Reed Measure Would Add SEC Investor Protections to Senate Financial Reform Bill

Legislation just introduced by Senator Jack Reed, a senior member of the Senate Banking Committee, would add a number of SEC investor protections to the Restoring American Financial Stability Act, S. 3217, including nationwide service of process and authority to impose civil penalties in cease and desist proceedings. Senator Reed plans to introduce these investor protection provisions as an amendment to S. 3217 when it reaches the Senate floor. Essentially, the effort is to fill investor protection gaps in the Senate financial reform legislation by reference to the House reform legislation passed last year, HR 4173, which contains enhanced authority for the SEC in a number of areas pursuant to provisions championed by Rep. Paul Kanjorski, a senior member of the House Financial Services Committee.

The Modernizing and Strengthening Investor Protection Act, S 3258. would improve the ability of the SEC to protect investors by strengthening its ability to bring enforcement actions, addressing issues revealed by the recent Madoff fraud, and modernizing its ability to obtain critical information. In particular, it would enhance the ability of the SEC to hire market experts, strengthen oversight of fund custodians, modernize the SEC's ability to obtain information from the firms it oversees, and clarify and enhance SEC penalties and other authorities. According to Senator Reed, his legislation is intended to mirror a bill that Rep. Kanjorski introduced and worked to include in the House version of Wall Street reform. (Cong. Record, April 26, 2010, S 2644)

Among other things, the Reed measure would streamline the SEC’s existing enforcement authorities by permitting the SEC to seek civil money penalties in cease-and-desist proceedings under federal securities laws. The measure would ensure appropriate due process protections by making the SEC’s authority in administrative penalty proceedings coextensive with its authority to seek penalties in federal court. As is the case when a federal district court imposes a civil penalty in an SEC action, administrative civil money penalties would be subject to review by a federal appeals court.

Also, the legislation would allow subpoenas to be served nationwide in SEC enforcement actions in federal court. Currently, the Commission can issue a subpoena only within the federal district where a trial takes place or within 100 miles of the courthouse. Witnesses in civil cases brought by the Commission are, however, often located outside of a trial court's subpoena range. The SEC has nationwide service of process of subpoenas in administrative proceedings.

The rapid globalization of financial markets in recent years has cast into stark relief issues surrounding the international reach of U.S. securities laws. Since the federal securities laws are silent on their international reach, federal courts have developed tests, including the conduct test, which focuses on the nature of the conduct within the United States as it relates to carrying out the alleged fraudulent scheme.

The legislation authorizes the SEC and the United States to bring civil and criminal law enforcement proceedings involving transnational securities frauds, which are securities frauds in which not all of the fraudulent conduct occurs within the United States and not all of the wrongdoers are located domestically. Specifically, the legislation would amend the Securities Act, the Exchange Act, and the Investment Adviser Act to provide that U.S. district courts have jurisdiction over violations of the antifraud provisions that involve a transnational fraud if there is conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors.

The legislation expressly authorizes the SEC to bring actions against persons formerly associated with a regulated or supervised entity, such as an investment company or an SRO, for misconduct that occurred during that association. This provision closes a loophole in the securities laws that had allowed those who engaged in misconduct while working for an entity regulated by the SEC, like a stock exchange, to resign and avoid being held accountable for their wrongdoing.

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