[House Report 107-283]
[From the U.S. Government Publishing Office]



107th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    107-283

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



 
               EMERGENCY SECURITIES RESPONSE ACT OF 2001

                                _______
                                

 November 13, 2001.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

  Mr. Oxley, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 3060]

      [Including cost estimate of the Congressional Budget Office]

      The Committee on Financial Services, to whom was referred 
the bill (H.R. 3060) to amend the Securities Exchange Act of 
1934 to augment the emergency authority of the Securities and 
Exchange Commission, having considered the same, report 
favorably thereon without amendment and recommend that the bill 
do pass.

                                CONTENTS

                                                                   Page
Purpose and Summary..............................................     1
Background and Need for Legislation..............................     2
Hearings.........................................................     3
Committee Consideration..........................................     3
Committee Votes..................................................     3
Committee Oversight Findings.....................................     3
Performance Goals and Objectives.................................     3
New Budget Authority, Entitlement Authority, and Tax Expenditures     4
Committee Cost Estimate..........................................     4
Congressional Budget Office Estimate.............................     4
Federal Mandates Statement.......................................     5
Advisory Committee Statement.....................................     5
Constitutional Authority Statement...............................     5
Applicability to Legislative Branch..............................     5
Section-by-Section Analysis of the Legislation...................     5
Changes in Existing Law Made by the Bill, as Reported............     7

                          Purpose and Summary

    The purpose of H.R. 3060, the Emergency Securities Response 
Act, is to provide the Securities and Exchange Commission (SEC 
or Commission) with enhanced authority to respond to 
extraordinary market disturbances. The legislation extends the 
duration of a Commission emergency order issued pursuant to 
section 12(k)(2) of the Securities Exchange Act of 1934 (15 
U.S.C. 78l(k)(2)) from ten to 30 business days, and under 
certain circumstances, up to a total of 90 calendar days.

                  Background and Need for Legislation

    The terrorist attacks of September 11, 2001, inflicted 
great human and physical loss in New York City, the financial 
capital of the world. The damage to lower Manhattan, home of 
the world's largest stock market--the New York Stock Exchange--
suspended the operation of the U.S. equities markets for the 
longest period since World War I. The U.S. securities markets 
reopened for trading on September 17, 2001. The markets resumed 
business without incident, in part due to the emergency relief 
orders issued by the SEC.
    To facilitate the reopening of the equities markets, the 
Commission used--for the first time--its emergency powers under 
section 12(k)(2) of the 1934 Act to ease certain regulatory 
restrictions temporarily. Most significantly, the SEC action 
permitted public companies to repurchase their own securities 
without meeting the volume and timing restrictions that 
ordinarily would apply. Most commentators believe this measure 
served its intended purpose of increasing liquidity in the 
markets. Additionally, in order to limit the impact of the 
market closure and settlement problems on securities firms, the 
SEC issued orders allowing brokerage firms to disregard the 
days the markets were closed in calculating their net capital. 
The SEC also took action under other authority, such as 
relaxing requirements applicable to mutual funds for in-person 
board meetings, which would have been impossible during the 
period in which the Federal Aviation Administration grounded 
all flights.
    Under current law, the duration of emergency orders granted 
by the Commission pursuant to section 12(k)(2) of the 1934 Act 
is limited to ten days. The Commission also has general 
exemptive authority applying to all of the Federal securities 
laws under various sections of each of those laws, including 
section 36 of the 1934 Act, which it used in the wake of the 
September 11 attacks to extend the duration of its emergency 
authority relief. The Committee commends the Commission for its 
responsive and appropriate use of its emergency and exemptive 
authority to help ensure the smooth reopening of the securities 
markets.
    The Committee wishes to underscore that the Commission was 
entirely within its statutory authority to extend the duration 
of the relief it granted pursuant to section 12(k)(2) of the 
1934 Act beyond ten days through use of its broad exemptive 
authority under section 36 of that Act. It is the Committee's 
view that the exemptive authority of section 36, as well as the 
corresponding provisions in other Federal securities laws 
granted pursuant to the National Securities Markets Improvement 
Act of 1996 (Public Law 104-290), were designed to provide the 
Commission with the maximum flexibility to reduce and otherwise 
alter regulatory requirements under those statutes for 
emergency, as well as more quotidian purposes. Nevertheless, 
granting the Commission greater flexibility to extend the 
duration of emergency authority pursuant to section 12(k)(2) 
will further ensure the Commission's continued ability to 
respond as necessary to emergencies affecting our nation's 
securities markets.
    Accordingly, H.R. 3060 extends the time frame under section 
12(k)(2) to 30 business days. The legislation also allows the 
Commission, in certain circumstances, to extend emergency 
orders under section 12(k) for more than 30 business days, up 
to a total of 90 calendar days. In order to do so, however, the 
SEC must find, at the time of the extension, that the emergency 
still exists and determine that the continuation of the order 
beyond 30 business days is necessary in the public interest and 
for the protection of investors to (i) maintain or restore fair 
and orderly securities markets, (ii) ensure prompt,accurate, 
and safe clearance and settlement of transactions in securities, or 
(iii) reduce, eliminate, or prevent a substantial disruption of 
securities markets, investment companies, or securities transaction 
processing.

