

[Policy Statement, Arizona Corporation Commission, Securities Division, 4-3-87.]

This substantive policy statement is advisory only.  A substantive policy statement does not include internal procedural documents that only affect the internal procedures of the agency and does not impose additional requirements or penalties on regulated parties or include confidential information or rules made in accordance with the Arizona administrative procedure act.  If you believe that this substantive policy statement does impose additional requirements or penalties on regulated parties you may petition the agency under section 41-1033, Arizona Revised Statutes, for a review of the statement.

Advertising materials submitted for review will not be acknowledged unless accompanied by a self addressed stamped envelope along with a copy of the cover letter to be date stamped and returned. If the Division finds the advertising non-compliant with A.A.C. R14-4-103, a letter will be sent to the Issuer within three business days of receipt of the advertising. Such letter will indicate the areas of non-compliance which must be corrected before the materials may be utilized in Arizona.

[Policy Statement, Arizona Corporation Commission, Securities Division, 4-3-87.]

This substantive policy statement is advisory only.  A substantive policy statement does not include internal procedural documents that only affect the internal procedures of the agency and does not impose additional requirements or penalties on regulated parties or include confidential information or rules made in accordance with the Arizona administrative procedure act.  If you believe that this substantive policy statement does impose additional requirements or penalties on regulated parties you may petition the agency under section 41‑1033, Arizona Revised Statutes, for a review of the statement.

1985 Amendments to Rules R14-4-101 - 103 of the Securities Division

On July 18, 1985 certain amendments to the Commission Rules and Regulations went into effect. Of particular significance to the Regulation Section are the amendments to A.C.R.R. R14-4-101, R14-4-102 and R14-4-103.

R14-4-101, promulgated pursuant to A.R.S. Section 44-1845, provides an exemption from the securities and dealer registration requirements where offers and sales are made to existing employees or security holders and no commission or remuneration is paid to any person in connection with the distribution or sale of such securities. The rule previously limited the dollar amount of the securities to be offered to $50,000; the amendment increased this amount to $500,000. The exemption is effective for one year.

R14-4-102, also promulgated pursuant to A.R.S. Section 44-1845, provides an exemption from the securities and dealer registration requirements where offers and sales are made to ten or fewer persons in Arizona. As amended, the dollar amount of securities which may be offered or sold pursuant to such exemption is increased from $50,000 to $100,000. The amendment also adds a purchaser suitability requirement whereby the investment will be presumed suitable for the purchaser if it does not exceed 20 percent of the purchaser’s net worth (excluding principal residence, furnishings and personal automobiles). The exemption is effective for one year.

R14-4-103, as amended, no longer requires the filing of advertising and sales materials used in connection with the sale of investment company shares registered pursuant to the Investment Company Act of 1940 if such materials meet the requirements of the Securities and Exchange Commission Rule 156 (17 CFR 230.156).

[Securities Bulletin, Winter 1986.]

This substantive policy statement is advisory only.  A substantive policy statement does not include internal procedural documents that only affect the internal procedures of the agency and does not impose additional requirements or penalties on regulated parties or include confidential information or rules made in accordance with the Arizona administrative procedure act.  If you believe that this substantive policy statement does impose additional requirements or penalties on regulated parties you may petition the agency under section 41‑1033, Arizona Revised Statutes, for a review of the statement.

Reporting Requirements

All registered issuers are required to file an annual report of sales of securities within 60 days after the registration’s expiration date or termination of the offering, whichever occurs first. The report of sales may be submitted by letter or on Form USR or similar form. If Form USR is issued to report such sales, redemption should not be calculated into the ending balance.

[Letter from Corporation Commission to CCH, dated 4-22-85.]

This substantive policy statement is advisory only.  A substantive policy statement does not include internal procedural documents that only affect the internal procedures of the agency and does not impose additional requirements or penalties on regulated parties or include confidential information or rules made in accordance with the Arizona administrative procedure act.  If you believe that this substantive policy statement does impose additional requirements or penalties on regulated parties you may petition the agency under section 41‑1033, Arizona Revised Statutes, for a review of the statement.

The Securities Division has noted the growing use of zero coupon bonds as incentives in the sales of furniture, cars, tires and houses. Although certain bonds may be exempt under A.R.S. § 44-1843, the use of non-exempt zero coupon bonds as incentives may constitute a “sale” within the meaning of the Arizona Securities Act. Section 44-1801.12, which defines “sale”, states that “a security given or delivered with, or as a bonus on account of, a purchase of securities or other thing, shall be conclusively presumed to constitute a part of the subject of the purchase and to have been sold for value.” Further, as Section 44-1842 of the Act provides, it is unlawful to offer or sell securities unless the offeror/seller is registered pursuant to Article 9 of the Act. In conclusion a merchant who uses zero coupon bonds as a sales incentive may have to be registered as a securities dealer or salesman unless he has a proper exemption. Rule 104 requires sellers of bonds issued by state governments to register as a dealer.

[Securities Bulletin, Spring 1985.]

This substantive policy statement is advisory only.  A substantive policy statement does not include internal procedural documents that only affect the internal procedures of the agency and does not impose additional requirements or penalties on regulated parties or include confidential information or rules made in accordance with the Arizona administrative procedure act.  If you believe that this substantive policy statement does impose additional requirements or penalties on regulated parties you may petition the agency under section 41‑1033, Arizona Revised Statutes, for a review of the statement.

