Securities Laws Enforcement

Mr. MARKEY. Good morning. This is a legislative hearing to consider H.R. 975, the Securities Law Enforcement Remedies Act of 1989, introduced earlier this year by Mr. Dingell. I would like to take the opportunity of this hearing to announce my cosponsorship of this legislation. H.R. 975 would expand the enforcement tools available to the SEC and, according to the testimony of one witness today, would affect a major transformation in the Commission's approach to enforcement. The legislation grew out of a series of recommendations made by the National Commission on Fraudulent Financial Reporting, also known as the Treadway Commission.

For this subcommittee, the consideration of this legislation takes place in the context of our continuing efforts to strengthen the securities laws and ensure the most effective means of combatting securities fraud.

In the last Congress though, these efforts produced the Insider Trading and Securities Fraud Enforcement Act of 1988. This year the subcommittee and full committee have reported out the International Securities Enforcement Cooperation Act of 1989, and approved the long term plan for steadily increasing the Commission's budget, all of these steps a part of a package including market reform legislation which is essential to restore the confidence of small, long term investors in our securities markets.

H.R. 975 would provide the Commission with two new potentially important enforcement tools. First, it would permit the Commission to impose, through administrative proceedings or obtained by court order, civil fines for a wide range of securities laws violations. Second, it would authorize the Commission to seek through administrative proceeding or court order, a bar against Security Law violators from serving as officers or directors of publicly held corporations.

Under present law, the SEC has authority to seek fines only for insider trading violations, leaving out a vast array of serious violations of statutory and regulatory proscriptions. But while the market in individual investors are harmed by many activities other than insider trading, the Commission is hampered in its ability to

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craft sanctions which fit the illegal activity. For example, earlier this spring the Commission censured Salomon Brothers for 70 violations of the selling rule during the market crash of October, 1987. This activity allegedly permitted Salomon Brothers to profit on a day when individual investors lost millions, helped fuel a downward spiral of the market on that day which, in turn, contributed so much to driving the small investor from the stock market. Yet, the Commission had no authority to impose $1 of fines against Salomon Brothers for this behavior.

In an era when the accountability of public corporations to their shareholders is under serious scrutiny, the authority for the Commission to bar future services as corporate directors and officers is significant. The Commission must be able to protect shareholders from the potential harm of raids on the corporate till from the board room or the management suite. In fact, the Treadway Commission recommended a far broader series of recommendations for preventing such misconduct than those contained in H.R. 975, recommendations which may well be worthy of future considerations. For certain, the subcommittee will have to address questions concerning the appropriate structure of this legislation as we steer it towards passage. But there is no question about the need for continued vigilance in preventing and punishing the broad range of securities fraud taking place today.

I look forward to the testimony from our witnesses on this important legislation. The time for the opening statement of the chairman has expired, and I turn to recognize the gentleman from Oregon, Mr. Wyden, for an opening statement.

Mr. WYDEN. Thank you very much, Mr. Chairman. This is going to be, as you know, an incredibly hectic morning. I have a brief opening statement. Before I make it, I want to ask unanimous consent of the Chair to be able to pose some questions in writing because of the hectic nature of this morning, it's not going to be possible to get them all in.

Mr. MARKEY. Without objection.

Mr. WYDEN. Thank you very much, Mr. Chairman. I do have a brief opening statement. I am very pleased that we are going forward with H.R. 975, the Securities Law Enforcement Remedies Act of 1989. I think it is important legislation, and I think that one of the keys to really carrying out the concept of stronger Securities Law Enforcement is going to be the role of auditors.

Our Oversight and Investigation Subcommittee, over a period of years has held 25 hearings on this issue of the role of auditors, particularly as it relates to the securities laws. There are some particularly important questions as it relates to the detection and reporting of materiel fraud. I hope that we can look into those issues as this hearing goes forward and the debate on H.R. 975 continues. We know that the vast majority of publicly held companies in this country are honest; they are run by reputable, decent and caring people, as are the vast number of auditors in this country. At the same time, as a result of these 25 hearings what we have seen is that, unfortunately in a minority of instances, virtually on the heels of a clean audit, a publicly held company goes belly up. At a hearing that was held before the Subcommittee on Oversight and Investigations in May of 1988, Chairman Ruder of the

SEC expressed his support for a requirement to have auditors directly notify the SEC of fraud if problems in protecting the accountant against potential legal liabilities could be overcome. I am very anxious as we discuss this legislation, in hearing what progress has been made at the Commission in discussing this issue and examining the various ramifications.

I was very pleased that the Commissioner did express his support at the time for having that kind of reporting if legal problems for auditors could be overcome. I look forward to discussing this issue with the Commission and our colleagues in the days ahead.

Mr. MARKEY. The gentleman's time has expired. The Chair recognizes the gentleman from Ohio, Mr. Oxley.

Mr. OXLEY. Thank you, Mr. Chairman. Just very briefly, I want to welcome our witnesses today, and in particular Mr. Lynch, who I understand is a very short-timer right now. We wish him the very best. He has been an excellent public servant; has done yeoman work in enforcement activities, and I think this committee and everyone connected with the Securities Law Enforcement owes him a great deal of credit for the job he has done.

We in this committee, I think, have a major responsibility in upgrading the Securities Enforcement, and some of the violations that have occurred most recently point out the need for strengthening that legislation. Mr. Chairman, I am sure that you are well aware of that. We look forward to participating in that.

I think there are some difficult legal issues that we have to deal with in this legislation that will take all of the attention of the committee in trying to work out not only what is doable and what is effective law enforcement, but what also protects individual rights at the same time. I look forward to working through the maize of statutes and regulations in putting this piece of legislation together.

I yield back the balance of my time.

Mr. MARKEY. I thank the gentleman very much. That concludes the time for opening statements by the subcommittee.

[Testimony resumes on p. 24.]

[Text of H.R. 975 follows:]

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