SEC Seeks Legislation Allowing It to Pursue Securities Regulators After Their Resignation

On July 29, the House voted by voice to approve a bill that clears away any confusion regarding the Security and Exchange Commission’s authority to go after individuals accused of violating federal securities laws while working for a self-regulatory organization (New York Stock Exchange, Financial Industry Regulatory Authority, etc.) even if they are now employed elsewhere.

Rep. Kevin McCarthy (R-Calif) had introduced H.R. 2623 last May. McCarthy says that the bill doesn’t broaden the SEC’s authority, but it does eliminate any questions about whether the agency can pursue “formerly associated persons” that are no long working for the SRO. McCarthy noted that there are “loopholes” in the 1934 Securities Act that let employees at certain organizations get out of being held accountable just by resigning.

The change also would make it obvious that the SEC can pursue former employees of registered clearing agencies, government securities broker-dealers, and the Municipal Securities Rulemaking Board.

In the past, Congress has attempted to grant the SEC this authority. Although the Securities Act of 2008 contained an identical provision that the House passed by voice vote on suspension, this did not make it through the Senate Banking Commission. That bill also suggested that the SEC be given the authority to issue monetary fines in cease-and-desist proceedings, as well as during litigation.

Rep. Barney Frank (D-Mass), who also chairs the House Financial Services Committee, made a motion to pass H.R. 2623 on suspension of the rules.

McCarthy says that Congress needs to codify the scope of the SEC’s authority of “formerly associated persons” of various entitites, including SRO’s, so that the courts can hear these cases rather than dismissing them because there is no statutory authority. McCarthy says it became clear that this kind of legislation was necessary in 2007 when the SEC accused Sal Sodano of failing to enforce compliance with the 1934 Securities Act. Sodano had been the CEO and chairman of the American Stock Exchange at the time the allegations were said to have taken place but by 2005 he had resigned from the Amex post. According to an administrative law judge, the law allowed the SEC to sanction former employers that had worked for different entities, but not an ex- SRO director or officer.

Related Web Resources:
House Passes Legislation Allowing SEC to Sanction Former SRO Officials, Financial Crisis Update, July 31, 2009
HR 2623, Washington Watch
Please contact our stockbroker fraud lawyers and ask us for your free case evaluation.