    [House Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

                     ENSURING EFFECTIVENESS, FAIRNESS, AND

                   TRANSPARENCY IN SECURITIES LAW ENFORCEMENT

    =======================================================================

                                    HEARING

                                   BEFORE THE

                        SUBCOMMITTEE ON CAPITAL MARKETS,
                           SECURITIES, AND INVESTMENT

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 JUNE 13, 2018

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 115-100

     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                 _________

                     U.S. GOVERNMENT PUBLISHING OFFICE

     31-476 PDF               WASHINGTON : 2018

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking
        Vice Chairman                        Member
    PETER T. KING, New York              CAROLYN B. MALONEY, New York
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
    STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
    BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
    BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
    BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
    SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
    STEVE STIVERS, Ohio                  AL GREEN, Texas
    RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
    DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
    ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
    ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
    ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
    KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
    LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
    SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
    ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
    BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
    MIA LOVE, Utah                       DENNY HECK, Washington
    FRENCH HILL, Arkansas                JUAN VARGAS, California
    TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
    LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
    DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
    BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
    ALEXANDER X. MOONEY, West Virginia
    THOMAS MacARTHUR, New Jersey
    WARREN DAVIDSON, Ohio
    TED BUDD, North Carolina
    DAVID KUSTOFF, Tennessee
    CLAUDIA TENNEY, New York
    TREY HOLLINGSWORTH, Indiana

                         Shannon McGahn, Staff Director
          Subcommittee on Capital Markets, Securities, and Investment

                       BILL HUIZENGA, Michigan, Chairman

    RANDY HULTGREN, Illinois, Vice       CAROLYN B. MALONEY, New York,
        Chairman                             Ranking Member
    PETER T. KING, New York              BRAD SHERMAN, California
    PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
    SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
    STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
    ANN WAGNER, Missouri                 KEITH ELLISON, Minnesota
    LUKE MESSER, Indiana                 BILL FOSTER, Illinois
    BRUCE POLIQUIN, Maine                GREGORY W. MEEKS, New York
    FRENCH HILL, Arkansas                KYRSTEN SINEMA, Arizona
    TOM EMMER, Minnesota                 JUAN VARGAS, California
    ALEXANDER X. MOONEY, West Virginia   JOSH GOTTHEIMER, New Jersey
    THOMAS MacARTHUR, New Jersey         VICENTE GONZALEZ, Texas
    WARREN DAVIDSON, Ohio
    TED BUDD, North Carolina
    TREY HOLLINGSWORTH, Indiana

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        June 13, 2018................................................     1
    Appendix:
        June 13, 2018................................................    35

                                   WITNESSES
                            Wednesday, June 13, 2018

    Bondi, Bradley J., Partner, Cahill Gordon & Reindel LLP..........     5
    Borg, Joseph P., Director, Alabama Securities Commission.........     7
    Quaadman, Thomas, Vice President, Center for Capital Markets
      Competitiveness, U.S. Chamber of Commerce......................     9
    Vollmer, Andrew N., Professor of Law and Director, John W. Glynn
      Jr. Law & Business Program, University of Virginia School of
      Law............................................................    10

                                    APPENDIX

    Prepared statements:
        Bondi, Bradley J.............................................    36
        Borg, Joseph P...............................................   114
        Quaadman, Thomas.............................................   129
        Vollmer, Andrew N............................................   140

                  Additional Material Submitted for the Record

    Maloney, Hon. Carolyn:
        Written statement from Community Bancorp of Santa Maria......   155
        Written statement from The Freedom Bank of Virginia..........   157
        Written statement from First Resource Bank...................   159
        Written statement from Meritage Hospitality Group............   162
        Written statement from Mission Valley Bank...................   164
        Written statement from OurPet's Company......................   166
        Written statement from OTC Markets Group Inc.................   168
        Written statement from Repro Med Systems, Inc................   204
        Written statement from Royal Financial, Inc..................   207
        Written statement from The Singing Machine Company, Inc......   210
        Written statement from Tix Corporation.......................   212
    Borg, Joseph P.:
        Responses to questions for the record from Representative
          Lynch......................................................   215

                       ENSURING EFFECTIVENESS, FAIRNESS,

                         AND TRANSPARENCY IN SECURITIES

                                LAW ENFORCEMENT

                                  ----------

                            Wednesday, June 13, 2018

                         U.S. House of Representatives,
                               Subcommittee on Capital Markets,
                                    Securities, and Investment,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 2:08 p.m., in
    room 2128, Rayburn House Office Building, Hon. Bill Huizenga
    [chairman of the subcommittee] presiding.
        Present: Representatives Huizenga, Hultgren, Poliquin,
    Hill, Emmer, Mooney, MacArthur, Davidson, Hollingsworth,
    Maloney, Sherman, Lynch, Scott, Foster, Sinema, Vargas,
    Gottheimer, and Waters.
        Also present: Representative Capuano.
        Chairman Huizenga. The committee will come to order, and
    without objection, the Chair is authorized to declare a recess
    of the committee at any time.
        This hearing is entitled, ``Ensuring Effectiveness,
    Fairness, and Transparency in Securities Law Enforcement.''
        I now recognize myself for 2 minutes to give an opening
    statement.
        Today's hearing on ``Ensuring Effectiveness, Fairness, and
    Transparency in Securities Law Enforcement'' will focus on the
    Securities and Exchange Commission's (SEC) approach to
    enforcing Federal securities law, and whether its activities
    and initiatives are complementary to all three prongs of its
    statutory mission, to protect investors, to maintain fair,
    ordinarily, and efficient markets, and to facilitate capital
    formation.
        According to the Division of Enforcement's annual report
    issued November 2017, in Fiscal Year 2017, the SEC brought 754
    enforcement actions, and obtained almost $3.7 billion in
    disgorgement and civil penalties resulting from those actions.
        Additionally, $1.07 billion was returned to harmed
    investors.
        Enforcement activities are an integral part of any
    regulatory agency, but especially for the SEC. Hardworking
    families in west Michigan and across the Nation rely on capital
    markets to save for everything from college to retirement.
        We must work to ensure the United States continues to
    maintain the most efficient capital markets so that Mr. and
    Mrs. 401(k) have the opportunity to safely invest in a better
    future and receive the greatest return on their investment.
        This hearing will further discuss areas of the law that
    would benefit from greater clarity to ensure that the SEC
    investigations have an appropriate scope and minimize instances
    of the practice known as regulation by enforcement.
        Additionally, the hearing will examine the role of
    administrative proceedings in the enforcement of Federal
    securities laws, including whether Congress should advance
    legislation like H.R. 2128, the Due Process Restoration Act of
    2017.
        We will also explore whether Congress should clarify the
    SEC's authority to seek disgorgement, including what is the
    appropriate statute of limitations for disgorgement sought by
    the SEC.
        Last, we will examine whether the lack of clarity between
    Federal and various State standards for securities fraud, as
    well as other potential violations, is chilling participation
    in our capital markets. The United States capital markets are
    the gold standard. We can all acknowledge that our markets are
    widely recognized for being the deepest, most liquid, and the
    most competitive markets in the world, and Congress must
    identify any inconsistencies or disparities between State and
    Federal laws, and take appropriate action to ensure greater
    consistency and predictability in the application of these
    rules and regulations.
        I look forward to hearing from our witness today.
        The Chair now recognizes the Ranking Member of the
    subcommittee, the gentlelady from New York, Mrs. Maloney, for 5
    minutes for an opening statement.
        Mrs. Maloney. Thank you, and I thank you for holding this
    important hearing, and I thank all of our panelists for being
    here.
        Proper enforcement of all the securities laws helps
    maintain investor confidence in our markets. Investors need to
    know that their rights will be protected and that bad actors,
    who try to take advantage of them, will be punished.
        It is for this reason that I would like to focus on one of
    the bills we are discussing in this hearing today, H.R. 5037,
    the Securities Fraud Act of 2018.
        This bill is deeply, deeply troubling to me. The bill would
    completely preempt all State civil securities fraud laws, and
    would actually preempt most, and likely all State criminal
    security 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 borders should
    be uncontroversial.
        I believe that fraud is fraud, and that States should be
    free to regulate any form of securities fraud that they see
    fit.
        Second, the way the bill is drafted, it actually preempts
    all State criminal securities laws, in addition to civil
    securities fraud laws. The bill's findings section says that
    States should retain the authority over criminal securities
    fraud, but then the bill proceeds to strip States of the
    authority over all criminal securities fraud cases.
        The reason is simple: The bill says that no State, and I
    quote, ``Shall regulate securities fraud with respect to an
    issuer,'' end quote. This preempts both civil and criminal
    security fraud laws.
        The bill then later states that States can bring criminal
    securities fraud cases, but only, and I quote, ``Consistent
    with this section,'' end quote. But that section of the bill
    has already stated that no State law can regulate any
    securities fraud, even criminal securities fraud. It is
    literally impossible for any criminal securities fraud case to
    be consistent with that section, which means that all criminal
    securities fraud laws at the State level would be preempted
    under this bill.
        But I am particularly opposed to this bill because in New
    York State, we have a powerful securities fraud law, called the
    Martin Act, which is a broader definition of fraud than other
    States, and therefore, serves as an effective deterrent for
    misconduct in the securities market.
        The Martin Act has been very successful, and I will
    strongly oppose any attempts to weaken this important law.
        For example, I have a letter here from the New York
    Attorney General's Office, which opposes H.R. 5037, and they
    highlight several cases that they brought under the Martin Act
    that they would no longer be able to bring under this bill.
        For example, just last year, they brought a case under the
    Martin Act against a small-time investment advisor in Queens
    who had defrauded about 58 investors out of $11 million. These
    are the kinds of cases that only the State security regulators,
    like the New York Attorney General's Office can bring, because
    the SEC simply doesn't have the resources to pursue every
    small-time fraud like this.
        Unfortunately, H.R. 5037, seems to be aimed directly at the
    Martin Act, and by preempting these State laws, the bill would
    allow small-time fraud to run rampant.
        Before I close, I want to submit for the Record letters of
    opposition to H.R. 5037 from the North American Securities
    Administration Association, the New York Attorney General, the
    Massachusetts Secretary of the Commonwealth, New Jersey
    Attorney General, and the Council of Institutional Investors.
        Chairman Huizenga. So moved, without objection.
        Mrs. Maloney. Thank you, and I look forward to this hearing
    from our witness, and especially from Mr. Borg, who is one of
    the State security regulators, whose authority would be
    weakened under this bill.
        Thank you, Mr. Chairman, and I yield back.
        Chairman Huizenga. The gentlelady yields back.
        While I have a moment, I had neglected to do one small
    point of business. I just ask unanimous consent for any member
    to participate in today's hearing, although not a member
    necessarily of the subcommittee. As long as that Member is a
    member of the full committee, we welcome that participation
    today.
        With that, the Vice Chairman from Illinois, Mr. Hultgren,
    is recognized for 2 minutes for an opening statement.
        Mr. Hultgren. Thanks, Chairman Huizenga, for holding this
    hearing. Thank you to our witnesses for being here.
        I think we can all agree that our securities laws are
    critical to providing structure and certainty to both issuers
    and investors participating in our capital markets. In turn,
    this certainty drives the capital formation and investor
    returns that are foundations of our American economy.
        It is important that Congress regularly review how the
    securities laws are being enforced and identify opportunities
    for our regulators to be more effective.
        Today's hearing is especially helpful in light of the
    testimony we heard in the subcommittee from the SEC's Division
    of Enforcement last month. In their testimony, the co-directors
    of enforcement underscored a number of things that I hope our
    witnesses can provide some more insight into today.
        Specifically, I believe that enforcement of our securities
    laws should prioritize protecting the least sophisticated
    investors, in other words, those that are most susceptible to
    fraud.
        Similarly, I agree that the basis for enforcement of our
    securities laws should not be the broken-windows approach that
    has been used by the Commission in the past. I am concerned
    that this could cause the SEC to overlook more significant
    investor protection issues that require more long-term
    resources to investigate.
        Finally, the recent Kokesh decision has ignited an
    important debate about the statute of limitations for
    disgorgement by the Commission.
        Last April, now-SEC Commissioner Hester Peirce testified in
    our hearing on the Financial CHOICE Act about the importance of
    making reforms to the Commission's approach to enforcement,
    such as increased transparency, expanding opportunities for
    parties to present their positions in person, and allowing
    parties to opt out of administrative proceedings and into
    district court.
        I hope these are ideas that our committee can further
    develop and advance.
        I look forward to our witness testimony today, and look
    forward to hearing the recommendations for improving the
    enforcement of our securities laws.
        With that, I yield back.
        Chairman Huizenga. The gentleman yields back.
        The Chair recognizes the gentleman from New Jersey, Mr.
    MacArthur, for 1 minute for an opening statement.
        Mr. MacArthur. Thank you, Mr. Chairman.
        I think we all know we have problem in our public markets.
    The year I graduated from college in 1982, there were about
    5,800 public companies. It is about the same number we have
    today, except that our economy has more than doubled during
    that period.
        There are a lot of reasons why companies aren't going
    public, but the one I hear most often, the one I have
    experienced in my own life, is that business people are scared
    to death of overzealous attorney generals that criminalize
    mistakes and make it difficult for businesses to go forward.
        It hurts Main Street investors, it hurts employees who want
    to invest in their companies, and I think there is a simple
    remedy. The Securities Fraud Act, that we will discuss in part
    today, retains in States policing power over criminal fraud,
    but it moves civil fraud to a single definition that requires
    intent, and it allows companies to repair to the Federal courts
    rather than being twisted in the wind in multiple States with
    different definitions, and I look forward to discussing that in
    more detail.
        I yield back.
        Chairman Huizenga. The gentleman's time has expired.
        Today, we welcome the testimony of Mr. Bradley Bondi, who
    is a partner at Cahill Gordon & Reindel LLP.
        We also welcome Mr. Joseph Borg, who is the Director of
    Alabama Securities Commission. He is here on behalf of NASAA.
    This is the good NASAA, the Financial Services NASAA, North
    American Securities Administrators Association.
        We also welcome Mr. Thomas Quaadman, who is the Vice
    President for the Center for Capital Markets Competitiveness
    from the U.S. Chamber of Commerce.
        Professor Andrew Vollmer, who is a Professor of Law and
    Director of the John W. Glynn, Jr. Law and Business Program at
    the University of Virginia School of Law.
        Each of you will be recognized for 5 minutes to give an
    oral presentation of your testimony, and without objection,
    each of your written statements will be made part of the record
    as well.
        With that, Mr. Bondi, you are recognized for 5 minutes.

