ATTORNEY GENERAL BRADY EXPRESSES CONCERNS TO CONGRESS
Attempt by Congress to Pre-empt State Securities Enforcement Authority at Issue
July 24, 2003
Hon. Michael G. Oxley Via Fax No. 202-226-0682
Committee on Financial Services
2129 Rayburn Bldg.
Washington, DC 20515
Hon. Barney Frank Via Fax No. 202-226-0070
Ranking Majority Leader
Committee on Financial Services
301 C Rayburn Bldg.
Washington, DC 20515
Re: Securities Fraud Deterrence and Investor Restitution Act of 2003
HR 2179 Sec. 8(b)
Dear Congressmen Oxley and Frank:
We strongly oppose the recent amendment of Section 8(b) to H.R. 2179, the Securities Fraud Deterrence and Restitution Act. As members of the group of five Attorneys General who also serve as the securities regulator in our respective states, and William Lockyer who, as President of the National Association of Attorneys General, is concerned about the preemption of state enforcement powers, we believe our states would be severely hampered in our ability to remedy frauds perpetrated upon the small investor. For example, the bill prohibits us from imposing injunctive relief that would require securities law violators to cease their deceptive practices relating to disclosure or conflicts of interest.
. State Securities Regulators.
Because each state has securities regulators who have direct contact with state residents and local police, and who publicize their interest in helping investors through the presentation of investor education opportunities, these securities regulators are often the first to receive complaints from individual citizens who have been harmed. The losses detailed in many complaints, while of extreme consequence to the investor, can be too small to merit the attention of the SEC. Often, the state securities regulators are the first, and last, resort for the small individual investor.
The impact upon the remedies available to the investor will be significant, if states are not permitted to continue their current enforcement efforts. From figures collected in a survey by the North American Securities Administrators Association (NASAA) of state action for FY 2001-2002, the states filed the following actions during that year:
• 2,579 administrative actions resulting in fines of $70,889,739.00 and recission orders (restitution) totaling $126,020,357.00; and
• 78 civil actions resulting in restitution or disgorgement in the amount of $183,396,049.00; and
• 360 criminal actions resulting in fines of $878,353,132.00 and a combined total of 1,612 years of incarcerations for those convicted of securities related crimes, during this time period.
These actions benefit the small investor in our states. Each state attempts to ensure that the aggrieved investor is made whole either by actions to seek restitution, or by the appointment of a receiver. And, while the previously mentioned NASAA survey did not ask specific questions about restitution, data from a new survey by NASAA, which is still in progress, shows that 29 states have reported that through their actions, 431.1 million dollars in restitution has been ordered in FY 03. Of that amount, 278 million dollars has been recovered and sent to victims of investment fraud or misconduct by investment professionals.
B. HR 2179 §8(b).
In the previous “mark-up” process language which would have deprived states of their fines received from state enforcement actions, was deleted. What was offered as a “compromise” to replace the deleted language, without significant input from state representatives, was more harmful than the language that preceded it.
In essence, the amended language in section 8(b)(1)(a) prohibits the states from making any “... law, rule, regulation, judgment, agreement or order, or any other action of any state, or political subdivision thereof [relating to] ... disclosure, or conflict of interest requirements for [stock] brokers, dealers ...” (Emphasis added)
The language of this amendment would prevent an inquiry by the states into misconduct by analysts at firms who have registered with our states to conduct business and sell securities products to investors in our states. In addition, an unintended consequence of the amendment is that it will restrict the ability of state regulators and prosecutors to address fraud, since state securities fraud statutes prohibit fraudulent non-disclosures as well as material misrepresentations. This impairs our investigators’ ability to address situations where security brokers and dealers intentionally and knowingly fail to disclose an important fact necessary for the investor to make a proper decision, or who engage in half truths when dealing with their clients. Even when no specific state statute exists prohibiting conflicts of interest, common sense dictates that where conflicts of interest are present, there is a motive for abuse or wrongdoing. Currently, most states cover these conflict situations under their “dishonest and unethical practices” statutes. This amendment will restrict states’ jurisdiction over securities fraud and will preclude our efforts to assist state investors harmed by some forms of securities fraud, or misconduct.
Section 8(b)(1)(b) amends the National Securities Markets Improvement Act (NSMIA). It is purported to be intended to preserve the states’ authority to combat fraud but, as amended, restricts the state’s ability to prevent and punish securities fraud, and broker misconduct. The amendment removes from present law the preservation of authority language for states to sanction “unlawful conduct by a broker or dealer.”
While the intent of the deletion is not clear, the removal of this phrase creates a defense argument that states no longer have the authority to protect state investors by addressing the many types of broker misconduct to protect state investors. There are many types of broker misconduct that do not directly involve fraud. Two types of misconduct which readily come to mind are excessive trading in a customer’s account (churning) and the sale of unsuitable securities, both examples of “dishonest and unethical” conduct.
In summary, in a time when there is a need for stricter oversight of the conduct of investment professionals, a need to enhance confidence in the markets, and a need to provide increased investor protection, the amendments to HR 2179, as currently drafted, impair enforcement by state regulators and law enforcement. In the final analyses, it is the investor who is ultimately harmed by the proposed language.
We thank you for your consideration of our concerns and would welcome any opportunity to discuss this matter with you.