Bill Targets States’ Securities Settlement Funds

From Reuters

Republican lawmakers floated legislation Wednesday that would force U.S. states to channel money from major securities law settlements into a federal investor restitution fund.

The bill was the latest volley in a feud between the lawmakers and New York state Atty. Gen. Eliot Spitzer, a Democrat who probed allegations of tainted stock research on Wall Street.

He has not reimbursed investors with any of New York’s proceeds from last month’s $1.4-billion settlement with 10 brokerages, drawing fire from the lawmakers.

The bill introduced by Rep. Richard H. Baker (R-La.) aims to change that by forcing states to send settlement winnings to the Securities and Exchange Commission’s Fair Fund, set up to get money from such cases back to investors.


“We’re going to help the attorneys general,” said Baker, who helped create the fund and who has repeatedly needled Spitzer and other state regulators over the settlement, which resulted in large part from Spitzer’s probes of brokerages.

State proceeds from securities settlements presently go to a variety of uses, including into state general funds, since states generally have no way of finding investors who might deserve restitution for losses or of sending money to them.

Baker said his bill aims to “give the states a mechanism whereby they can return recovered money to injured investors.”

The bill also would beef up the SEC’s fining and subpoena power, give it access to grand jury information and allow it to hire private agents to collect outstanding fines.

In addition, it would enable the SEC to override state laws against property repossession, such as the homestead acts in Florida and Texas, where millionaires build huge mansions to shield assets from seizure.

SEC Chairman “Bill Donaldson and all the folks at the SEC are on board,” said Rep. Michael G. Oxley (R-Ohio), who chairs the House Financial Services Committee and who is co-sponsoring the bill with Baker.

Oxley said the committee would hold a hearing on the bill soon and take testimony from state officials and others.

“The overall thrust of this legislation is positive,” said Barbara Roper, investor advocate for the Consumer Federation of America. “But we have problems with the provision ... affecting state conduct remedies.”


Spokesmen for Spitzer, the SEC and the North American Securities Administrators Assn., which represents state securities regulators, had no comment.

Roper said she feared that the Fair Fund part of the bill could discourage cash-strapped states from spending money on probes such as those that led to the Wall Street settlement.

“It could make it harder for states to justify spending limited state resources on those kinds of actions where the state gets no direct benefit,” she said.