                      STATEMENT OF BRADLEY J. BONDI

        Mr. Bondi. Good afternoon, Chairman Huizenga, Ranking
    Member Maloney, and distinguished members.
        My name is Brad Bondi, and I am honored to appear before
    you today.
        I am a practicing attorney and partner with the law firm
    Cahill Gordon & Reindel, where I lead the firm's securities
    enforcement and regulatory practices. Much of my law practice
    is devoted to representing public companies and financial
    institutions in securities enforcement cases before the SEC.
        I previously served in senior positions in the Government,
    including as counsel to SEC Commissioner Paul Atkins, and then
    SEC Commissioner Troy Paredes.
        Although I am affiliated with a number of organizations, my
    views today are my own, and do not necessarily represent those
    of my law firm or my clients.
        The SEC is an agency that I greatly admire and respect. In
    my years of serving on the Commission and in private practice,
    I have worked with many talented, dedicated, hardworking
    professionals at the SEC.
        My observation is that the SEC, as a whole, overwhelmingly,
    has sought to abide by its mandate, and for the most part, has
    been successful in doing so.
        Nevertheless, there are some areas where the SEC can
    improve. One area where I believe the SEC has strayed from its
    mission is in its approach to financial penalties of public
    companies and disgorgement.
        A penalty against a company is directly borne by its
    shareholders. In other words, investors for whom it is the
    SEC's mission to protect.
        Previously, the Commission had a penalty statement that
    spelled out the circumstances in which it would seek a penalty
    against shareholders, but in 2013, several commissioners
    disavowed it.
        The amount of a monetary penalty is unpredictable because
    the SEC has nonarticulated criteria and metrics for calculating
    how much it will penalize a company, and, also, its approach to
    the remedy of disgorgement. This unpredictability negatively
    impacts companies. For example, the inability to predict the
    size of a potential penalty hinders the markets for mergers and
    acquisitions because potential bidders cannot accurately
    forecast regulatory exposure.
        I commend SEC Chairman Clayton and the current commission
    for taking what appears to be a more measured and thoughtful
    approach to assessing monetary penalties, and I encourage the
    Commission to release a renewed penalty statement explaining
    the circumstances in which the SEC will seek a shareholder
    penalty and articulating the standards for disgorgement.
        I understand that in the wake of the Supreme Court's
    decision in Kokesh, there has been discussion about extending
    the statute of limitations for disgorgement and financial
    penalties.
        Although I believe it is critical for the SEC to pursue
    those who commit fraud, I am concerned that the cost of
    extending the applicable statute of limitations may greatly
    outweigh the benefits. Five years is the longest period of
    limitations and repose found in any Federal securities law.
    Extending the statute of limitations beyond that would create
    uncertainty for the investing public because of the possibility
    the SEC may prosecute stale claims.
        It also could open up the door for inefficiencies in the
    way the SEC investigates if more time is allotted to bring
    those actions.
        In my two decades of experience as a defense lawyer, an SEC
    investigation into potential securities law violations by a
    public company, even an investigation that ultimately does not
    find any violations of law, can take several years, distract
    management, and cost the company tens of millions of dollars.
    The cost of that investigation is directly borne by the
    shareholders of the company.
        Of particular concern are SEC enforcement investigations
    that begin after a news story about a high profile company,
    prompting the enforcement staff to pursue one theory of
    liability, but then morph into an open-ended investigation that
    wanders into other areas of a company in search of a potential
    violation.
        SEC investigations can impede entrepreneurship and
    innovation.
        I understand the current leadership at the SEC is cognizant
    of these concerns and has been working to address them.
    Policies and procedures in this area need to be improved.
        I have been asked to comment about H.R. 2128, the Due
    Process Restoration Act of 2017. H.R. 2128, I believe, is a
    step in the right direction, but it may, in fact, go a bit too
    far and cause the SEC to initiate all enforcement actions in
    Federal district court.
        Yet not all enforcement actions require the formality of
    Federal district court. Some cases, such as those involving
    disciplinary actions against registered investment personnel
    and so-called follow-on action could be adequately brought as
    administrative proceedings.
        I have also been asked to comment on H.R. 5037, entitled
    Securities Fraud Act of 2018. From my experience, I generally
    agree with the observation in that bill that imposing different
    State regulatory requirements for civil securities fraud on
    national markets increases risk, creates inefficiencies, raises
    cost, and can harm the efficient operation of these critical
    markets without providing material investor protection.
        While I think that H.R. 5037 represents a thoughtful and
    encouraging effort toward greater uniformity and
    predictability, I would offer two suggestions.
        First, consider adding a dollar threshold above which the
    cases could be preempted by the Federal enforcement regime, and
    below which would still be within the State realm for
    enforcement. States are oftentimes the front line on these
    smaller micro cap fraud cases involving public companies.
        The second consideration would be to--with that added
    threshold--also add related cases such as those against
    underwriters, officers, and directors that would avoid the
    split Federal/State enforcement of what really is the same case
    in controversy.
        Chairman Huizenga. The gentleman's time has expired.
        Mr. Bondi. Thank you, Mr. Chairman.
        [The prepared statement of Mr. Bondi can be found on page
    36 of the appendix.]
        Chairman Huizenga. Thank you.
        Mr. Borg, you are recognized for 5 minutes.

                       STATEMENT OF JOSEPH P. BORG

        Mr. Borg. Thank you, and good afternoon. I am Joseph Borg,
    Director of the Alabama Securities Commission, and President of
    the North American Securities Administrators Association.
        I am privileged to have served as Director of the Alabama
    Securities Commission since 1994, and have been elected as
    NASAA's president three times.
        State security regulators have protected Main Street
    investors for the past 100 years, longer than any other
    securities regulator. We are responsible for administering
    State securities laws that serve to protect your constituents
    from fraud. We are often referred to as the cops on the beat,
    because we are the regulators closest in proximity to your
    constituents.
        Thank you for the honor to testify before the subcommittee.
        The committee has requested NASAA's views on two bills;
    H.R. 5037, the Securities Fraud Act, would amend the Exchange
    Act to prohibit States from pursuing many civil securities
    fraud cases.
        The bill is drafted in such a way that a defendant would
    argue, and a court could find that States are preempted from
    pursuing civil fraud violations in connection with any
    transaction involving publicly traded securities. This will
    place all retail investors at risk because such securities are
    widely held by the investing public.
        State anti-fraud provisions serve as a powerful deterrent
    to improper conduct by companies of all sizes. States' ability
    to pursue enforcement activity against issuers of securities,
    including independently, and when necessary and appropriate, is
    one of the reasons investors have confidence in America's
    capital markets.
        Further, under the bill, certain State criminal securities
    fraud prosecutions must quote, ``comply in all respects,'' end
    quote, with Federal legal requirements without defining what
    this means.
        Defendants in a State criminal prosecution will argue the
    broadest possible reading of this language. Thus, for practical
    purposes, this requirement will be preemptive and no State
    judge will agree to suspend all State criminal law procedures.
        Here is the way it would work. I am the prosecutor: Judge,
    you have to use Federal law here. Mr. Borg, this is a State
    court. I am a State judge. We apply State law. I suggest you go
    find yourself a Federal prosecutor. Federal courthouse is over
    in Birmingham. Case dismissed.
        No one will be left to protect Main Street investors.
        I imagine with the fraudsters, including the ones I have
    prosecuted, would be very pleased with such a result.
        Finally, 5037 will deprive defrauded investors of a choice
    of forum. It represents a direct threat to State pension funds
    and other investors who seek to opt out of shareholder class
    action litigation, and instead, advocate on their own, as it
    would require them in all cases to litigate exclusively in
    Federal courts.
        In summary, for all the reasons I just enumerated, which I
    have discussed further in my written testimony, 5037 is a
    misguided and dangerous bill, enacting policies that will make
    it more difficult, and, in some cases, impossible, for State
    regulators, the regulators closest to Main Street investors, to
    hold accountable the most powerful companies on Wall Street,
    and serves no valid interest.
        For all these reasons, NASAA opposes 5037 and strongly
    encourages the committee to reject it.
        Turning now to H.R. 2128, the Due Process Restoration Act,
    this bill would benefit SEC enforcement actions, the
    respondents in SEC enforcement actions, by providing them with
    a broad right of removal to Federal district courts, and
    raising the burden of proof in SEC administrative proceedings
    from preponderance of the evidence to clear and convincing
    evidence.
        This bill will have adverse consequences for the public
    interest. As detailed in my written testimony, NASAA sees no
    good reason for Congress to enact 2128, and several reasons why
    these changes would disrupt our securities markets and the
    efficient functioning of the Federal judiciary.
        My written testimony addresses other issues, including SEC
    enforcement resources, the expanding marketplace for private
    securities offerings, strong penalties as a deterrent to
    fraudulent conduct, and the need for legislation granting the
    SEC authority to bring Federal court claims for discouragement
    and restitution for the benefit of harmed investors.
        I will be happy to discuss these issues further.
        I will close by reiterating my opposition to 5037. In more
    than 24 years as a securities regulator, I don't believe I have
    ever seen a legislative proposal that so alarms and offends me.
        Should Congress pass this bill, my office's efforts, as
    well as my colleagues in your States, to protect investors from
    serious violations of securities law will be eviscerated. Real
    investors in your districts, you can call them mom-and-pop
    investors, call them Mr. and Mrs. 401(k), but real investors,
    real people, will suffer as a result of this misguided and
    irresponsible legislation.
        Thank you, and I will be pleased to answer any questions
    you may have.
        [The prepared statement of Mr. Borg can be found on page
    114 of the appendix.]
        Chairman Huizenga. With that, Mr. Quaadman, you are
    recognized for 5 minutes.

