Friday, July 11, 2008

House Financial Services Committee Marks Up Securities Act of 2008

A bipartisan bill increasing the SEC’s enforcement powers and requiring increased attention to accounting and auditing matters has been marked up by the House Financial Services Committee. The Securities Act of 2008 would allow the SEC to impose monetary penalties in cease and desist proceedings. In 1990, the Securities Enforcement Remedies Act authorized the SEC to issue cease and desist orders through administrative action, which allows the Commission to act quickly when ongoing conduct places investors in continuing jeopardy. A cease and desist order is an administrative remedy directing a person to refrain from engaging in further violative conduct.

The bill provides that the SEC can impose a tiered monetary penalty if it finds that a person is violating or caused a violation of the securities laws or regulations; and the penalty is in the public interest. The first tier maximum penalty is $6500 for a natural person and $65,000 for any other person. The penalty increases to $65,000 for a natural person and $325,000 for others if the act involved fraud or the reckless disregard of a regulation. Finally, for fraudulent or reckless acts resulting in substantial losses to victims or substantial pecuniary gain to the actor, the SEC may impose penalties of up to $130,000 for a natural person and $650,000 for others.

The measure provides that actors subject to these monetary penalties may present evidence of their ability to pay such penalty, which the Commission has discretion to consider in determining whether such penalty is in the public interest. The evidence may relate to the extent of such person’s ability to continue in business and the collectability
of a penalty, taking into account any other claims of the United States or third parties upon the person’s assets.

The Act also finds that the complexity of accounting and auditing standards in the United States has added to the costs and effort involved in financial reporting. In this regard, the bill mandates the SEC, FASB and the PCAOB to annual provide oral testimony to Congress on their efforts to reduce the complexity of financial reporting in order to provide more accurate and clear financial information to investors.

The testimony must discuss the reassessment of complex and outdated accounting standards. The agency chairs must also discuss how to improve the understandability, consistency, and overall usability of the existing accounting and auditing literature. Congress also wants information on how the development of principles-based accounting
standards is progressing. In addition, there must be a discussion of how to encourage the use and acceptance of interactive data, as well as efforts to promote disclosures in plain English.

The bill’s sponsor, Rep. Paul Kanjorski, noted that a majority of the provisions in the bill have been recommended to Congress by the Commission. Also, several of the sections of the bill have previously passed the House or the Financial Services Committee. He noted that SEC Chairman Cox has written a letter supporting the bill, in which he said that the measure would increase the effectiveness of the Commission’s major operational programs.