A bill currently being debated by the House Financial Services Committee to help control securities fraud may do the opposite.
The House Financial Services Committee held a hearing entitled “Ensuring Effectiveness, Fairness, and Transparency in Securities Law Enforcement” and the committee debated two bills specifically during the hearing.
One bill was the “Due Process Restoration Act” and the other is entitled “Securities Fraud Act of 2018.”
But if you believe Democratic Congresswoman from New York Carolyn Maloney, the Securities Fraud Act of 2018 will increase rather than decrease the amount of securities fraud.
“This bill is deeply, deeply, troubling to me. This bill would completely pre-empt all state civil securities laws and would actually pre-empt most and likely all state criminal securities fraud laws too. I have very serious problems with both the premise of this bill and the drafting of the bill which has managed to make a bad idea even worse. First, the premise of the bill is fundamentally flawed; companies don’t need relief from state securities fraud laws. They need to stop committing securities fraud. The idea that securities fraud should be illegal, and that states should be able to police securities fraud within their own border should be uncontroversial. I believe that fraud is fraud and that states should free to regulate any form of securities fraud they see fit. Second, the way the bill is drafted it actually pre-empts all state securities fraud laws.”
Indeed, as Congresswoman Maloney noted, the bill usurps much power from the states and grants it to the federal government under the premise that companies who do business in multiple states would find it too burdensome to follow multiple state securities laws.
The bill notes: “Imposing differing State regulatory requirements for civil securities fraud on national markets increases risk, creates inefficiencies, raises costs, and can harm the efficient operation of these critical markets, without providing material investor protection benefits.
“Complying with dual regulatory regimes places America’s public companies at a unique competitive disadvantage in an increasing global marketplace.”
Philosophically, the debate over the bill continues an ongoing political debate which is as old as the United States itself.
The debate comes down to the idea of federalism and the tenth amendment of the Constitution, which grants to the states the power to regulate anything which is not specifically in the Constitution.
That idea was first championed America’s third president, Thomas Jefferson, who worried that the US would throw out one tyrant, the British government, and replace it with another: the federal government.
While interstate commerce is specifically identified in the Constitution, securities are not, and as such, there is a wide variety of opinions about just how much power should be granted to the federal government as opposed to the states in enforcing securities laws.
“The several states composing the United States of America are not united on the principle of unlimited submission to their general government; but by a compact under the style and title of a Constitution for the United States, and of amendments thereto, they constituted a general government for special purposes [and] delegated to that government certain definite powers ,”Jefferson said of federalism.
Ironically, it is usually the Republicans who generally favor less government who generally like to leave as much to the states as possible.
But in this case, it is a Republican, Thomas McArthur from the State of New Jersey, who introduced the bill which would add to the power of the federal government and take away from the states.
It is the Democrat, Carolyn Maloney, who is arguing for more power granted to the states.
Under this bill, Maloney argued, all criminal securities fraud cases would be prosecuted by federal authorities.
“But I’m particularly opposed to this bill because in New York state we have a powerful securities fraud law called the Martin act,” which would be pre-empted by this bill, Maloney noted.
McArthur saw it different, noting that one reason why companies are afraid to go public is “because of overzealous (state) Attorney Generals that criminalize mistakes and make it difficult for businesses to go forward. It hurts main street investors. It hurts employees.” MacArthur said in defending his bill. “I think there’s a simple remedy, the Securities Fraud Act we’ll discuss today.”