                      STATEMENT OF THOMAS QUAADMAN

        Mr. Quaadman. Thank you, Chairman Huizenga, Ranking Member
    Maloney, members of the subcommittee. Thank you for holding
    this hearing today.
        A prosperous and growing economy needs efficient capital
    markets in order to grow, and those markets actually need a
    strong securities regulator to make sure that it is fair and
    balanced. Fair and balanced regulation of the capital markets
    provides certainty and confidence to invest and raise capital
    for both investors and businesses. In other words, we need a
    strong cop on the beat.
        We have seen the treatment of securities cases evolve over
    the last generation. We have seen a rise in the use of
    administrative proceedings that have made administrative law
    judges (ALJs) the primary means of adjudication. In fact, we
    have also seen these cases morph from being civil proceedings
    to being quasi-criminal proceedings.
        Before 2016, there were serious due process issues
    regarding the use of administrative proceedings. There is no
    discovery, no right to deposition, no jury trial, a lack of
    evidentiary rules, and the use of hearsay.
        Because of these concerns, in 2015, the Chamber issued a
    report with 20 recommendations to strengthen SEC enforcement
    and address some of these due process issues.
        We believe that there should be continued use of
    administrative proceedings in administerial matters such as
    stop orders as well as license revocations.
        If administrative proceedings are going to be used in more
    complex cases, then there need to be due process reforms such
    as discovery, deposition, rights that conform with the Federal
    rules of civil procedure.
        We also believe that there should be a right of removal for
    jury trial under limited circumstances so that a defendant, and
    not a Government agency, decide if a jury trial is appropriate
    for a defense.
        We believe that these reforms will make the SEC a stronger
    enforcement agency, as well as give defendants the right of
    appropriate due process in order to defend themselves.
        These recommendations led to amendments to SEC rules of
    practice for the first time in 20 years, and while some of
    those reforms were a good step forward, they are very limited
    and pale in comparison to those procedures that are in the
    Federal rules of civil procedure.
        Additionally, the constitutional issues regarding the use
    of administrative law judges were not addressed by the SEC at
    that time, and may be addressed by the Supreme Court within the
    next several days.
        The Chamber strongly supports H.R. 2128, the Due Process
    Restoration Act. We believe that this right of removal under
    limited circumstances is an appropriate way for a defendant to
    remove a case, a complex case, to district court where more
    complex cases have historically been treated in article 3
    courts. This would also allow for defendants to decide if they
    want to have a jury trial.
        We also believe that a standard of proof of clear and
    convincing is necessary, since many of these proceedings are
    actually quasi-criminal in nature.
        The Chamber also supports the Securities Fraud Act. Under
    our constitutional system, we have a bifurcated system of
    regulation. Those transactions that happen in interstate
    commerce are regulated by the Federal Government, and those
    transactions that happen on an intrastate basis are regulated
    by the States.
        Under the 1921 Martin Act, the New York State Attorney
    General, through the listing of public companies on the New
    York Stock Exchange and NASDAQ, has become, over the last 15
    years, a de facto national securities regulator.
        What is additionally troubling is that under the Martin
    Act, the New York State Attorney General does not have to prove
    intent to defraud. What we have also seen is litigation through
    press releases with selective press leaks being put out in the
    press in order to drive settlements.
        These name and shame campaigns are one of the reasons why
    we have seen a lack of desire of businesses to want to go
    public.
        H.R. 5037 sets up commonsense guardrails to preserve the
    distinction between national and State cases. H.R. 5037 would
    not impact the ability of any State to bring a criminal case,
    nor would it impact the ability of a State to pursue a case for
    a sale of securities that was not done through a national
    exchange.
        We believe that the passage of these bills would help
    provide for stronger enforcement and is certainly needed for
    healthy capital markets, and I am happy to take any questions
    you may have.
        [The prepared statement of Mr. Quaadman can be found on
    page 129 of the appendix.]
        Chairman Huizenga. The gentleman yields back.
        Professor Vollmer, you are recognized for 5 minutes.

