CLOSE PROX ACR-MDT GA-SMA IN CLT ARSA SOUTH OF ARPT ON LOCALIZER FOR RWY 35R.

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CLRED FOR THE ILS 36R AT CLT. WE WERE HANDED OVER TO TWR APPROX 13 MI OUT. AT 2400 FT ON THE LOC WE WERE BTWN LAYERS WITH CLOUD TOPS AT ABOUT 2000 FT AND THE NEXT LAYER ABOUT 3500 FT. VISIBILITY WAS HAZE; ABOUT 2 MI. AT HAYOU; THE FAF I NOTICED AN SMA SWBND 200 FT BELOW US AND COMING RIGHT AT US AT ABOUT 1:30. HE WAS UNDER US BEFORE I COULD TAKE EVASIVE ACTION. WE RPTED A NMAC RIGHT AWAY AS THE FELLOW WAS HEADED FOR THE 36L LOC (SIMULTANEOUS ILS'S WERE IN OPERATION). HAD HE BEEN AT OUR ALT I WOULD HAVE HAD TIME TO REACT. HOWEVER; IT WOULD HAVE BEEN VERY ABRUPT AND WOULD HAVE ALARMED THE PAX. SINCE HE WAS 200 FT BELOW I CHOSE (IN THE SPLIT SECOND I HAD) NOT TO ALARM THEM OR RISK INJURY TO THE FLT ATTENDANTS WHO MAY HAVE BEEN IN THE AISLE BY TAKING EVASIVE ACTION. THE PLT OF THE SMA WAS ILLEGAL; ONLY 200 FT ABOVE THE CLOUDS; AND IN AN ARSA WITH NO CLRNC. HE APPARENTLY HAD A XPONDER; BUT IT HAD NO ALT ENCODING CAPABILITY. I PHONED ATC LATER AND FOUND THIS OUT. THIS INCIDENT COULD HAVE BEEN AVOIDED IF SLOW ACFT NOT CAPABLE OF MAINTAINING AT LEAST 150 KTS ON APCH WOULD BE PROHIBITED FROM OPERATING WITHIN THE CTLED AIRSPACE OF THE MAJOR ACR ARPTS. ALSO; REQUIRE ANY ACFT WITH AN ELECTRICAL SYS TO HAVE A XPONDER WITH MODE C ALT ENCODING CAPABILITIES AND TO USE IT.