SEC Objects to New Enforcement Fairness Act

The Securities and Exchange Commission’s efforts to police about 5,300 small brokerage firms would be hampered by a provision in a bill signed by President Clinton, officials said.

Attached to the so-called debt ceiling bill is a measure, originally part of the Republican’s “contract with America,” that gives new authority for small businesses to challenge federal regulations in court.

The Small Business Regulatory Enforcement Fairness Act of 1996 is one of several measures attached to the debt ceiling bill--legislation that extends the government’s borrowing authority. The House passed the bill Thursday and Clinton signed it Friday.

Republicans attached the measure to the bill because Clinton had little choice but to sign it.

The debt-ceiling measure averts a first-ever federal default and also avoids another government shutdown. A telephone call Friday to the White House about the SEC provision was not immediately returned.

SEC Chairman Arthur Levitt urged House GOP leadership earlier last week to delete the small-business measure from the bill. Failure to do so would greatly complicate the agency’s ability to police small brokerages, he said.

Under one provision, the SEC could be forced to pay attorneys fees and other expenses should the agency fails to win all of its case in court, Levitt said.

The SEC contends it cannot precisely know the state of mind of every participant before it brings a complex fraud case, particularly when it moves quickly to stop an ongoing fraud scheme from bilking more investors. If a business is later dropped as a defendant or if the SEC does not get the full penalty it initially sought, the agency’s budget could be placed at risk because the small firms could recover fees from the SEC.

Although the SEC backs efforts to help small businesses, the bill could “hamper the commission’s enforcement efforts as it seeks penalties or other appropriate relief from wrongdoers,” Levitt said.

In a letter to House Commerce Committee Chairman Thomas J. Bliley Jr. of Virginia, Levitt said the agency “has serious concerns that the bill could have a negative impact on the commission’s enforcement program.”

Throughout most of the 1990s, the agency has devoted enormous resources cracking down on fraudulent “penny stock” sales, or low-priced stock from risky start-up companies. Penny stock enforcement could be affected by the small business regulatory relief bill, Levitt said.

About 5,300 small securities firms would qualify as small businesses under the definitions of the law, according to the SEC.

A congressional aide, speaking on condition he wouldn’t be identified further, said: “There were some legitimate concerns expressed by the SEC.”

The aide said Bliley intends to fix the problem by clearly stating in the bill’s legislative history that it doesn’t cover “willful conduct” and should not be taken to impair the SEC’s enforcement of antifraud laws.

“And if our interpretation is wrong, then we will fix it,” the aide said.

Several sources said Bliley attempted to resolve the problem but was partly unable to do so because the bill moved so quickly.