                     STATEMENT OF ANDREW N. VOLLMER

        Mr. Vollmer. Mr. Chairman, Ranking Member Maloney, members
    of the subcommittee, I appreciate having this opportunity to
    talk about some of the issues with SEC enforcement.
        My written statement addresses four separate topics. I am
    going to use this opportunity for oral comments to address two
    of them. One is the question about disgorgement and the
    limitations period, and the second is the role of SEC
    administrative proceedings.
        As I noted in my written statement, my comments are solely
    my own views and are not on behalf of any other person.
        I start out with a paragraph to try to set a tone for my
    written statement, and the theme running through all of my
    comments is that SEC enforcement of the Federal securities laws
    needs to be tough but fair. Fair treatment of defendants helps
    achieve the goals of the Federal securities laws. But it is
    sometimes a value in short supply.
        Let me talk about the disgorgement question and the
    possibility of extending the statute of limitations.
        We are thinking more about that issue because of the Kokesh
    decision. My view is that the 5-year period in 2462 is already
    too long, and it should not be extended absent compelling
    empirical data that the SEC is not capable of bringing a large
    number of important cases within the existing 5-year period.
        I don't think we have that data, and I am dubious that it
    exists, but that is the research that the Congress would need
    to extend the statute of limitations.
        The reason I am opposed to extending the statute is because
    5 years is a very long time already. Limitations periods are
    extraordinarily important to society, and you never hear anyone
    talk about the values protected by limitations period except
    the Supreme Court when it analyzes statutes of limitation.
        The second reason that I urge you not to lengthen the
    limitations period is that, in my experience, there is a strong
    correlation between limitations periods and the length of
    investigations. One of the principal problems with SEC
    enforcement today is that the investigations are too long.
        There are serious social harms that occur from SEC
    investigations and from unduly long statutes of limitation, and
    my written statement describes what those social harms are.
        My written statement also refers to another problem that I
    think Congress needs to address, and that is the SEC staff's
    use of tolling agreements to circumvent the current limitations
    period.
        If Congress is thinking about extending the statute, I
    would urge it to consider the following additional factors.
        First, as I said, obtain information about whether a
    problem really exists and the size of the problem. If the
    problem is limited to a certain category of cases, let's
    address the category of cases as an exception.
        Second, I have heard various people try to connect
    disgorgement and extended limitations period to investor damage
    or investor loss. A limitations period should not be connected
    to investor loss. Congress has never given the SEC the power to
    calculate a monetary penalty based on investor loss or damage.
    It would be a dramatic break with the model that we currently
    use in the United States of allowing private plaintiffs to
    recover loss and having the SEC obtain different forms of
    relief.
        I will spend 10 seconds on the second topic, and that is
    the role of SEC administrative proceedings.
        The basic problem is that they are inherently unfair to
    defendants. If Congress agrees with that, it has a couple
    different paths it could follow. One would be a very broad
    removal right. I favor a very broad removal right, and that
    would be to let the SEC make the first choice of forum, but
    then give every defendant in an administrative proceeding an
    unqualified, unreviewable power to remove.
        [The prepared statement of Mr. Vollmer can be found on page
    140 of the appendix.]
        Chairman Huizenga. The gentleman's time has expired.
        With that I recognize myself for 5 minutes for questioning.
        I appreciate the testimony that we have before us today,
    and maybe, Professor Vollmer, we will continue where you left
    off.
        Last month, the SEC's Division of Enforcement co-directors
    testified in front of the subcommittee that the SEC has been
    unable to collect over $800 million in disgorgement since
    Kokesh, which is not an unmeaningful percentage, considering
    that they had imposed $4 billion in penalties and disgorgement
    since 2016. Fairly significant amount of money and percentage-
    wise, as well as money.
        But since Kokesh, many have called for extended statute of
    limitations, and I am just curious if you can briefly give some
    of that context and whether there just are not simply clear
    statutes of limitations, and what we can do to do that. Mr.
    Bondi, I would like you to address that as well. Does extending
    the statute of limitations for disgorgement run the risk of
    allowing more time for the SEC to just investigate and bring
    cases, as Professor Vollmer was drawing the correlation between
    that length of time, and maybe, Mr. Bondi, we can start with
    you.
        Mr. Bondi. Thank you, Mr. Chairman.
        I do think extending the statute of limitations is going to
    create a tremendous risk that the SEC will have investigations
    that linger on for multiple years, and these wandering
    investigations are really a threat to shareholders of public
    companies because, oftentimes, they don't lead anywhere, and
    they don't even actually lead to an enforcement case, but they
    cost the company and, in turn, its shareholders tens of
    millions of dollars.
        In terms of extending the statute of limitations, I agree
    wholeheartedly with Professor Vollmer that I think the SEC
    needs to actually demonstrate what cases it could not have
    brought within 5 years. Five years is the longest statute of
    limitations or repose under Federal securities law. I would
    like to see them demonstrate which are the cases that they
    couldn't bring. They have the ability to seek tolling
    agreements from companies or persons that are under
    investigation, and, oftentimes, they do.
        It would be really interesting to understand what are those
    cases that still linger and make up that amount.
        Chairman Huizenga. But certainly there has to be examples
    out there of fraud discovered beyond that 5 years, and then how
    do you go back and deal with that? Is this somehow inconsistent
    with the SEC's traditional mission?
        Mr. Bondi. I would like to see what frauds haven't been
    discovered after 5 years. I hear a lot about that, and I hear
    that there were frauds that were discovered many years back,
    but I do think that--
        Chairman Huizenga. Would you put the Madoff situation in
    that category?
        Mr. Bondi. They did discover within 5 years, brought it,
    and keep in mind too, the SEC does have the ability--
        Chairman Huizenga. My understanding of that was the fraud
    had been happening for far more than 5 years.
        Mr. Bondi. It was, but as I understand, they also brought
    an action and disgorged an amount that actually was greater
    than the amount that was even at Madoff.
        But in any event, the SEC has the ability, in cases of
    extreme fraud like that, to seek penalties and to seek other
    types of remedies that could then be put into a fair fund under
    Sarbanes-Oxley and distributed to shareholders to make up for
    any amount that somehow lingered past the 5 year statute of
    limitations.
        Chairman Huizenga. I have a minute and 15, and I think,
    Professor Vollmer, you have been fairly clear both in your
    written and in your oral statements.
        Mr. Quaadman, how often do the State enforcement agencies
    bring State charges that are substantially the same as those
    brought against the same defendant by their Federal
    counterparts?
        Mr. Quaadman. There is a study from Professor Amanda Rose
    from Vanderbilt that shows that Federal enforcement agencies
    bring cases 91 percent of the time as State enforcement
    agencies do, and, in fact, there is even a split between those
    State securities regulators that are elected that bring four
    times as many cases as those who are appointed.
        Chairman Huizenga. Are there cases where States, then, have
    brought enforcement actions, even after a company has already
    settled with the SEC?
        Mr. Quaadman. That happens an awful lot. There is a lot of
    duplication that is going on, and one of the things we talked
    about in our 2015 report was actually to get at that
    duplication issue.
        Chairman Huizenga. Mr. Borg, I will let you address that a
    little bit as well, both that situation and then how do we
    further elaborate how these actually are investigations that
    are new and different than what has happened at the SEC?
        Mr. Borg. Mr. Chairman, with regard to those cases, the big
    cases that we work with, and I will give you examples,
    Comtronics, HealthSouth, Morgan Keegan, Enron, WorldCom. These
    are cases that my office was involved in. In each one of those
    cases, yes, there was a State component, but those cases were
    worked with the SEC, sometimes with FINRA, on occasion there
    might even be a CFTC (U.S. Commodity Futures Trading
    Commission) case.
        The question is not whether or not they were completely
    separate actions. Yes, we do work on a cooperative and
    collaborative basis.
        Chairman Huizenga. You don't feel they were duplicative?
        Mr. Borg. No, sir, I don't. Think about some of the cases
    that we have had in the past, especially the bigger cases, the
    Mutual One timings. That was all done cooperatively and
    collaboratively.
        Chairman Huizenga. My time has expired.
        With that, the Ranking Member is recognized for 5 minutes.
        Mrs. Maloney. Thank you.
        Following up with Mr. Borg, I would like to ask you about
    H.R. 5037.
        Do you believe you would be able to bring any criminal
    securities fraud cases if this bill were enacted?
        Mr. Borg. The way it is set up, it says I have to apply
    Federal law in all respects. I don't know if that means Federal
    law in all respects including civil procedure, criminal
    procedure, and all the other items that go with prosecuting a
    case.
        I am a prosecutor. I know what needs to be done with regard
    to a judge.
        If I have a judge sitting in State court who has been
    trained for State law, trained for State procedures, he is not,
    I guarantee, is not going to listen to me when I say: Judge,
    suspend everything you have been elected to do here and apply
    Federal law.
        The times we apply Federal law is when we are looking for
    some other guidance or something to apply to State law, but not
    apply Federal law.
        At that point, his argument to me is going to be very
    simple: You are in the wrong court. The Federal court is over
    in Birmingham, go find yourself a Federal prosecutor.
        Now, I will have to find a Federal prosecutor to take the
    case, because they are the ones, DOJ, that prosecute those
    criminal cases in Federal court, not State securities
    regulators.
        Mrs. Maloney. Under this bill, the Department of Justice
    would be the only agency with the authority to bring a criminal
    securities fraud case. Given that the Department of Justice has
    limited resources, and only brings a small number of criminal
    securities fraud cases per year, do you believe that this bill
    would effectively allow some securities fraud to go completely
    unpunished?
        Mr. Borg. Yes, ma'am, especially the smaller ones. Now,
    they may have an interest in some $10 million case, but as a
    practical matter, given the priorities of the U.S. Attorney's
    Office right now, which include the opioid addiction issues,
    immigration issues and whatnot, there is insufficient staff
    there to worry about Mrs. Johnson in Elba, Alabama, who was
    taken on a $10,000 churning case in listed stock securities.
    That is not going to be a case they are going to try.
        In essence, I can't bring it, they won't bring it because
    they don't have the resources or the inclination. That means
    that harm goes unresolved, and that is just too bad for Mrs.
    Johnson. We can't have that.
        Mrs. Maloney. Thank you. Stepping away from the criminal
    fraud issue, I am still extremely concerned about preempting
    even civil securities fraud laws.
        Mr. Borg, could you talk a little bit about what kinds of
    civil securities fraud causes this bill would prevent you from
    bringing? Can you talk about any specific examples of cases you
    have brought recently?
        Mr. Borg. Yes, ma'am. Let's talk about listed company
    cases, and I will just list them. I gave some earlier.
        One of the first cases I prosecuted against a New York
    Stock Exchange company was Comtronics, it was actually located
    in Alabama, for fraudulent invoices. Basically they raised
    their stock price with phony information.
        We were involved in the HealthSouth case. We worked with
    the U.S. Attorney's Office.
        Morgan Keegan was a subsidiary of one of the 15 largest
    banks in the country.
        Enron and WorldCom we worked on behalf of the retirement
    systems and made a recovery there.
        The types of cases on the smaller scale will include
    churning listed securities. I gave you the example of maybe
    Mrs. Johnson in Elba, Alabama.
        On the broker/dealer side engaged in pump and dump to
    manipulate sales of securities, that happens a lot. Also on the
    broker/dealer side, recommending unsuitable listed securities,
    usually tied to a churning or just to make some commissions.
        On the advisor side again, pushing an overconcentration of
    listed company shares.
        These are cases we see on a regular basis, and we strive to
    enable our residents to recover their savings when they fall
    victim to such frauds.
        With a preemption, that is not going to happen, and I don't
    know anybody else who will do it.
        Mrs. Maloney. OK. Do you think that it is appropriate for
    the Federal Government to tell States how they can and can't
    define fraud?
        Mr. Borg. I think that is for my legislature to decide. My
    legislature has decided what the elements are.
        Now, I will say this: 43, 44 States have the Uniform
    Securities Act, so we are fairly similar because we do--under
    the Uniform Act, same folks that brought you the Uniform
    Commercial Code, the Uniform Probate Code, the Uniform Gift to
    Minors Act, and whatnot.
        My legislature defines what it says is required in my
    State, and my job is to enforce that. Same as occurs in every
    other State.
        Mrs. Maloney. Thank you.
        Finally, you said you thought this bill was particularly
    dangerous. Why do you think it would be particularly dangerous
    to enact this bill right now?
        Mr. Borg. You have already heard testimony from others
    about the decrease in the SEC's case numbers with regard to
    bringing cases. We are the ones on the beat. We hear the first
    cases. We are the ones that know all the complaints. We are the
    ones that actually will bring those cases. If they are coming
