Resale of Private Offerings : SEC May Loosen Securities Trading Rule

The Securities and Exchange Commission voted Monday to seek public comment on a rule allowing large institutional investors to trade certain privately issued securities among themselves.

The move is seen as a way to attract more funds to the American capital markets.

Current rules severely limit resales of private offerings to prevent small investors who lack the sophistication to analyze the merits of these offerings from buying the securities.

But in the past decade, the private debt and equity market in the United States has tripled in size to about $80 billion. The rules today limit buyers, depressing prices, and that has led to pressure for change.

The rules approved by the SEC for public comment before the commission takes a final vote would allow institutional investors with $100 million in securities to buy and sell to each other.

The New York Stock Exchange and the Securities Industry Assn. had objected that a flourishing private market would create a dual system, undermining the public exchanges.

Bowing to these concerns, the revised rule would apply only to resale of debt in U.S. companies, not to stock. However for foreign companies, both debt and equity could exchange hands as long as their issues are not already listed on U.S. exchanges.

Although the SEC voted unanimously for the proposed rule, Commissioner Charles Cox urged broadening the group of institutional investors it covers.

“One-hundred-and-two qualified broker-dealers only are covered in this proposal out of about 9,000 listed broker-dealers,” Cox said. He proposed allowing institutions with $25 million to $50 million invested in securities to join the club.

But Linda Quinn, director of the SEC’s division of corporate finance, suggested waiting for public comments before tampering with the definition.

An earlier SEC proposal last fall suggested allowing institutions with $100 million in total assets, not securities, to trade among themselves. This provoked criticism that a tiny rural bank without investment experience would be eligible.

In other action, the SEC voted to seek public comment on relaxing public disclosure requirements for Canadian companies that trade securities in the United States.

The reciprocal plan would allow all Canadian companies listed on the Toronto, Montreal or U.S. exchanges to file documents with the SEC that meet their nation’s disclosure standards.

The proposal is the first in an SEC plan to make U.S. markets more attractive to foreign companies by easing stringent reporting standards.

Both proposals will be published in the Federal Register, and the SEC expects to take final votes in the fall.