[Congressional Record Volume 142, Number 143 (Monday, October 21, 1996)]
[Extensions of Remarks]
[Pages E1938-E1939]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




CONFERENCE REPORT ON H.R. 3005, NATIONAL SECURITIES MARKETS IMPROVEMENT 
                              ACT OF 1996

                                 ______
                                 

                          HON. JOHN D. DINGELL

                              of michigan

                    in the house of representatives

                        Monday, October 21, 1996

  Mr. DINGELL, Mr. Speaker, in connection with the passage of H.R. 
3005, the National Securities Markets Improvement Act of 1996, I offer 
the following extension of my remarks to clarify the congressional 
intent underlying two key components of the legislation.

                   SEC Exemptive Authority and Fraud

       The House bill and Senate amendment contained substantially 
     identical provisions granting the Securities and Exchange 
     Commission [SEC] general exemptive authority under both the 
     Securities Act of 1933 and the Securities Exchange Act of 
     1934. See H. Rept. 104-622 at 38; S. Rept. 104-293 at 28. The 
     conference agreement adopted those provisions.
       By the express terms of the exemption provisions, any 
     exemption must be necessary or appropriate in the public 
     interest and consistent with the protection of investors.
       In that regard, Congress intends the public interest test 
     to include the national public interests noted in the 
     underlying statutes, the prevention of fraud and the 
     preservation

[[Page E1939]]

     of the financial integrity of the markets, as well as the 
     promotion of responsible financial innovation and fair 
     competition. Clearly exemptions from the antifraud provisions 
     would not be in the public interest nor consistent with the 
     protection of investors. This is consistent with the 
     explanation that was before this body when it passed H.R. 
     3005 (see Congressional Record, June 18, 1996 at H6447): `` * 
     * * this bill does not grant the SEC the authority to grant 
     exemptions from the antifraud provisions of either act. In 
     determining the public interest, Congress has expressed the 
     public interest through the express provisions of law that it 
     has enacted. The SEC may not administratively repeal these 
     provisions by use of the new exemptive authority.''

                     Qualified Purchaser Exception

       The Investment Company Act of 1940 (Investment Company Act) 
     establishes a comprehensive federal regulatory framework for 
     investment companies. Regulation of investment companies is 
     designed to: prevent insiders from managing the companies to 
     their benefit and to the detriment of public investors; 
     prevent the issuance of securities having inequitable or 
     discriminatory provisions; prevent the management of 
     investment companies by irresponsible persons; prevent the 
     use of unsound or misleading methods of computing earnings 
     and asset value; prevent changes in the character of 
     investment companies without the consent of investors; ensure 
     the disclosure of full and accurate information about the 
     companies and their sponsors. To accomplish these ends, the 
     Investment Company Act requires the safekeeping and proper 
     valuation of fund assets, restricts greatly transactions with 
     affiliates, limits leveraging, and imposes governance 
     requirements as a check on fund management.
       Congress has been reluctant to exempt pooled investment 
     vehicles from the Investment Company Act unless sufficient 
     alternative protections have been established. Thus, Congress 
     has acted cautiously in enacting any new exemptions, 
     appreciating the perils to the public investor, including 
     sophisticated investors, and the American capital markets 
     that can arise from the operation of pooled investment 
     vehicles outside the Investment Company Act. The following 
     examples are part of the record: Last year, an investment 
     fund, Foundation for New Era Philanthropy, collapsed after 
     reportedly running a ``Ponzi scheme'' that left its 
     investors, including at least 180 nonprofit organizations, 
     with an estimated $200 million in losses.
       The collapse of the Orange County investment fund last 
     year, reportedly due to overleveraging, portfolio 
     illiquidity, and mispricing of assets, harmed many 
     ``sophisticated'' investors, including more than 180 local 
     governmental bodies that had invested in the pool.
       Last year, David Askin, a failed hedge fund manager, 
     settled administrative proceedings in which the SEC charged 
     him with fraudulent conduct in the collapse of his $600 
     million hedge funds. It was reported that the collapse caused 
     serious harm to at least one large personal estate, a pension 
     fund, major state universities, and large insurance and 
     brokerage houses.
       In 1992, Steven Wymer pleaded guilty to nine felony counts 
     for defrauding his clients, including a state investment pool 
     in which 88 governmental units reportedly had invested.
       Section 3(c)(1) of the Investment Company Act currently 
     exempts from regulation any pooled investment vehicle with up 
     to one hundred investors that has not made and does not 
     propose to make a public offering. The conference agreement 
     would create a new section 3(c)(7) exemption from the 
     Investment Company Act for pooled investment vehicles that 
     sell their securities only to ``qualified purchasers'' 
     defined as persons with at least $5 million in investments 
     and institutional investors with at least $25 million in 
     investments. The term ``investments'' must be defined by the 
     SEC.
       The conferees believed that invester protections could be 
     maintained under more liberal thresholds than the House 
     bill's $10 million in ``securities'' for natural persons and 
     $100 million in securities for institutional investors. 
     However, for investor protection reasons, the conferees 
     rejected the Senate amendment's provisions that would have 
     allowed the SEC by rule to specify additional qualified 
     purchasers who did not meet the statutorily defined standards 
     of financial sophistication but nonetheless would be taken 
     outside the protections of the Investment Company Act.
       Given this record and the purposes of the Investment 
     Company Act, it is not the intention of Congress that the SEC 
     would use its authority under section 6(c) of the Act to 
     reduce the thresholds or to ease the statutorily-established 
     conditions to this exemption.
       Moreover, the grandfather provision in section 3(c)(7) was 
     intended to allow existing section 3(c)(1) pools to open 
     themselves up to qualified purchasers without having to 
     terminate longstanding relationships with investors that are 
     not qualified purchasers. The grandfather provision was not 
     intended to allow sponsors to nominally ``convert'' that pool 
     to a section 3(c)(7) pool in order to raise additional funds 
     through another section 3(c)(1) pool without regard to 
     section 3(c)(1)'s 100 person limitation. In the absence of 
     new, bona fide qualified purchaser investors in the 
     ``grandfathered'' section 3(c)(1) pool, this would be an 
     abuse of the grandfather provision that Congress did not 
     intend. The grandfather provision also was not intended to 
     override existing interpretative positions concerning the 
     circumstances under which two or more related section 3(c)(1) 
     pools would be integrated for purposes of determining whether 
     section 3(c)(1)'s requirement that the voting securities of a 
     section 3(c)(1) company be owned by no more than 100 persons. 
     Such an abusive practice would not be protected by the ``non-
     integration'' provision of new section 3(c)(7)(E) which 
     explicitly provides that that provision does not address the 
     question of whether a person is a bona fide qualified 
     purchaser.

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