    down in numbers, that is more duty on us. We have a duty to
    protect our citizens, and we intend to do so.
        Mrs. Maloney. Thank you very much. My time has expired.
        Chairman Huizenga. The gentlelady's time has expired.
        With that, the Vice Chairman of the committee, Mr. Hultgren
    from Illinois, is recognized for 5 minutes.
        Mr. Hultgren. Thank you, Mr. Chairman. Thank you all again
    for being here.
        Section 881 of the Financial CHOICE Act would require the
    SEC to establish a process for closing investigations.
    Specifically, it calls for the Commission within a timely
    manner, two different things; one, to make a determination of
    whether or not to institute an administrative or judicial
    action in a matter or refer the matter to the DOJ for potential
    criminal prosecution; and number two, requires the Commission
    to inform the subject of the investigation that the matter is
    closed if the Commission does not pursue an action or refer it
    to DOJ for criminal prosecution.
        Mr. Quaadman, I wonder if I could address my first question
    to you. Can you discuss how this provision would prevent the
    Commission from abusing its investigation powers? Are there
    instances where investigations could remain open despite little
    or no reason to impose this burden and uncertainty on a market
    participant? What are the effects on a public company when they
    are required to disclose an investigation, even when there is
    not necessarily a finding of guilt?
        Mr. Quaadman. The reason why we started looking at SEC
    enforcement in 2015 was that we had released a managerial
    reform SEC report in 2011, and one of the last recommendations
    in there was about this issue of cases being open and not being
    closed.
        There are numbers that are kept at the SEC as to cases
    being open, but they were never closed. As a result of that, we
    actually had one of our members come in and started to talk
    about how there was an issue that they had with internal
    control dealing with tax, and it was referred to the SEC by an
    employee. The SEC came back. What it then did is it created
    this whole situation where that company had to preserve all of
    its emails at the cost of $1 million a month. That case went on
    for years, and there was never indication from the SEC as to
    what direction that case was going in.
        Additionally, we should also understand too, for that
    company, they actually corrected the problem as soon as they
    were told about it, but again, this dragged on for years, and
    for a very long period of time.
        Mr. Hultgren. Thanks.
        Professor Vollmer, your testimony notes the SEC enforcement
    process should, among other things, allow for an ability to
    bring cases that lack merit to a rapid close.
        Would you support legislation requiring the Commission to
    establish a process for closing investigations, and are there
    any specific criteria that the Commission should consider when
    establishing such a process?
        Mr. Vollmer. Thank you, sir. I would support that. I think
    the principal issue is a time limit, and that is what the
    legislation needs. I connect the length of investigations to
    limitations periods. The SEC staff decides on how long cases
    can be investigated by whether they have a deadline set by the
    statute of limitations. I would be in favor of that.
        I referred specifically to early mechanisms for testing the
    merits, specifically during administrative proceedings, so
    during the litigation phase, and there is not currently the
    equivalent to a motion to dismiss.
        Mr. Hultgren. Section 884 of the Financial CHOICE Act would
    require the SEC to institute a process to permit recipients of
    a Wells notice to appear before the Commission or its staff in
    person, and to vote on whether to bring an administrative or
    judicial action against an individual.
        Again, Professor, can you please discuss how this would
    improve due process or enforcement of the securities laws by
    the Commission, and are there any cases in which efficient
    delegation of authority to the Director or direction of the
    Division of Enforcement is inappropriate?
        Mr. Vollmer. There are inappropriate delegations. In
    particular, the delegation to the Director about the ability to
    open what is called a formal order of investigation, or
    essentially, the power to issue subpoenas.
        That is wholly inappropriate for the commissioners to have
    delegated to the staff, and so, I would encourage you to look
    at that.
        Repeat the--
        Mr. Hultgren. Yes, the first one was how would you improve
    due process for enforcement of the securities laws by the
    Commission?
        Mr. Vollmer. I have addressed some of these topics in a Law
    Review article that I wrote. Rather than go over those points,
    let me address the one particular point that you mention, and
    that is, allowing commissioners to attend an oral Wells
    submission.
        I actually don't think that would make a big difference in
    very many cases. Of course, it might in a few, but the lawyers
    always have the opportunity and take the opportunity to meet in
    person with the senior staff of the Division of Enforcement.
    You are correct, they do not get a chance to meet with
    commissioners. That might be useful in some circumstances, but
    generally, I think it is more effective for the lawyers to
    submit their views in writing, which is what they do.
        Mr. Hultgren. Thank you. My time has expired. I yield back.
        Chairman Huizenga. The gentleman's time has expired.
        The Ranking Member is recognized for 5 minutes for
    questioning.
        Ms. Waters. Thank you very much.
        I would like to direct this question on disgorgement to Mr.
    Borg.
        In your view, is the Supreme Court's decision in Kokesh
    versus SEC, that SEC disgorgement is a penalty subject to the
    5-year Federal statute of limitations consistent with earlier
    jurisprudence on disgorgement?
        Mr. Borg. My opinion on the Kokesh case is that the SEC
    should do everything they can to get money back for investors.
    The statute of limitation issue, we actually faced that in
    Alabama not too long ago. The Supreme Court had issued a case
    that the decision that, of course, the cause of action for
    recovery and for criminal penalties and everything else started
    from the date of the inception of the crime, occurrence,
    whatever it was.
        We fixed that. We fixed that unanimously in my legislature
    by going to 5 years from date of discovery. That is one
    alternative you might want to consider.
        The question is how long did it take to discover it? I
    think that issue was mentioned earlier by the chairman.
        In the current frauds, it takes a long time sometimes to
    find these frauds. The fraudsters are hiding information,
    whether it is financial information buried in a financial
    statement of a company, or convincing the victims not to
    report.
        The statute of limitations, if it starts from the date of
    the occurrence, in many cases, is not going to allow for
    recovery.
        I do not believe a disgorgement or recovery to investors
    should be considered a penalty, and I do not think there should
    be a statute of limitations on recovering for the victims of a
    crime.
        The idea that the statute of limitations should be cutoff
    at 5 years, no matter when it occurred or when anybody knew
    about it, only encourages those fraudsters to hide it as long
    as they can, and that is not in the public interest.
        Ms. Waters. Thank you very much.
        Let me just move on to H.R. 2128, Due Process Restoration
    Act of 2018, continuing with you, Mr. Borg.
        H.R. 2128 would help alleged fraudsters by allowing them to
    choose where their case is tried. What is more, this bill would
    further help these bad actors by subjecting the SEC to a
    heightened burden of proof when an enforcement is brought in an
    administrative form.
        Could you describe how this bill could affect the SEC's
    ability to effectively enforce Federal securities laws, and how
    do administrative proceedings help ensure efficient policing of
    our capital markets?
        Mr. Borg. Yes, ma'am. This bill will benefit respondents in
    SEC enforcement actions by providing them the broad right of
    removal to Federal district courts. I have been a prosecutor a
    long time. Venue is usually selected in both Federal and State
    courts in the best interest of the public, not the best
    interest of the defendant.
        If I was a defendant and I could move to Federal court for
    significant delays and I was financed enough, that defendant
    could continue his business until that case is over.
        This will invariably lead the SEC, because of the change
    from preponderance of evidence to clear and convincing in the
    ALJ matters, to either go straight to Federal court, and
    therefore, overload the Federal courts, that is a possibility.
    The bill would raise that burden of standard to the point where
    we are going to have inconsistent decisions. The same fact
    pattern or the same type of interpretation of law, if you are
    in ALJ and you are clear and convincing, that is one standard,
    and let's go to Federal court and have a different standard.
    The precedence on that is going to be difficult to resolve, and
    I think now you have set two different standards for one
    particular law.
        The SEC might likely forego bringing enforcement actions
    through the administrative process. If that is the case,
    litigating those actions will require a lot more time, a lot
    more money, and a lot more resources.
        Ms. Waters. Thank you very much.
        I think we should all be concerned about any and all
    efforts to tie the hands of the SEC or to undermine their
    ability to do what it is they are mandated to do. I think that
    we need further clarification on some of these issues that are
    not only in 2128, but in some of the other legislation that may
    be coming down the pike, and I thank you for being here and I
    yield back the balance of time.
        Chairman Huizenga. The gentlelady yields back.
        With that, the gentleman from Minnesota, Mr. Emmer, is
    recognized for 5 minutes.
        Mr. Emmer. I thank the Chair. I thank the panelists for
    being here today.
        I would like to get into it this way: To have a valid and
    credible justice system, and maybe, Professor Vollmer, I will
    start with you, since you do this in the academic world, and
    you have to present this to folks, my perspective, to have a
    valid and credible justice system, number one, you need a
    clearly defined rule of law. Two, you need a fair and impartial
    process to resolve alleged violations of laws, disputed claims,
    and in short, that is the due process piece. People have to
    have the ability to have a fair and impartial arbiter, someone
    that decides it. Three, and I think this is incredibly
    important and often underestimated, you need the public's
    confidence and legitimacy of the law and of the process that
    actually metes out justice.
        We have been asking--or I have listened to my colleagues
    ask a lot questions about the State and Federal systems today,
    and unlike some of the testimony I have heard today, I have a
    lot of confidence in our State court judges. Granted, I only
    practiced civil law, I wasn't over on the criminal side very
    often, but if you went into a State district court, and you had
    a State district court judge, and you had a case that was going
    to be the State law preempted by Federal law, State judges are
    entirely capable of applying the Federal law.
        It is not that far of a stretch to imagine them being able
    to do it. But if you are on the other side of the bench and you
    have the State people you have to worry about, you have the
    Federal courts you have to worry about, and then you have the
    SEC too that you have to worry about.
        I would like to talk about these administrative proceedings
    at the SEC.
        Professor, do all of the Federal rules of civil procedure
    and the Federal rules of evidence apply to SEC administrative
    proceedings?
        Mr. Vollmer. None of them do.
        Mr. Emmer. Do respondents in SEC administrative proceedings
    have the same discovery rights as defendants in Federal
    district court proceedings?
        Mr. Vollmer. No, they don't.
        Mr. Emmer. Just so anybody who hasn't practiced in a court
    of law understands, that is the ability of the defendant to
    find out whatever the other side has if they are accusing them
    of violating or doing wrong.
        Mr. Vollmer. More importantly, obtain information from
    third parties.
        Mr. Emmer. Right. Do respondents in SEC administrative
    proceedings have the right to a jury trial?
        Mr. Vollmer. No, they don't.
        Mr. Emmer. Mr. Quaadman, in your opening statement you
    referred to some of this.
        Are there time limits in terms of when an SEC
    administrative proceeding needs to be completed, Professor?
        Mr. Vollmer. Yes.
        Mr. Emmer. How does this compare to the time limits in a
    Federal district court proceeding?
        Mr. Vollmer. There are no time limits in Federal district
    court proceedings.
        Mr. Emmer. The argument that we are going to have different
    standards being applied if we pass some reform, we already have
    different standards being applied, correct?
        Mr. Vollmer. There are many differences between
    administrative proceedings and Federal district court
    proceedings.
        Mr. Emmer. Are you concerned, Professor, that respondents
    in SEC administrative proceedings have fewer due process rights
    compared to those who are actually having their case or their
    future determined in a Federal district court proceeding?
        Mr. Vollmer. Oh, I think that we should be deeply concerned
    about it.
        Mr. Emmer. My colleague Warren Davidson from Ohio has a
    bill, H.R. 2128, called the Due Process Restoration Act. Have
    you taken a look at this, Professor?
        Ms. Vollmer. I have, yes.
        Mr. Emmer. Can you just comment on how this could--let's
    talk about facts first, because I talked about the perception.
    You have to perceive that you have a fair and impartial
    process.
        Isn't it true that, over the past several years, the SEC
    has been picking its own forum, its administrative procedures,
    and then it has been winning more and more in its own forum?
        Mr. Vollmer. I think the data is actually not entirely
    complete on that, those two questions. I think there are open
    issues about the data.
        Mr. Emmer. Prior to the passage of Dodd-Frank, the SEC
    historically brought approximately 60 percent of its new cases
    as administrative proceedings. In contrast, over 80 percent of
    the new enforcement actions in the first half of Fiscal Year
    2015 were filed as administrative proceedings.
        They are clearly filing more as administrative proceedings.
        Mr. Vollmer. Yes, I think you have to be careful about
    cases filed versus settled cases.
        Mr. Emmer. Let's attack that quick, as my time is running
    out. That is the problem. They have been bringing them in
    administrative proceedings that they have the advantage, they
