House Subcommittee Considers Legislation on SEC Enforcement of Securities Laws

The U.S. House Financial Services Subcommittee on Capital Markets, Securities and Investment considered testimony on the SEC's approach to enforcing federal securities laws. At the hearing, the legislators examined, among other things, two proposed bills: the "Securities Fraud Act of 2018" (H.R. 5037), which rebalances the division of civil enforcement authority for securities fraud between federal and state authorities, and the "Due Process Restoration Act of 2017" (H.R. 2128), which enacts increased protections for defendants in SEC administrative proceedings.

Witnesses included: Bradley J. Bondi, a partner at Cahill Gordon & Reindell LLP; Joseph P. Borg, President of the North American Securities Administrators Association and Director of the Alabama Securities Commission; Thomas Quaadman, Vice President of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness; and Professor Andrew N. Vollmer, Professor of Law and Director of the John W. Glynn Jr. Law and Business Program at the University of Virginia School of Law.

H.R. 5037

The Securities Fraud Act would preempt state civil actions for securities fraud involving issuers listed on a major national exchange, and provide federal courts with exclusive jurisdiction over these actions. It would also require any criminal enforcement actions brought by a state to "comply in all respects with the legal requirements for securities fraud under federal law." Mr. Borg testified against H.R. 5037 as "misguided and dangerous." He argued that it is disproportionately favorable to big businesses and reduces the ability of states to police fraudulent activity in publicly traded companies. The other witnesses were largely supportive of the bill and praised its efforts to minimize duplication in state and federal enforcement actions.

H.R. 2128

The Due Process Restoration Act would increase protections for defendants in SEC administrative proceedings in two important ways. First, it would give defendants the right to remove the action to federal court in cases where the SEC is seeking a cease-and-desist order and a civil penalty. Second, it would raise the burden of proof in administrative proceedings from a preponderance of evidence to clear and convincing evidence. The witnesses agreed that additional protections for defendants in administrative proceedings were necessary, but expressed concern over the impact this change could have on already crowded federal courts. The witnesses also had reservations about the provision changing the burden of proof in administrative proceedings.

Commentary

These bills deal with the issue of overreach by state securities regulators and the SEC in similar ways – by taking away their perceived home field advantage (in state courts or administrative proceedings) and making them bring civil securities fraud cases in federal court. The Securities Fraud Act preempts state civil actions for securities fraud and the Due Process Restoration Act would largely eliminate the SEC's use of administrative proceedings in contested cases. This would be very welcome news to companies and individuals facing civil enforcement actions. The federal judiciary may feel otherwise.

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