The Securities Division subscribes to the Statements of Policy adopted by the North American Securities Administrators Association, Inc. (NASAA) relating to the registration of securities in Arizona except where in conflict with a state rule or regulation. The Statements of Policy are printed in CCH NASAA Reports.

[Letter from Corporation Commission to CCH, dated 11-27-84.]

This substantive policy statement is advisory only.  A substantive policy statement does not include internal procedural documents that only affect the internal procedures of the agency and does not impose additional requirements or penalties on regulated parties or include confidential information or rules made in accordance with the Arizona administrative procedure act.  If you believe that this substantive policy statement does impose additional requirements or penalties on regulated parties you may petition the agency under section 41‑1033, Arizona Revised Statutes, for a review of the statement.

What Constitutes Security

Effective January 11, 1983, the Commodity Exchange Act was amended to afford the states authority to take action, under the Blue Sky Laws or otherwise, against fraud in the sale of commodities which do not occur on regulated exchanges.

Under the Securities Act of Arizona, the sales of certain commodities which do not require delivery to the purchaser within 28 days of payment of any portion of the purchase price are defined as securities.

The result of this provision is that such transactions are subject to the regulatory provisions of the Arizona Securities Act. It is felt that the disclosure requirements and review associated with registration will reduce investor losses as a result of fraud in this area.   Individuals engaging in any form of deferred delivery transactions are invited to come in and discuss registration and the law in this area.

[What Constitutes Security]

In the meantime, the issue of what constitutes a security in other areas continues to confront the Division. Sellers seeking to avoid disclosure requirements under the Act continue to be creative in putting together programs which, they argue, do not fall within the definition of a security. The most common tact is to utilize “third parties” to provide managerial efforts for investors.   The Division views transactions in the context of their economic substance, rather than form.

[Securities Bulletin, Fall 1983.]

This substantive policy statement is advisory only.  A substantive policy statement does not include internal procedural documents that only affect the internal procedures of the agency and does not impose additional requirements or penalties on regulated parties or include confidential information or rules made in accordance with the Arizona administrative procedure act.  If you believe that this substantive policy statement does impose additional requirements or penalties on regulated parties you may petition the agency under section 41‑1033, Arizona Revised Statutes, for a review of the statement.

Inquiries Concerning Pending Registrations and No-Action Requests

Due to the great increase in the number of applications with the Securities Division, until further notice, the following policies will be in effect:

A. Questions regarding pending securities, broker-dealer, and salesman applications will be accepted between the hours of 8:00 a.m. and 5:00 p.m. MST.

B. The Division will respond to no action requests. The fee for a no action letter is set forth in A.R.S. § 44-1861(L).

C. As with filings with the Division, requests for no action letters are public record. At the Division’s discretion, requests for no action letters, whether granted or denied, may be published.

[Policy Statement, Arizona Corporation Commission, Securities Division, 9-18-91.]

This substantive policy statement is advisory only.  A substantive policy statement does not include internal procedural documents that only affect the internal procedures of the agency and does not impose additional requirements or penalties on regulated parties or include confidential information or rules made in accordance with the Arizona administrative procedure act.  If you believe that this substantive policy statement does impose additional requirements or penalties on regulated parties you may petition the agency under section 41‑1033, Arizona Revised Statutes, for a review of the statement.

The procedures set forth herein are intended to facilitate preparation of applications to register the above-referenced securities. Such applications should be made in accordance with the following:

1. Convertible Securities. A sale or offer for sale of a convertible security is deemed to be an offer to sell the security into which it may be converted (A.R.S. §44-1801(8)). Hence, application must be made to register both the convertible security and the security into which it may be converted. The fee for registration is based on the aggregate amount of the convertible security to be registered.

The registration of securities to be acquired pursuant to the conversion must be effective at the time of exchange unless an exemption from A.R.S. §44-1841 is available.

2. Rights to Subscribe/Warrants. A sale or offer for sale of a right to subscribe, option, warrant, or other similar right (collectively “right”) is deemed to be an offer to sell the security underlying such right (A.R.S. §44-1801(8)). Hence, application must be made to register both the right and the underlying security. The fee for registration is based on the aggregate amount of the rights and the underlying securities.

The registration of the underlying securities must be effective at the time the right is exercised unless an exemption from A.R.S. §44-1841 is available.

3. Assessments. A sale or offer for sale of securities which are assessable is deemed to be an offer to sell the assessments as a separate security. Hence, application must be made to register both the security and the assessment. The fee for registration is based on the aggregate amount of the security and the assessment.

The registration of the assessment must be effective at the time it is called, unless an exemption from A.R.S. §44-1841 is available.

This substantive policy statement is advisory only.  A substantive policy statement does not include internal procedural documents that only affect the internal procedures of the agency and does not impose additional requirements or penalties on regulated parties or include confidential information or rules made in accordance with the Arizona administrative procedure act.  If you believe that this substantive policy statement does impose additional requirements or penalties on regulated parties you may petition the agency under section 41‑1033, Arizona Revised Statutes, for a review of the statement.