    have been winning on above-average numbers, and guess what, now
    they just file them or they threaten to file them, and you
    don't want to go through that process, so you pay before it
    ever happens.
        Mr. Vollmer. Actually, my point is slightly different.
    Defendants sometimes prefer to--when they are going to settle
    at the initiation phase, they would prefer to settle in an
    administrative case rather than a Federal district--
        Mr. Emmer. I appreciate it. You and I have a difference. I
    think many of them settle because the cost that they are going
    to have to put up to fight the Government just doesn't make it
    worth it. That is why we should change this law.
        My time--
        Mr. Vollmer. We don't have a difference at all.
        Chairman Huizenga. The gentleman's time has expired.
        Mr. Vollmer. I agree with that completely. This is solely a
    question of what--
        Chairman Huizenga. The gentleman's time has expired.
        Mr. Emmer. Thank you. I appreciate it. We will continue
    this offline.
        Chairman Huizenga. The gentleman from California, Mr.
    Sherman, is recognized for 5 minutes.
        Mr. Sherman. As we go down this road, I should comment that
    both the cost and the benefits of securities enforcement are
    far greater than we might think at first blush. The costs of
    securities enforcement not only include the salaries of Mr.
    Borg and his compatriots and those of his brethren at the SEC,
    but they include the private-sector cost of complying--but not
    just the private-sector cost of complying when there is an
    investigation, but, also, all of the business opportunities
    that aren't pursued because one more reason not to do it is
    this whole expensive process. The jobs, not created.
        On the other hand, the benefits of securities enforcement
    are greater, because we tend to focus on, ``A-ha, here is
    Enron, here is Madoff, here is how much money was recovered for
    investors.'' That is just the tip of the iceberg on the
    benefits of enforcement. The chief benefit of enforcement are
    the frauds that don't happen, the documents, the disclosures to
    investors that are made more clear, the corners that are not
    cut.
        Mr. Borg, you pointed out a number of areas in which the
    statute you criticize, or the proposed statute you criticize,
    is unclear. I would just say that we shouldn't, at this stage,
    be urging people to vote against legislation because it is
    unclear; we should be urging the authors to make it clear. Your
    earlier testimony identifies certain areas where this statute
    should either do the extreme thing that you don't think we
    should do or clearly not do that extreme thing. But we should
    clarify statutes and then decide.
        Mr. Quaadman, we have a unique history in this country that
    has led us to shared sovereignty between a Federal and
    subnational governments. So we have securities law enforcement
    at both the national and subnational level. Does any other
    country do it that way? It seems very peculiar to anyone not
    familiar with American history.
        Mr. Quaadman. No. Most other nations do it on a national
    level. Canada does do it a little differently, that they have
    their securities regulation done on the provincial level.
        But I do want to add that I--
        Mr. Sherman. But there is no country that does it at both
    levels.
        Mr. Quaadman. No.
        Mr. Sherman. There is no evidence that the German stock
    market or the British stock market is a place for fools who
    want to be defrauded because they benefit only from one level
    and not two levels of securities enforcement.
        Mr. Quaadman. Correct. In fact--
        Mr. Sherman. OK. I do want to go on.
        Mr. Borg, we tend to focus on the big companies that do
    register with the SEC, that do big things, that have big pots
    of money that we can go after and at least try or pretend to
    comply with our securities laws.
        I got an offering from an initial coin offering. Anybody
    can invest. No government official has ever been asked to
    review this document. There is no investor protection at all.
    They imitate, by calling it an initial coin offering, the
    documents that are filed when there is.
        Why haven't you protected the people of Alabama from the
    DDF initial coin offering and similar complete failures to even
    acknowledge that securities laws exist except for the purpose
    of imitating those investment documents created in compliance?
        Mr. Borg. We have a number of cases ongoing. I can cite
    about eight--
        Mr. Sherman. These folks--shouldn't this just be a slam
    dunk? They are offering an investment to the public,
    unregistered by anywhere.
        Mr. Borg. We do have a number of cases pending. Some
    respond to our cease-and-desist as we do the investigations. A
    lot of them are considered securities. Some are considered
    commodities. We have jurisdiction for both. NASAA, 44 States
    just completed a crypto-sweep, with 75 potential defendants.
        Mr. Sherman. But the DDF initial coin offering is still
    taking in money right now.
        Mr. Borg. I am not familiar with that particular one. I
    could cite a lot of others. I would be more than happy to take
    a look at it and, if necessary, bring an appropriate action. I
    just don't know that particular one. But considering the 75
    that we have looked at--
        Mr. Sherman. Will you be putting people in jail or just
    stopping them from defrauding people of additional funds?
        Mr. Borg. That depends if they are overseas and we can get
    them or not, and that depends on whether or not there was an
    actual fraud where the money has been taken, received, and
    spent. In essence, if it is lying, cheating, and stealing, yes,
    we should.
        Can I get them? Do I have jurisdiction? That is something
    we will have to look at on a case-by-case basis. But we are not
    ignoring this section. We are--
        Mr. Sherman. Please propose any new legislation you need.
        Thank you.
        Mr. Borg. Yes, sir. We--
        Chairman Huizenga. The gentleman's time has expired.
        The Chair recognizes the gentleman from New Jersey for 5
    minutes.
        Mr. MacArthur. Thank you.
        Mr. Quaadman, do you believe that duplicative State and
    Federal regulation is chilling interest in our public markets?
        Mr. Quaadman. There is no question about it. As I said in
    my oral statement, it is one of the reasons why businesses
    aren't going public.
        As I was going to mention before, I had a meeting with the
    deputy Governor of the Bank of England a few years ago where he
    was directly complaining about that and started to talk about
    how that is going to impact the ability of the U.S. to be
    competitive globally.
        Mr. MacArthur. Does it negatively affect our global
    competitiveness?
        Mr. Quaadman. It absolutely does, because you can have a
    situation where New York State, through the Martin Act, is
    suddenly, let's say, with the financial analyst issue, is
    entering into a settlement that regulates things nationally
    that, also, international companies have to comply with.
        Mr. MacArthur. Mr. Bondi, are you familiar with the
    Securities Fraud Act? Have you reviewed it?
        Mr. Bondi. I am.
        Mr. MacArthur. Mr. Borg tried to make an argument that,
    because the bill doesn't specify whether it is Federal
    procedural or substantive law that we are talking about, that
    it would effectively shut down any State AG prosecution of
    criminal fraud. I don't concede that point, but if that were
    true, that is so easily remedied by amendment that that could
    be clarified in a moment. I think that is more of an excuse
    than a real reason.
        But let me ask you, since you are familiar with the bill:
    Is this accurate, that all criminal fraud, whether it is public
    or not public companies, all criminal securities fraud would
    still be at the State level, that non-public companies would
    all be at the State level, that public companies that are not
    engaged in interstate commerce would all be at the State level?
    Is that true?
        Mr. Bondi. That is true.
        Mr. MacArthur. This is a narrowly defined bill that is only
    targeting public companies who have to report immediately if
    they are even accused of civil fraud--this trial by press
    release. If they are merely accused of civil fraud, they have
    to report it to their shareholders, with great negative effect
    on their companies, and it makes them less competitive on the
    world stage.
        Would you agree that this is a very narrowly defined bill
    that is simply protecting public companies engaged in
    interstate commerce?
        Mr. Bondi. Yes, Congressman, I think this is very narrow.
        I would disagree with Mr. Borg about churning cases as an
    example of something that would be preempted. As I understand
    in my reading of the case, those types of cases could continue
    at the State level. Congressman, I think that it could be even
    further narrowed and still achieve the goals by perhaps
    inserting a market capitalization--
        Mr. MacArthur. I want to explore that with you. That is
    actually what made me turn to you, is I heard that point, and I
    am concerned that we don't take cops off the beat. I think that
    was Mr. Borg's expression. That is not what I am after here. I
    am not trying to stop State AGs from going after bad actors. We
    have a responsibility to protect people.
        But there are a handful of States that do not use a uniform
    definition of fraud, and they are wreaking havoc on public
    companies. Since some of them, like New York, for example--
    there is a nexus between nearly every public company in the
    country and the New York AG--the lack of that State alone
    adopting a uniform standard gives that particular AG the
    ability to wreak havoc across public markets, which they have
    done successively AG after AG.
        But I do want to explore your suggestion. You mentioned in
    your opening remarks that you thought that a size limitation
    might help. Could you unpack that a little bit?
        Mr. Bondi. Yes, Congressman.
        In other areas, Congress has imposed certain capitalization
    amounts in terms of preemption. For example, in the
    registration of hedge funds, there is an amount above which the
    hedge fund has to be to be registered at a Federal level.
    Otherwise, if it is below that amount, it doesn't have to
    register with the SEC.
        I would agree that, in many cases, especially with microcap
    fraud cases, very small public companies that are traded on
    national exchanges, the States are oftentimes the front line of
    those cases. I agree with that statement by Mr. Borg.
        I think one way to address this in the legislation is to
    put in a market capitalization amount about the issuer. Maybe
    it is $50 million of market cap--
        Mr. MacArthur. I am running out of time. I would actually
    like to explore that with you.
        One last question. Professor Vollmer, I have tried to
    strike a fair balance between protecting States' policing
    powers and preserving regulators' ability to pursue fraud
    within their borders and giving public markets a life here. Do
    you think that this bill strikes that balance?
        Mr. Vollmer. I think it does excellent work in trying to
    strike a balance. I actually think it is too narrow. I think
    that there should be broader Federal preemption. But I
    understand there are competing considerations.
        Mr. MacArthur. Thank you. I yield back.
        Chairman Huizenga. The gentleman's time has expired.
        The Chair now recognizes the gentleman from Georgia, Mr.
    Scott, for 5 minutes.
        Mr. Scott. Thank you, Mr. Chairman.
        I first of all want to preface my remarks by just sharing
    with the panel that there are some good points in this
    legislation. But I have a few troubling concerns here that
    alarm me since the Trump Administration has taken over.
        First, if you recall, in February 2017, then-Acting
    Chairman Michael Piwowar revoked subpoena authority from
    roughly 20 senior enforcement officials, which meant only the
    Director was left to approve any formal investigation.
        Then the second troubling point was that the Trump
    Administration made a decision, as you will recall, to stop all
    hiring, which resulted in the SEC imposing a strict hiring
    freeze, which has prevented the SEC from even replacing their
    departing staff.
        But it doesn't stop there. There have been actions in our
    courts, with the Supreme Court ruling of Kokesh v. the SEC,
    that have resulted in significant crippling of the SEC's
    disgorgement authority, according to current co-directors of
    the Enforcement Division.
        Finally, we mustn't forget the Republicans' efforts here in
    Congress to never increase the SEC funding for the SEC
    Enforcement Division, even though it has zero effect on our
    national deficit because the SEC is funded by fees.
        You can see, taken all together, it is very troubling.
        Now, Mr. Quaadman, I want you to know that I agree with you
    and the goal of the Chamber of Commerce. I have always been at
    the front of the spear here in this committee in making sure
    that, as you put it--I couldn't have put it any better--quote,
    you said in your report that ``there needs to be identifying
    problems and shortfalls of our financial regulatory system so
    that the United States can compete in the global economy'--and,
    I add, remain and always remain number one in the global
    economy.
        But with what is going on in the Administration, I get
    skeptical about whether legislative action is necessary. Let me
    ask the panel, do you think we have conclusive evidence here
    that H.R. 2128 and H.R. 5037 are solving serious problems in
    our markets?
        Especially you, Mr. Borg, do you think that these two bills
    are necessary?
        Mr. Borg. No, sir, I do not.
        I think that there is a misconception here about what is
    stopping IPOs or further development. Let's take a look for a
    moment at history.
        Back when I started 24 years ago, the private market for
    capital was very, very small. It has grown. Congress has
    mandated it. It has passed laws to encourage the shift from
    IPOs to private market. The private market now is bigger than
    the public market. That is one. The second thing, of course, is
    that the crowdfunding--Reg A, Reg A-plus--is another
    alternative vehicle for capital formation.
        The capital formation shift has occurred at Congress'
    direction. I don't pass a positive or negative on that. But to
    say that the capital has decreased in the public sector through
    IPOs or whatnot is incorrect unless you take into consideration
    what we have done to move that sector from public to private. I
    think that is an important factor that has not been considered.
    Just looking at the number of IPOs is not going to make it.
        Mr. Scott. Right. Yes, Mr. Quaadman.
        Mr. Quaadman. Yes, Mr. Scott, if I can answer, we think
    both bills are important.
        Number one, 2128. We don't have due process in the
    administrative proceedings at the SEC. In fact, it has been
    reported where SEC staff has talked about the use of ALJs in
    administrative proceedings because it is the home-field
