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House Bill to Weaken SEC Enforcement Moves Ahead

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Despite opposition, the House Financial Services Committee approved a bill introduced by Rep. Scott Garrett (R.-N.J.) that seeks to allow companies to opt out of the Securities and Exchange Commission’s current enforcement proceedings.

“I’m pleased that today the Financial Services Committee passed my bill to restore the due process rights of all Americans by allowing them to have their case before the SEC heard by a federal court. I’m also happy to announce that my bill to allow Main Street businesses to raise capital by accessing public markets passed the committee,” explained Garrett in a statement late Wednesday. 

According to Garrett, HR 3798, the Due Process Restoration Act, would provide a mandatory right of removal allowing the defendant to request that the case be moved to a district court rather than having it dealt with by an SEC panel and would raise the burden of proof for some cases to a “clear and convincing evidence” standard.

Garrett, who chairs the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, introduced the bill in December. It now moves to the full House of Representatives.  

Members of the committee worked on the text of this bill and nine others on Wednesday. As that markup process got underway, Rep. Maxine Waters, D.-Calif., pressed lawmakers not to weaken investor protections.

“The American people — on a strong, bipartisan basis – broadly favor efforts to properly regulate the financial services sector,” Waters said in her opening remarks. “When we use this committee to advance the needs of special interests, rather than the interests of working people, we squander the trust of the public and fail in our obligation to protect the least of these.”

Also on Wednesday, Americans for Financial Reform wrote to House members in opposition to HR 3798.

“Contrary to its sponsor’s stated goal of ‘restor[ing] due process rights for all Americans,’ this bill would reinforce a two-tiered justice system. HR 3798 would make it more difficult for the Securities and Exchange Commission (SEC) to hold companies accountable when they break the law — even as those same firms frequently deny basic due process to their investors and customers through forced arbitration,” it explained in a letter.

The group, which includes some 200 national, state and local organizations, objects to the bill’s main objective, which is to “allow respondents in SEC administrative proceedings to unilaterally terminate those proceedings, leaving the SEC to either re-file in federal court or drop the charges,” it explained.

Such a measure would “significantly raise the burden of proof in administrative proceedings to require the SEC show clear and convincing evidence that the company violated the law – a significantly greater burden than the civil standard of a preponderance of the evidence,” the group adds.

Americans for Financial Reform also states that respondents who are found to have violated the law “are entitled to two full appeal processes, including a review in federal court. The extensive protections that already exist for respondents in SEC hearings stand in stark contrast to the efforts by many of these same companies to deprive their own investors and customers of legal protection.”

The group notes that some businesses in favor of the bill “use forced arbitration in their standard form contracts … It is astoundingly hypocritical to seek still further extraordinary legal protections for companies accused of wrongdoing while the same companies refuse to grant their own customers the basic legal right to access the courts.”

An amendment advocated by Rep. Keith Ellison, D-Minn., and Rep. Stephen Lynch, D-Mass., would make HR 3798’s special protections inapplicable to those parties that use forced arbitration against consumers and investors. “We strongly urge members to support this amendment, which stands against stacking the deck even further in favor of financial institutions when they are charged with violating federal securities laws,” according to Americans for Financial Reform.

Garrett Responds

Earlier in the month, Rep. Garrett responded to SEC criticism of the bill.

“The [SEC] is missing the point that this isn’t about how many cases are won or lost — it’s about protecting every American’s due process rights and their ability to have a fair trial. The SEC has become more concerned about making headlines than executing an effective enforcement program, and these comments are reflective of that approach,” he explained in a statement.

According to Garrett, as part of the 2010 Dodd-Frank Act, the SEC was given expanded administrative enforcement powers, which translated into increased use of in-house administrative panels” rather than “in the federal courts established by Article III of the Constitution.”

“The [SEC] announced that it will be giving more legal safeguards to defendants that come before its in-house administrative panels,” Garrett said. “Unfortunately, the SEC’s proposed changes fall well short of addressing many of these concerns and its enforcement practices continue to violate the separation of powers guaranteed by the Constitution.”

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