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Reform Bill Has Regulators Worried

Congress: Language now in House securities legislation would make it harder for states to fight fraud, they say.


NEW YORK — State securities regulators warned Monday that seemingly arcane clauses in a bill expected to pass in the House of Representatives today could prevent states from weeding out dishonest stock brokers and fraudulent investment schemes.

The bill that would overhaul federal securities laws is a much milder version of legislation proposed last July by House Republicans that would have all but wiped out state licensing of brokers and supervision of securities offerings.

Neal E. Sullivan, executive director of the North American Securities Administrators Assn., the organization of state securities commissioners, praised amendments that preserve much of states' authority. But in a Washington news conference, he listed what he said is a series of loopholes inserted recently into the bill that could result in significant harm to small investors.

Mike Collins, spokesman for the House Commerce Committee, called the state regulators' objections "a smoke screen" designed to deflect attention from what he said is the real purpose of the bill, to make it easier for businesses to raise capital. Collins denied that some of the provisions will have the dire effects state regulators fear.

State regulators' specific objections include a provision proponents say will allow brokers to continue to serve clients who travel to other states on vacation.

Sullivan contends that the clause actually would open the door to massive evasion of state licensing requirements. It would allow brokers to make as many as 10 transactions per state for customers in states where the broker is not licensed. Most states license brokers to keep out ones who have records of cheating customers, and currently don't allow any transactions by unlicensed brokers.

Sullivan said it would be nearly impossible for state regulators to know if a broker has made more than 10 transactions in a state, making it much more difficult to take action against a disreputable broker.

State regulators said another part of the bill would take away states' ability to stop stock offerings that made inflated claims about a company's financial prospects. In an effort to promote a uniform national securities market, the bill would exempt from state supervision larger offerings by companies with total assets of $10 million or more. But Sullivan said that the term "total assets" includes intangible items such as the value of patents or "goodwill" associated with a company, which issuers can easily inflate. He called for a stricter definition of assets.

Another recently inserted amendment would limit states' ability to block the sale of new stock or bond offerings by individuals with records of committing fraud. The change would prevent a state's interfering in an offering based on another state's administrative action against an individual.

Sullivan said that if the bill becomes law, overtaxed state regulators would either be forced to allow dubious offerings or try to duplicate investigations already completed in other states.

Backers of the bill say it provides adequate protection by allowing states to rely on court judgments, as opposed to administrative actions by state securities departments.

The bill is expected to pass by a wide margin.

A Senate version of the bill, which does not contain most of the provisions the state regulators object to, is expected to be approved by the Senate Banking Committee on June 26. But state regulators said they fear that some of the objectionable provisions could end up in the Senate bill or in a final House-Senate compromise.

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