    advantage. This would correct a wrong where the Government, and
    not the defendant, decides if they should have a jury trial.
        5037 is also very important, too, because the Martin Act--
    you have to understand this: There is a confluence of the
    public companies being listed on the exchanges in New York and
    this law where now the New York State attorney general can be a
    national regulator and has sought to have that role.
        We should also remember that even yesterday the New York
    State Court of Appeals issued a ruling where they issued
    concerns about the fact that the Martin Act does not provide
    for proof to defraud or intent to defraud, which they have now
    limited the statute of limitations from 6 years from common law
    fraud to 3 years.
        Mr. Scott. Right.
        I wanted to just put this in to Mr. Davidson and the
    authors of the bill real quick, if they felt that--if they
    could, within the bill, increase the funding at the SEC
    Enforcement Division, and would you guys be willing to urge the
    Administration to lift the hiring freeze. If you could do that,
    then I would like to look at it more carefully.
        Chairman Huizenga. The gentleman's time has expired.
        Mr. Scott. Is that possible?
        Chairman Huizenga. They will have a chance to respond at
    the questioning.
        Next, we will recognize the gentleman from Maine, Mr.
    Poliquin, for 5 minutes.
        Mr. Poliquin. Thank you, Mr. Chairman, very much.
    Appreciate it.
        Thank all for being here today.
        It is so important to make sure we do everything we can to
    help our businesses grow and expand and hire more workers and
    pay them more. You can see what is happening with the GDP
    growth now, which is about double what it was a short year and
    a half or so ago. Things are going in the right direction.
        I am very interested in Mr. MacArthur, my terrific
    associate from New Jersey, his bill, 5037. I am sure you folks
    have been discussing it today. I have been in and out a little
    bit here.
        But, my concern here is a constitutional concern when it
    comes to the 10th Amendment and States' rights and everything
    else, but, at the same time, making sure that we make it as
    easy as we can for businesses to sell themselves or part of
    themselves to the public. It gives an opportunity for small
    savers in the State of Maine to invest in America and, at the
    same time, allow these companies to raise the capital they need
    to be successful.
        Mr. Quaadman, if you don't mind commenting on this, and
    then I will turn it over to Mr. Borg too. I would like to hear
    what you both have to say. Do you think that the SEC would
    still be able to do its job, enforcement job, effectively if
    they were the sole entity dealing with companies listed on
    national exchanges?
        Mr. Quaadman. Yes, so first off, I think we have to
    remember the Founding Fathers made this decision with the
    Constitution 200 years ago that if there is a transaction in
    interstate commerce the Federal Government is going to regulate
    that; if it is intrastate, then it is going to be the State
    that is going to regulate that. I think that is a very
    important distinction that was made with the founding of the
    Constitution.
        I think it is also important to remember here, too, that
    5037, number one, preserves the right--in our reading of it,
    preserves the right of States to pursue criminal actions. It
    preserves the right to take other actions. However, when you
    are dealing with a statute such as the Martin Act and, as I
    said earlier, with that confluence of those exchanges being
    listed in New York, that it would have those cases going to
    Federal court because we are dealing with an interstate
    commerce issue.
        That Vanderbilt study that I had mentioned earlier looked
    at 2,000 public companies and found that the SEC was bringing
    cases--or Federal agencies were bringing cases in 91 percent of
    the cases that States were. We are not going to see a drop-off
    in enforcement. We are going to see the proper rationalization,
    as was mandated under the Constitution, with this bill.
        Mr. Poliquin. Uh-huh. Thank you very much, Mr. Quaadman.
        Mr. Borg, would you care to comment on this issue?
        We have a terrific State regulator in your space, Judith
    Shaw up in Maine. You might know Judith. She is wonderful.
    And--
        Mr. Borg. I do.
        Mr. Poliquin. She has weighed in on this. I am trying to
    sort this out and see--
        Mr. Borg. Yes, sir. She has sent to you a letter outlining
    her objections to 5031.
        With all due respect to Mr. Quaadman, there is one item in
    the Constitution he forgot about: The States have a right to
    protect their citizens from fraud and whatever it might be.
        Also, with regard to the fact that States are somehow
    impeding this process, this committee has had over 20 hearings
    in the last number of years talking about increasing IPOs or
    what is impeding the ability to go public, and not one of those
    hearings has ever brought up State involvement as an issue. We
    have talked about Reg D's and everything else. This Congress
    alone, six hearings have been held, and not one has ever said
    that the States are the problem.
        I think we are focusing on the wrong issue here. The fact
    of the matter is that, if States are going to protect their
    citizens from actions that affect their citizens, then they
    have a right to do so without being overridden by a Federal
    preemption such as 5037.
        Mr. Poliquin. Mr. Borg, before I run out of time, if you
    don't mind, I would like to turn it back over to Mr. Quaadman.
        Because I know your body language was such that you might
    disagree a little bit with Mr. Borg. If you want to comment on
    that.
        Mr. Quaadman. Yes, I just have to disagree with that last
    statement, because I have testified at a couple of those IPO
    hearings here at this committee. We have raised these issues
    before, and we have raised the Martin Act before. This is not a
    new issue that is being raised.
        Mr. Poliquin. Mr. Borg, you have the last word.
        Mr. Borg. The Martin Act is a New York law. I think that is
    something that the folks in New York should decide. I think
    this argument over the Martin Act, if that is what we are
    talking about, the Martin Act, ought to be in Albany.
        I am addressing 5037 that is going to affect my State and
    49 other States. I am not here talking--I am no expert on the
    Martin Act. If this is a Martin Act issue, then I think it
    ought to be handled up in Albany or wherever their legislature
    meets.
        Mr. Poliquin. To be continued. Thank you, gentlemen. I
    really appreciate it very much.
        Thank you, Mr. Chairman. I yield back my time.
        Chairman Huizenga. The gentleman yields back.
        With that, we welcome our colleague and guest to the
    subcommittee, Mr. Capuano from Massachusetts, who is
    recognized.
        Mr. Capuano. Thank you, Mr. Chairman. I thank you for your
    indulgence. I appreciate it. I came over today because this is
    an important issue.
        Mr. Borg, could you tell me again what your title is?
        Mr. Borg. I am Director of the Alabama Securities
    Commission. I am the current President of the North American
    Securities Administrators Association.
        Mr. Capuano. What State was that again?
        Mr. Borg. Alabama.
        Mr. Capuano. Alabama. Has Alabama changed? Are you now the
    bastion of liberalism, like Massachusetts?
        Mr. Borg. We are there to protect our citizens, whatever it
    takes, and that is what we are going to do.
        Mr. Capuano. I am not aware--that is a lovely State, but I
    am not aware that you have a reputation for being a progressive
    or a liberal--not you, but the State. So that what you do is,
    in your estimate, within a conservative viewpoint, the
    protection of consumers.
        Mr. Borg. My legislature has passed the laws. They have
    seen fit to say that we need to enter this space and protect
    our citizens, and we have done so.
        Mr. Capuano. How many other States do this?
        Mr. Borg. I hope all the other States do this.
        Mr. Capuano. That is what I thought. I am under the
    impression that every State does this.
        Now, we talk here regularly about insurance regulation.
    Now, on insurance regulation, I think I hear the mantra pretty
    much all the time to leave it to the States. Have you heard
    that argument relative to regulation of insurance companies?
        Mr. Borg. I have. I understand that there is exclusive
    jurisdiction to the States with regard to insurance regulation.
        Mr. Capuano. Right, because they do a decent job.
        Mr. Borg. There is no Federal regulator for insurance.
        Mr. Capuano. Right.
        I came today because all the nice talk is one thing, but
    the concept of taking protections away from small investors
    just strikes me as anathema. It just strikes me as--look, if
    the SEC is doing a great job, the truth is we don't need the
    States. But they have to look me in the eye and tell me the SEC
    has done a great job all the time and they haven't missed
    anything and that the States are nothing but doubling up. If
    that is the case, I haven't heard that from anybody, and I
    don't quite know why we are here. I am not sure what the
    problem is we are trying to solve, and I would really like to
    hear it.
        Look, every regulation is overregulation to some people. I
    get that. But, in this particular case, especially when we have
    a gentleman from Alabama--no one has ever said that Alabama is
    guilty of overregulating anything. If all the States are
    overregulating, I would like to hear that from somebody on the
    panel.
        Are all the States overregulating? Or is it just a couple
    of States you are trying to target?
        Mr. Quaadman. Mr. Capuano, I would just say, as I mentioned
    earlier, I think what we have here is a situation where we have
    one State where you have a confluence of the two major
    exchanges of the United States being located in that State, we
    have the Martin Act being used over the last 15 years in such a
    way there is litigation through press release, there has never
    been a case brought into court except for once where New York
    State--
        Mr. Capuano. We are here targeting one State.
        Mr. Quaadman. I think that is where we have the biggest
    problem, because that is where we have--the New York State
    attorney general has set themselves up to be a de facto
    national regulator--
        Mr. Capuano. I get that. Then why don't we have a bill just
    to stop New York State from doing this and leave the other 49
    to do it? Leave Alabama alone.
        Mr. Quaadman. Our view is--and I have great respect for Mr.
    Borg and what he does down in Alabama. Our review of it is
    that--our reading of 5037 is that it would actually just do
    that. It would take care of those cases up in New York. If
    there is more clarity that is needed there, that is fine.
        Mr. Capuano. All of a sudden, if Massachusetts were to--
    now, one of reasons the other States don't do it is because we
    know New York happens to be the biggest one of the bunch, and
    they take care of business for us, to a certain extent.
        At the same time, I am sure you know that when they move,
    many other States will join in with them. They are the lead dog
    because they are the biggest dog.
        Let's assume for the sake of discussion that the entire
    State of New York were to go to sleep tomorrow and stop doing
    whatever it is you don't like about it. What if Mr. Borg
    stepped up and said, now that New York is not doing this, maybe
    we need to step up a little bit? What would that argument be?
        Mr. Quaadman. I also remember the Massachusetts State
    regulator saying that people shouldn't by Apple stock because
    it was risky.
        I think it is really important to remember we have an SEC
    that is looking at these things from a national level, from an
    international level. We are talking about the sales of
    securities listed on national exchanges. If it is something
    that is not listed on a national exchange, that it falls within
    the purview of the States, we don't have a problem with that.
        Mr. Capuano. The SEC has never issued a single ruling that
    you disagreed with. That is good, I guess. There is nothing
    wrong with that. That is a good thing, if you feel that
    comfortable with them. Because there are a couple of things
    they have done that I haven't agreed with.
        Mr. Quaadman. We haven't agreed with some things either,
    which is why we also support 2128, which I would hope you do
    too, in terms of due process.
        Mr. Capuano. I am all for due process. What I am not for--
        Chairman Huizenga. The gentleman's time has expired.
        Mr. Capuano. --Is taking people's protections away.
        Thank you, Mr. Chairman, for your indulgence.
        Chairman Huizenga. With that, the gentleman from Ohio, Mr.
    Davidson, is recognized for 5 minutes.
        Mr. Davidson. Thank you, Chairman.
        To our guests, thank you for your expertise and for the
    preparation you have given, the testimony you have already
    given, and for the lengthy dialog that has already occurred. As
    one of the sponsors of one of the bills that has been talked
    about a bit, it is nice to be able to discuss it--and a
    cosponsor of Mr. MacArthur's bill.
        I appreciate the committee for having this hearing and for
    devoting the time that it has taken.
        Mr. Quaadman, in your testimony, you state that the
    administrative proceedings have, quote, ``created an imbalance
    within the system that endangers the right of defendants and
    undermines the use of appropriate enforcement tools while
    raising important questions regarding the separation of powers
    between the Executive and Judicial Branches of Government.''
        This is one of the reasons why I introduced H.R. 2128, the
    Due Process Restoration Act. This bill provides respondents in
    SEC enforcement cases with the ability to have their case
    removed from the SEC's administrative proceedings and sent to a
    Federal district court. It essentially puts them at parity with
    the SEC. If the SEC can choose their venue, so can the
    defendant.
        Can you please elaborate more about the concerns regarding
    separation of powers? Specifically, how would legislation like
    H.R. 2128 help alleviate this imbalance?
        Mr. Quaadman. If you take a look at the Federal Rules of
    Civil Procedure, none of the traditional things that you have
    seen in an Article III court exists in an administrative
    proceeding at the SEC.
        I think one example is very illustrative of that, and that
    is of Nelson Obus at Wynnefield Capital. See, he was involved
    in a case that went on for at least 12 to 14 years, cost him
    millions of dollars, and he was one of last people to get into
    Federal district court before some of the changes with Dodd-
    Frank, which really shifted things into administrative
    proceedings.
        As a result of the right of discovery, he was able to
    uncover information that led to cross-examination that led to
    his exoneration. He has even said, had that case happened
