October 23, 1990
TO: BOARD OF GOVERNORS NO. 77-90
CLOSED-END FUND MEMBERS NO. 42-90
INVESTMENT ADVISER MEMBERS NO. 50-90
INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 45-90
SEC RULES MEMBERS NO. 72-90
RE: FEDERAL SECURITIES BILLS BECOME LAW
__________________________________________________________
Last week, President Bush signed into law two major federal
securities bills, the "Market Reform Act of 1990" and the
"Securities Enforcement Remedies and Penny Stock Reform Act of
1990". The main provisions of each bill are summarized below.
Market Reform Act of 1990
The Market Reform Act, originally inspired by the October
1987 market break, is intended to enhance the SEC's oversight of
the securities markets and participants in those markets. The
legislation gives the SEC emergency authority to halt trading on
a securities exchange, after notifying the President. Previously,
only the President could order a trading halt. The legislation
also authorizes the SEC to adopt rules that would enable the SEC
to restrict various practices such as program trading during
periods of extraordinary market volatility.
Other provisions of the legislation authorize the SEC to
impose reporting requirements on certain large traders to enable
the SEC to monitor their activities. The legislation also
includes risk assessment provisions that authorize the SEC to
adopt recordkeeping and reporting requirements for registered
broker-dealers with respect to the activities and financial
status of certain associated persons. The Institute supported an
exemption from this provision for any registered broker-dealer
primarily engaged in mutual fund underwriting, on the theory that
the failure of such a broker-dealer would not have a material
adverse effect on the securities markets as a whole.
In this regard, the report of the House Committee on Energy
and Commerce on the bill specifically recognizes that "[s]ome
financial and securities activities, such as ... mutual fund
distribution, involve lower degrees of risk and a lower
probability that financial problems will adversely affect the
broker-dealer." Additionally, the final version of the
legislation authorizes the SEC to grant exemptions based on
consideration of several factors, including "the nature and
extent of the regulated person's securities activities."
The Market Reform Act contains provisions intended to
strengthen the clearance and settlement systems for securities,
options and futures; provides for coordination between the SEC
and banking regulators with respect to risks to broker-dealers;
and requires the SEC, the Treasury Department, the Federal
Reserve Board and the Commodity Futures Trading Commission to
report annually to Congress on the status of their efforts to
coordinate regulatory activities and to protect the markets.
Securities Enforcement Remedies and Penny Stock Reform Act of
1990
The Securities Enforcement Remedies and Penny Stock Reform
Act significantly expands the SEC's enforcement powers. It
enables the SEC to ask a federal district court to impose money
penalties in civil actions involving violations of the federal
securities laws. The maximum penalties allowed range from $5,000
to $100,000 for an individual, and from $50,000 to $500,000 for a
corporation, depending on the egregiousness of the offense. The
court also would have discretion to bar persons from serving as
officers or directors of reporting companies. The applicable
standard for such a bar is that the person has demonstrated
"substantial unfitness to serve" as an officer or director.
The legislation gives the SEC authority to impose both
temporary and permanent cease-and-desist orders under certain
circumstances.
Other provisions authorize the SEC to assess civil money
penalties in administrative proceedings involving willful
violations of the federal securities laws or for failure to
supervise another person who has committed such a violation. The
maximum penalties are the same as those described above. The
legislation sets forth certain factors that the SEC may consider
in determining the appropriate amount of any penalty. The SEC
also is authorized to order an accounting and disgorgement.
When the legislation was proposed, the Institute expressed
concern to the SEC staff about authorizing the SEC to assess
penalties against registered investment companies. The concern
was that this could have the effect of penalizing shareholders
for the wrongful behavior of responsible individuals, such as an
investment adviser. This concern is addressed in the Senate
Banking Committee's report on the legislation, which indicates
that the Committee does not normally expect the SEC to seek
penalties against registered investment companies. Rather,
penalties generally will be assessed against responsible
individuals.
The final version of the legislation also includes
provisions intended to address penny stock fraud. Among other
things, it requires development of an automated quotation system
for penny stocks, and authorizes the SEC to adopt rules
restricting blank check offerings and requiring brokers and
dealers to provide additional information to customers with
respect to penny stock transactions. In response to the
Institute's request, the definition of "penny stock" specifically
excludes securities issued by a registered investment company.
Frances M. Stadler
Assistant General Counsel