                                Hearings

    The Committee held a hearing on September 26, 2001 on the 
state of the nation's financial markets in the wake of the 
terrorist attacks of September 11, at which SEC Chairman Harvey 
L. Pitt testified with respect to the nation's securities 
markets. Pursuant to requests by Members of the Committee at 
that hearing, Chairman Pitt submitted a request for expanded 
emergency authority under section 12(k)(2).

                        Committee Consideration

    On October 11, 2001, the Committee met in open session and 
ordered H.R. 3060 reported to the House, without amendment, 
with a favorable recommendation by a voice vote.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. No 
record votes were taken in conjunction with the consideration 
of this legislation. A motion by Mr. Oxley to report the bill 
to the House with a favorable recommendation was agreed to by a 
voice vote.

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee held a hearing and made 
findings that are reflected in this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee establishes the 
following performance related goals and objectives for this 
legislation:
    The Commission will continue to use its emergency powers to 
ensure the effective functioning of the securities markets.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee finds that this 
legislation would result in no new budget authority, 
entitlement authority, or tax expenditures or revenues.

                        Committee Cost Estimate

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                  Congressional Budget Office Estimate

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, October 15, 2001.
Hon. Michael G. Oxley,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3060, the 
Emergency Securities Response Act of 2001.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Ken Johnson.
            Sincerely,
                                         Barry B. Anderson,
                                    (For Dan L. Crippen, Director).
    Enclosure.

H.R. 3060--Emergency Securities Response Act of 2001

    H.R. 3060 would lengthen the amount of time during which 
the Securities and Exchange Commission (SEC) can exercise 
special authority over securities markets in the event of an 
emergency. The bill also would expand the definition of an 
emergency to include major disturbances that disrupt the 
functioning of securities markets.
    Based on information from the SEC, CBO estimates that 
implementing H.R. 3060 would have no significant budgetary 
effect. The bill would not affect receipts or direct spending; 
therefore, pay-as-you-go procedures would not apply.
    H.R. 3060 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA) 
and would impose no costs on state, local, or tribal 
governments.
    The CBO staff contact for this estimate is Ken Johnson. The 
estimate was approved by Robert A. Sunshine, Assistant Director 
for Budget Analysis.

                       Federal Mandates Statement

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                   Constitutional Authority Statement

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds that the 
Constitutional Authority of Congress to enact this legislation 
is provided by Article 1, section 8, clause 1 (relating to the 
general welfare of the United States) and clause 3 (relating to 
the power to regulate interstate commerce).

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of section 
102(b)(3) of the Congressional Accountability Act.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This section establishes the short title of the bill, the 
``Emergency Securities Response Act.''

Section 2. Extension of emergency order authority of the securities 
        exchange commission

