State Regulators Sound Off to Committee Over Dangers of Securities Fraud Act of 2018

(CN) – The North American Securities Administrators Association is sounding the alarm about its opposition to a bill before the U.S. House Committee on Financial Services, claiming that the new legislation would limit states’ authority to police fraud by publicly traded companies.

H.R. 5037, also known as “The Securities Fraud Act of 2018” seeks to provide exclusive federal jurisdiction over civil securities fraud actions.

The bill was sponsored by Rep. Thomas MacArthur, R-NJ and has cosponsorship from four other members in the House.

H.R. 5037 states “The lack of a uniform standard for public companies is a contributing factor to the declining interest in the United States public market, harming the United States economy.”

NASAA president Joseph Borg blasted the bill when he testified before the House Subcommittee on Capital Markets, Securities, and Investment.

Borg called the legislation “misguided and dangerous,” saying that the proposed legislation would shift policies in a direction opposed to that of the Trump Administration, which favors states’ rights, and encourages the exercise of state authority.

“It is premised on a flawed understanding of the importance of state securities enforcement functions in protecting ‘mom and pop’ investors and deterring fraudulent conduct in our securities markets. In every instance, the bill places the interests of big companies above those of the hard-working Americans,” said Borg.

According to Borg’s testimony, if congress were to pass the bill, the NASAA’s efforts to protect investors for serious violations of securities laws would be eviscerated.

A particularly damaging section of H.R. 5037, Section 3(a), would amend the Securities and Exchange Act to require that state criminal securities fraud prosecutions “comply in all respects” with federal legal requirements, according to the NASAA.

“This provision is also inherently ambiguous and poorly drafted, and as a result, has the potential to be extremely problematic for all state criminal authorities,” Borg testified. “By forcing state regulators, state courts, and state prosecutors to comply with federal legal requirements applicable to securities fraud cases, Section 3(a) would have a chilling effect on the willingness and ability of states to bring criminal securities fraud prosecutions if not halt all such actions altogether.”

Borg also stated in his testimony that H.R. 5037 threatens state pension funds because it deprives defrauded investors the ability to seek recourse for their claims. Borg pointed out an example in which the legislation would prevent private litigants from seeking relief in state court and would require them to litigate in federal courts for securities fraud claims.

“In more than 24 years as a securities regulator, I don’t believe that I’ve ever seen a legislative proposal that so alarms me, offends me, and worries me,” Borg concluded.


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