[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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