    Section 2 modifies the authority of the Securities and 
Exchange Commission to issue emergency orders under section 
12(k)(2) of the Securities Exchange Act of 1934 (15 U.S.C. 
78l(k)(2)). The section modifies section 12(k)(2) to grant the 
Commission authority to take emergency action with respect to 
any matter or action subject to regulation by the Commission or 
a self-regulatory organization under the securities laws, not 
just under the Securities Exchange Act of 1934. The Committee 
recognizes that emergency conditions can necessitate emergency 
relief under securities laws other than the Securities Exchange 
Act of 1934 and is broadening the emergency measures the 
Commission can take under section 12(k)(2) accordingly.
    The section also modifies the findings required for the 
Commission to enter an emergency order by adding a third 
finding that may support emergency action. Under new section 
12(k)(2)(A)(iii), the Commission may take emergency action if 
it determines that action is necessary in the public interest 
and for the protection of investors ``to reduce, eliminate, or 
prevent the substantial disruption by the emergency of (I) 
securities markets, investment companies, or any other 
significant portion or segment of such markets, or (II) the 
transmission or processing of securities transactions.''
    The first of these two findings--in section 
12(k)(2)(A)(iii)(I)--covers situations in which emergency 
relief is warranted to reduce, eliminate or prevent the 
substantial disruption by the emergency of securities markets 
broadly defined, including investment companies or any other 
significant portion or segment of the securities markets (such 
as broker-dealers or investment advisers, or a class thereof). 
As illustrated by the aftermath of the terrorist attacks of 
September 11, 2001, the effects of transportation and 
communication problems, no less than market disruptions, can 
require emergency relief. If transportation or communication 
problems or other circumstances substantially disrupt or 
threaten to substantially disrupt the operation of investment 
companies, broker-dealers, or any other significant portion or 
segment of the securities markets, and constitute an 
``emergency'' under section 12(k)(6) of the Securities Exchange 
Act of 1934 (15 U.S.C. 78l(k)(6)), section 12(k)(2)(A)(iii)(I) 
allows the Commission to take emergency action under section 
12(k)(2) even if the securities secondary-trading markets and 
the national system for clearance and settlement of securities 
transactions are not threatened or disrupted.
    The second of these two findings--in section 
12(k)(2)(A)(iii)(II)--covers situations in which emergency 
relief is warranted to reduce, eliminate or prevent the 
substantial disruption by the emergency of the transmission or 
processing of securities transactions. The Committee is aware 
that certain market participants experienced difficulties in 
transmitting and processing securities transactions, including 
government securities transactions, in the aftermath of the 
attacks of September 11, 2001. In the future, should these or 
other circumstances substantially disrupt or threaten to 
substantially disrupt the transmission or processing of 
securities transactions and constitute an ``emergency'' under 
section 12(k)(6), section 12(k)(2)(A)(iii)(II) allows the 
Commission to take emergency action under section 12(k)(2) even 
if the national system for clearance and settlement of 
securities transactions is not threatened or disrupted.
    The section modifies the statute's definition of 
``emergency'' to reflect the broader scope of findings that may 
support an emergency order. Specifically, the definition of 
``emergency'' in section 12(k)(6) of the Securities Exchange 
Act (15 U.S.C. 78l(k)(6)) is modified to include a major 
disturbance that substantially disrupts, or threatens to 
substantially disrupt, the functioning of securities markets, 
investment companies, or any other significant portion or 
segment of such markets, or the transmission or processing of 
securities transactions. This modification of section 12(k)(6) 
mirrors the changes to the findings under section 12(k)(2)(A) 
and, as discussed above, is designed to account for emergencies 
that substantially disrupt, or threaten to substantially 
disrupt, the securities markets broadly defined, including the 
functioning of investment companies or any other significant 
portion or segment of the securities markets or the 
transmission or processing of securities transactions, even in 
the absence of a major market disturbance under section 
12(k)(6)(A).
    The section also extends the duration of a Commission 
emergency order to 30 business days, from the current ten 
business days. The section also allows the Commission to extend 
an emergency order for more than 30 business days, up to a 
total of 90 calendar days, based upon certain findings. 
Specifically, under new section 12(k)(2)(C) (15 U.S.C. 
78l(k)(2)(C)), the Commission may extend the duration of an 
emergency order beyond 30 business days if the Commission 
finds, at the time of the extension, that the emergency still 
exists, and determines that the continuation is necessary in 
the public interest and for the protection of investors to 
attain one of the three objectives that may support the 
Commission's initial emergency action. The calendar day, as 
opposed to business day, limit on total extensions of an 
emergency order reflects the judgment that a total of 
approximately three months is a reasonable limit on Commission 
discretion, while providing sufficient latitude for the 
Commission to provide appropriate immediate relief.

