House Passes Securities Act of 2008 Enhancing SEC Enforcement Powers

A bipartisan bill increasing the SEC’s enforcement powers and requiring increased attention to accounting and auditing matters has passed the House under a suspension of the rules. The Securities Act of 2008 (HR 6513) authorizes 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.

Moreover, SEC enforcement efforts will benefit from provisions authorizing the nationwide service of subpoenas and the imposition of collateral bars. These provisions respectively will allow the Commission to allocate its funds more efficiently and prevent bad actors from re-entering other parts of the industry. The bill is endorsed by the SEC and the North American Securities Administrators Association. In fact, the bill’s sponsor, Rep. Paul Kanjorski, noted that a majority of the provisions in the bill were recommended to Congress by the Commission.

Other provisions in the bill help investors by extending the insurance provided by the Securities Investor Protection Corporation to securities futures held within their portfolio. As a result, the bill enhances the competitiveness of the U.S. markets by advancing portfolio-based margining for the customers of broker-dealers.

The bill also 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.

Many provisions of the Federal securities laws authorizing the sanctioning of a person who engages in misconduct while associated with a regulated or supervised entity explicitly provide that such authority exists even if the person is no longer associated with that entity. Several provisions, however, do not explicitly address this issue, although, according to Rep. Kanjorski, the intent of earlier Congresses appears to have been that the SEC had such authority, and no contrary statutory language or legislative history exists.

In fact, Congress has amended several statutory provisions to ratify and confirm the authority of the Commission to discipline a person formerly associated with a regulated entity for conduct while an associated person, but it did not express intent to provide such authority only for those provisions being amended

To build on these previous efforts, section 3 of the Act amends additional provisions of the securities laws that do not explicitly address this issue. These changes confirm that the Commission may sanction or discipline persons who engage in misconduct while associated with a regulated or supervised entity, even if they are no longer associated with that entity.

Thus, the amendments would not alter or expand the Commission's current authority, noted Rep. Kanjorski, they would only ratify and confirm it. As a general rule, it is the intent of the Congress that the securities laws, including but not limited to those provisions amended by section 3, apply to and provide meaningful remedies for sanctioning persons who engage in misconduct while associated with a regulated or supervised entity, even if the person is no longer associated with that entity.

The bill also conforms the language of the law to existing interpretations about when unlawful margin lending occurs. The Capital Markets Efficiency Act of 1996 exempted from federal margin requirements, adopted under section 7 of the Exchange Act, credit extended, maintained, or arranged to or for a member of a national securities exchange or registered broker-dealer under certain circumstances. In the portion of section 7 that was not substantively amended by the Capital Markets Efficiency Act, the word ``and'' was inserted, which could be read to mean that margin lending would be unlawful only if both elements of the pre-existing prohibitions were violated, when prior to the Capital Markets Efficiency Act violation of either prong was sufficient to make such margin lending unlawful.

Specifically, the first prong, section 7(c)(1)(A), states that margin lending is unlawful if done in contravention of the Federal Reserve Board's rules, and the second prong, section 7(c)(1)(B), states that margin lending is unlawful without collateral or on any collateral other than securities, except in accordance with the Federal Reserve Board's rules. The bill would clarify that a violation of either prong remains sufficient to establish a cause of action for improper margin lending.

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.