    several years later, had it gone into administrative
    proceeding, he would have never had the right of discovery, he
    would have never gotten that information, he would have never
    had the cross-examination, he would never have been exonerated.
        I think we have to be very careful--let's forget for a
    second about if this is a securities issue or not--if we are
    going to have American citizens being brought before American
    tribunals where they don't have the right to defend themselves.
        I think what your bill does is it allows that defendant,
    under certain circumstances and limited circumstances, to go
    into Federal district court and to get a jury trial, which, in
    our view, is a matter of fundamental fairness and due process.
        Mr. Davidson. Frankly, it is a constitutional protection,
    and I think it is core to the oath that we all swore. I think
    it should be a bipartisan thing to support and defend the
    Constitution in this way.
        As a huge supporter of the Ninth and Tenth Amendments, I
    respect some of the arguments that have been laid out here. But
    even as we talk about Mr. MacArthur's bill, the idea that there
    could be no limited safe harbor as a condition of going public,
    as a consequence of a publicly traded stock on civil
    litigation, I think, misses the point.
        I respect the emphasis on the Martin Act, but if you look
    at the things that were done in the name of investor
    protection, it was really advancing a cause on climate change,
    not investor protection, that not just New York but
    Massachusetts, the Virgin Islands, Illinois, California, and
    others put pressure that affects investors, affects
    shareholders. You have this market-distorting behavior that
    hurts all shareholders, including shareholders in my State of
    Ohio. You have a need for legislative certainty here.
        I am particularly interested in initial coin offerings and
    working on a bill for that. These offerings can present another
    avenue for businesses to raise capital and increase liquidity.
    We have seen a myriad of State and Federal regulations, and now
    we are seeing enforcement action, and perhaps regulation by
    enforcement is one of the concerns that folks have expressed to
    our office. A hope that somehow the courts create some cohesive
    framework.
        Do you think these concerns about the patchwork hold water?
    Or do you see a role for Congress bringing clarity in this
    matter for the SEC and CFTC to create regulatory certainty, Mr.
    Quaadman?
        Mr. Quaadman. We think there is definitely a role for
    Congress here. We, in fact, are putting together our FinTech
    agenda, which we are going to look at ICOs, and we are going to
    release that next month. Treasury is going to do something like
    that, as well, this month.
        We think there needs to be a strong regulatory structure on
    this, that there are investor protections, there is balance,
    there is fairness. It is also important to remember this is
    also a matter of international competitiveness as well.
        Mr. Davidson. Very well said.
        I see my time has expired, and I yield.
        Chairman Huizenga. The gentleman's time has expired.
        With that, the gentleman from Arkansas, Mr. Hill, is
    recognized for 5 minutes.
        Mr. Hill. I thank the chairman. Thanks for holding this
    hearing.
        I appreciate our panel and your expertise, for coming down
    and spending the afternoon with us. We are grateful for your
    expertise on this topic.
        I have to say from listening to the excellent dialog, Mr.
    Borg and Mr. Quaadman, thanks for bringing that robust debate
    about these issue to the committee, and I appreciate all my
    colleagues' involvement in it, because it really is helpful. We
    don't always get to do that in these hearings. Being able to
    drill down and have some exchanges is helpful.
        I hear the concerns that Mr. MacArthur's legislation is
    perhaps too broad for the North American securities
    administrators across the country and they have concerns about
    that and also their States' rights. That is something that
    maybe needs more work in the bill, because the issue of
    interstate commerce and international exchange competitiveness
    for listing is a big concern to this committee too. It is a
    classic case of public policy where we are working to balance
    those interests.
        Mr. Borg, do you have a couple of narrowing suggestions,
    maybe, on further tailoring that would get at this issue of
    international competitiveness? Since our exchange and our
    listing entities are all in the State of New York; we are not
    moving them. I am not going to foot the bill for that project.
    Although New York tax structures may drive them out one day,
    but let's assume they stay in New York for now.
        Do you have some suggestions? Because I know you all
    probably had to talk about this in preparation for the
    testimony.
        Mr. Borg. Certainly, I am looking at this bill as to how it
    affects my State and other States as well. I am not versed in
    the Martin Act, and there has been a lot of discussion today
    about where the Martin Act is and how it applies and how it
    doesn't. I do know New York has filed with the committee a
    rather extensive letter on New York law, and I would be out of
    my territory to talk about New York law.
        With regard to the idea that foreign markets somehow are
    scared of this area, I will tell you that there are studies
    about--and I have heard this overseas as well--that the markets
    in the United States, because of the protections afforded, the
    amount of regulation, is one reason why they are attractive to
    good overseas--
        Mr. Hill. I agree. We have the rule of law. We have
    terrific liquidity and terrific players, diversity of players,
    a lot of expertise in bringing companies to the public market
    and sustaining their marketability. We are the biggest in the
    world. We also have the largest set of buyers of that market,
    for now. We have many competitors around the world.
        But there is also data about the barriers if you are
    comparing markets and litigation is a concern to you. I saw
    some recent data, I think in April or March, from the Business
    Roundtable and their corporate governance survey that indicated
    that there are some foreign markets that are more attractive
    for certain kinds of listers.
        I think this is an issue. I think Mr. MacArthur raises a
    good point and we ought to be sensitive to it and try to find
    the right spot where we are not impeding the administrative
    responsibilities in the private placement market and broker
    oversight and firm oversight that you have in our States.
        Mr. Quaadman, we have been working on our JOBS 3.0 here in
    the Congress, on things that can enhance capital formation. One
    that I noted in my last couple of decades of working in the
    securities industry is how Sarbanes-Oxley raised costs and
    didn't get any concomitant increase in efficiency or compliance
    by requiring a PCABO-approved audit firm for small,
    noncustodial introducing brokers.
        I wondered, would you support our idea of making that--it
    has gotten waivers in the past umpty-ump years from Sarbanes-
    Oxley in 2002. But making a permanent waiver, would you support
    that?
        Mr. Quaadman. Yes, look, the Chamber is a strong supporter
    of internal controls, but we support a waiver and we support
    the direction that you are going in.
        I think one thing to remember, the first two letters in
    PCAOB stand for ``Public Company.'' Most of the brokers that
    you are talking about, number one, aren't public companies,
    number two, don't hold securities, so that the audit that they
    are being subjected to by the PCAOB doesn't match their model.
        The other thing I would just say, too, is, when you are
    taking a look at a Bernie Madoff situation, what you need is
    the bank records and what you need is the revenue statements,
    and you put those two things together and you are going to find
    out if there is a problem. You are going to have that
    information. What we are trying to solve here is not going to
    prevent that information from being in the hands of regulators.
        Mr. Hill. Right. Thank you.
        Mr. Chairman, I yield back.
        Chairman Huizenga. The gentleman's time has expired.
        With that, the gentleman from Indiana, Mr. Hollingsworth,
    is recognized for 5 minutes.
        Mr. Hollingsworth. Good afternoon. I really appreciate
    everybody being here and second what Representative Hill said
    about the vigorous debate that we have undertaken today. I
    think it is necessary.
        Something that Hoosiers have been concerned about for some
    time and continue to express to me every time I am back home in
    the district is some of the silent encroachment upon their
    rights of due process and ensuring that they have the
    opportunity to understand that which is being brought against
    them and they have the opportunity to defend themselves
    vigorously in a court of law.
        Mr. Bondi, I had a couple questions for you based on some
    of the testimony you have had, so we may bond here for a
    moment, if you might.
        I know that one of the things that you talked about before
    was some of the forum shopping, and that particularly concerns
    me with regard to--I think it was the Cyan decision earlier
    this year by the Supreme Court, in that 33 class actions could
    be brought in State court and are not removable to Federal
    court.
        I guess we had some concerns when that decision came down
    that, ultimately, this would lead to a lot of forum shopping.
    This would lead to, also, law being developed in different ways
    in different places versus a coherent system of law being
    developed all the way across the country, from sea to shining
    sea.
        I wonder if you might be able to elaborate on that.
        Mr. Bondi. Yes, I agree, Congressman. I think that is a
    real concern. What we are seeing, I think, in the defense bar
    is plaintiffs that are looking for the most favorable forum to
    extract the largest possible settlement. It exists also at the
    regulatory level, I think, what we are seeing here with the
    administrative law proceedings.
        Mr. Hollingsworth. Yes.
        I know one of things that Hoosiers are focused on--and,
    really, the previous Governor of Indiana, Mitch Daniels, really
    talked about this a lot--is we all want to make sure that the
    bad actors that exist out there get hit with a sledgehammer,
    but, ultimately, we don't want to impede capital markets, we
    don't to inhibit good actors from being able to service their
    customers, to be able to create new innovations, and ultimately
    be able to continue U.S. competitiveness around the world.
        I think that is really important, that we don't develop law
    in a way that will continue to be a drag on overall capital
    markets' effectiveness, but, instead, we create law that will
    ensure that bad actors are taken out of the market but
    ultimately we are not harming good actors in the market.
        Another question that I had for you is elaborating on the
    standard that the SEC demonstrate a ``reasonable
    approximation''--quotation marks around that--for its
    disgorgement calculation. Just better understanding of how the
    SEC might develop that, is there public guidance about that,
    what does that look like, but it certainly seems like a really
    wide spectrum.
        Mr. Bondi. Yes, Congressman. It definitely is a wide
    spectrum. The difficulty is most of the cases the SEC brings
    are settled cases. The standard that the SEC applies, this
    reasonable approximation standard, never really gets challenged
    in an Article III court. If it is an administrative proceeding,
    sometimes it never even reaches an Article III court and it is
    dealt with an ALJ judge.
        It is particularly poignant in the case of books and
    records and internal controls violations, where the SEC might
    take a books and records violation and then disgorge an
    extraordinarily high amount that was associated, for instance,
    with a foreign bribe. Where, instead of bringing an FCPA case
    for that foreign bribe, they bring a books and records internal
    controls case and say all of the ill-gotten gains from that
    foreign bribe were related to that one entry that was incorrect
    in the books.
        There needs to be some standard here. I think either
    Congress should impose it or the SEC should come up with a
    standard by the way it calculates disgorgement.
        Mr. Hollingsworth. We have talked a lot about forum
    shopping in the course of this testimony, but really talking
    about limiting the ability for these actions to be brought and
    really shop the different ways that they might be able to
    attack these actions to be able to get the largest penalty. I
    think that is what we are trying to hold back.
        We want to make sure that any nefarious activities by
    individuals, that they pay the price for that, but we don't
    want to shop around so that they pay the largest possible
    price, in terms of the avenue taken. Is that fair?
        Mr. Bondi. That is fair.
        Mr. Hollingsworth. OK. Great.
        I think the other thing--this is something that you cited
    in your written testimony--is the NYU study that, in the first
    half of 2018, the percentage of new enforcement actions against
    public companies--and I want to make sure I get this right--
    that were brought as administrative proceedings declined to 80
    percent, down from 94 percent in the second half of 2017.
        Is this an encouraging trend that you see in response to
    some of the public outcry about this, some of the articles that
    have been about this, some of the challenges that have been
    brought to this process? Or, what do you attribute that decline
    to?
        Mr. Bondi. Yes, absolutely. I think the new Commission,
    particularly Chairman Clayton and the enforcement directors,
    are very much cognizant about this perception of unfairness
    associated with the ALJ proceedings. I think they are taking
    better courses to determine when and where to bring ALJ
    proceedings. I think the statistics are very, very encouraging.
        Mr. Hollingsworth. Great.
        Look, I know, a lot of times, on this committee we talk
    about esoteric financial products, we are talking about aspects
    of law that maybe don't touch everyday lives for Hoosiers. But
    what does touch them every single day is making sure that they
    have due process and making sure they have confidence in the
    legal system and being able to defend themselves or an
    individual accused of a crime is able to defend themselves.
        Thank you all for being here. I appreciate the testimony.
        Chairman Huizenga. The gentleman's time has expired.
        I would like to thank our witnesses today for their
    testimony. I think this was helpful.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        Again, we appreciate your time and your expertise, and we
    look forward to continuing these conversations.
        The hearing is adjourned.
        [Whereupon, at 3:52 p.m., the subcommittee was adjourned.]

                                A P P E N D I X

                                 June 13, 2018

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