         Changes in Existing Law Made by the Bill, as Reported

    In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italics, existing law in which no change 
is proposed is shown in roman):

           SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934


                registration requirements for securities

  Sec. 12. (a) * * *

           *       *       *       *       *       *       *

  (k) Trading Suspensions; Emergency Authority.--
          (1) * * *
          [(2) Emergency orders.--(A) The Commission, in an 
        emergency, may by order summarily take such action to 
        alter, supplement, suspend, or impose requirements or 
        restrictions with respect to any matter or action 
        subject to regulation by the Commission or a self-
        regulatory organization under this title, as the 
        Commission determines is necessary in the public 
        interest and for the protection of investors--
                  [(i) to maintain or restore fair and orderly 
                securities markets (other than markets in 
                exempted securities); or
                  [(ii) to ensure prompt, accurate, and safe 
                clearance and settlement of transactions in 
                securities (other than exempted securities).
          [(B) An order of the Commission under this paragraph 
        (2) shall continue in effect for the period specified 
        by the Commission, and may be extended, except that in 
        no event shall the Commission's action continue in 
        effect for more than 10 business days, including 
        extensions. If the actions described in subparagraph 
        (A) involve a security futures product, the Commission 
        shall consult with and consider the views of the 
        Commodity Futures Trading Commission. In exercising its 
        authority under this paragraph, the Commission shall 
        not be required to comply with the provisions of 
        section 553 of title 5, United States Code, or with the 
        provisions of section 19(c) of this title.]
          (2) Emergency orders.--(A) The Commission, in an 
        emergency, may by order summarily take such action to 
        alter, supplement, suspend, or impose requirements or 
        restrictions with respect to any matter or action 
        subject to regulation by the Commission or a self-
        regulatory organization under the securities laws, as 
        the Commission determines is necessary in the public 
        interest and for the protection of investors--
                  (i) to maintain or restore fair and orderly 
                securities markets (other than markets in 
                exempted securities);
                  (ii) to ensure prompt, accurate, and safe 
                clearance and settlement of transactions in 
                securities (other than exempted securities); or
                  (iii) to reduce, eliminate, or prevent the 
                substantial disruption by the emergency of (I) 
                securities markets, investment companies, or 
                any other significant portion or segment of 
                such markets, or (II) the transmission or 
                processing of securities transactions.
          (B) An order of the Commission under this paragraph 
        (2) shall continue in effect for the period specified 
        by the Commission, and may be extended. Except as 
        provided in subparagraph (C), the Commission's action 
        may not continue in effect for more than 30 business 
        days, including extensions. If the actions described in 
        subparagraph (A) involve a security futures product, 
        the Commission shall consult with and consider the 
        views of the Commodity Futures Trading Commission. In 
        exercising its authority under this paragraph, the 
        Commission shall not be required to comply with the 
        provisions of section 553 of title 5, United States 
        Code, or with the provisions of section 19(c) of this 
        title.
          (C) An order of the Commission under this paragraph 
        (2) may be extended to continue in effect for more than 
        30 business days if, at the time of the extension, the 
        Commission finds that the emergency still exists and 
        determines that the continuation of the order beyond 30 
        business days is necessary in the public interest and 
        for the protection of investors to attain an objective 
        described in clause (i), (ii), or (iii) of subparagraph 
        (A). In no event shall an order of the Commission under 
        this paragraph (2) continue in effect for more than 90 
        calendar days.

           *       *       *       *       *       *       *

          [(6) Definition of emergency.--For purposes of this 
        subsection, the term ``emergency'' means a major market 
        disturbance characterized by or constituting--
                  [(A) sudden and excessive fluctuations of 
                securities prices generally, or a substantial 
                threat thereof, that threaten fair and orderly 
                markets, or
                  [(B) a substantial disruption of the safe or 
                efficient operation of the national system for 
                clearance and settlement of securities, or a 
                substantial threat thereof.]
          (6) Definition of emergency.--For purposes of this 
        subsection, the term ``emergency'' means--
                  (A) a major market disturbance characterized 
                by or constituting--
                          (i) sudden and excessive fluctuations 
                        of securities prices generally, or a 
                        substantial threat thereof, that 
                        threaten fair and orderly markets; or
                          (ii) a substantial disruption of the 
                        safe or efficient operation of the 
                        national system for clearance and 
                        settlement of transactions in 
                        securities, or a substantial threat 
                        thereof; or
                  (B) a major disturbance that substantially 
                disrupts, or threatens to substantially 
                disrupt--
                          (i) the functioning of securities 
                        markets, investment companies, or any 
                        other significant portion or segment of 
                        the securities markets; or
                          (ii) the transmission or processing 
                        of securities transactions.

           *       *       *       *       *       *       *


                                
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